It is no secret or surprise that mortgage foreclosures are on the rise as a result of today’s downtrodden economy. Of course, with an increase in foreclosures, mortgagees can be expected to develop new and unique ways of attempting to shed their contractual obligations. Counterclaims for various and sundry alleged “predatory lending” techniques, or even third party claims for violation of fair debt collection laws, have become common place. Perhaps on the horizon is one of the newest targets on the foreclosure battlefield: the Mortgage Electronic Registrations Systems, more commonly referred to as simply “MERS”.
By way of brief background, MERS was created in the late 1990’s to more easily identify and track individual mortgage loans and the information related to those loans. The MERS System was established as a national electronic registry that tracks the changes in servicing rights and beneficial ownership interests in mortgage loans. Perhaps more notably, the MERS System has been used in lieu of filing the traditional paperwork associated with a mortgage loan with local clerks of court.
During the housing boom in the mid-2000s, hundreds of thousands of residential mortgages were bundled together and investors were offered the opportunity to buy shares of each bundle, known as Mortgage Backed Securities (MBS). The MERS System was created to streamline the loan securitization process when the bundles of MBS were constantly traded and reassigned. One of the pitfalls associated with the constant reassigning of mortgages was a timely and costly paperwork process which was required to be completed each time a mortgage was reassigned. The MERS System sped up this process by utilizing a type of electronic signature, a unique 18-digit Mortgage Identification Number (“MIN”), to track the ownership of the mortgages.
In essence, MERS operates as follows: When a home buyer closes on a home loan, the paperwork signed at settlement often appoints a “nominee” for the lender. Often times MERS is appointed as the nominee for the lender in the event the lender intends to sell the mortgage to MERS at a later date. Each time the loan is traded, MERS tracks the reassignment in its system, without generating any paperwork. In this manner, MERS saves financial firms and banks millions of dollars because no paperwork is filed with the clerk of courts, thus bypassing the fees associated with the traditional filing of the mortgages documents. Unfortunately, this protocol has resulted in homeowners’ challenging MERS’s legal right to foreclose on homes where MERS is named as the mortgagee, on the grounds that MERS does not actually own the mortgages.
A consequence of speeding up the paperwork process by utilizing the MERS System is the lack of paper trail typically left behind by the traditional filing of mortgage documents with the court. When thousands of homes fell into foreclosure in recent years, a common problem arose in attempting to determine who actually held the mortgages for these homes. MERS is sometimes listed on the promissory note as the mortgagee of record, which MERS argues gives the company the ability to carry out foreclosure actions on behalf of the lender when borrowers stop making payments.
The MERS System has also spawned a host of class-action suits across the country. For example, in September 2010, a class action suit was filed in federal court in Louisville, Kentucky by a group of Kentucky residents who had undergone foreclosure proceedings where MERS was nominated as the mortgagee. The class members allege that MERS violated laws pertaining to the improper and illegal drafting, execution and public recording of Affidavits, Mortgages and Assignment of Mortgages. These claims arise from situations where, due to the lack of official paper trail, a mortgagee has difficulty producing evidence that it is the true owner of the mortgage. In some cases, shockingly, it has been alleged that banks and lenders falsified documents in order to proceed with the foreclosure process. Similar class actions have been filed in California, Nevada and Arizona.
If courts across the country invalidate the MERS System, this could have a profound impact on the legitimacy of mortgages recorded using the MERS System. In a few states where these class actions have arisen, such as Arizona and Missouri, judges have upheld the legitimacy of the MERS System and allowed MERS to proceed to act on behalf of lenders. However, other judges have ruled that MERS does not have the ability to act on behalf of lenders because it does not have any ownership over the mortgages foreclosed upon. Courts across the country appear to be split on the legitimacy of MERS and the MERS System.
What’s next in the state of Ohio? Well, there can be no debate that hard-luck foreclosure defendants (mortgagees) are not shying away from aggressive efforts to avoid the consequences of foreclosure (or more accurately, their failure to pay contractual obligations under notes with the lenders). What is more dangerous is the tendency of Ohio judges to provide avenues of relief for these purported victims of the slow economy. Judges, as elected officials, have little sympathy for the lending and financial institutions. Lenders issuing home loans in Ohio are well-advised to review and monitor their current underwriting, recordation, registration, and foreclosure practices, particular in those portfolios where MERS has been nominated at the mortgagee.
Any questions relative to the rights, remedies, and liabilities associated with finance and creditors’ rights associated with the MERS System can be addressed to a member of the Firm’s Finance and Creditors Rights Practice Group listed below. Please contact a member of our Practice Group for further information regarding the pending class action claims related to MERS or other general inquiries related to Finance and Creditors rights.
