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MERS, Under Attack, Says It Can't Be Blamed for the Mortgage Mess

Homeowners and county recordkeepers have been challenging the massive MERS mortgage database in courts all over the country. But while MERS is losing many of these cases, it's winning some, too.

In an article entitled, "MERS? It May Have Swallowed Your Loan," New York Times journalists Michael Powell and Gretchen Morgenson shone a critical light this weekend on the MERS Corporation and its Mortgage Electronic Registration Systems, which contain data on 60 million loans -- half of all U.S. mortgages. MERS is an electronic registry designed to track mortgage servicing rights and ownership of U.S. residential mortgage loans that was founded 16 years ago by Fannie Mae, Freddie Mac, Bank of America, JPMorgan Chase and other large banks.

The article points out that MERS and the data in its custody are being challenged in courts. In many of these cases, homeowners are fighting foreclosure proceedings on the grounds that MERS doesn't have a legitimate claim to the mortgage, and they are often winning. In one example the authors cite, a chef whose income was reduced by half due to the recession and who therefore was unable to make his mortgage payments is questioning the legitimacy of MERS.

"The Arkansas Supreme Court ruled last year that MERS could no longer file foreclosure proceedings there, because it does not actually make or service any loans," the article states. "Last month in Utah, a local judge made the no-less-striking decision to let a homeowner rip up his mortgage and walk away debt-free. MERS had claimed ownership of the mortgage, but the judge did not recognize its legal standing. And, on Long Island, a federal bankruptcy judge ruled in February that MERS could no longer act as an 'agent' for the owners of mortgage notes. He acknowledged that his decision could erode the foundation of the mortgage business."

But the New York Times article fails to mention that in February, MERS won five state court cases affirming its right to act on behalf of banks. A Georgia court held that MERS has the right and power to enforce a security deed. A New Hampshire court affirmed the legality of MERS' role as a nominee for lenders and upheld MERS' authority to transfer a mortgage servicer's interest in a mortgage. A California court affirmed MERS' authority to foreclose, finding that the language in the deed of trust gives MERS the authority to initiate non-judicial foreclosures. A Massachusetts court affirmed MERS as a mortgagee in a case, upholding the rights of the mortgage servicing company. And a Kansas court found that mortgages naming Mortgage Electronic Registration Systems are valid and enforceable.

The article also doesn't address regulators' recent criticism of Bank of America, Citigroup and PNC for relying on MERS instead of original documents to justify foreclosures. Nor the fact that MERS itself has asked banks to stop foreclosing in its name.

MERS spokesperson Karmela Lejarde notes that MERS does not maintain mortgage documents. "MERS does not receive or maintain either the mortgage (or deed of trust) or the promissory note," she says. "The mortgage is sent to the county land records where it is recorded and where an imaged copy is stored. The county recorder adds recording data to the original document, and then returns it to the servicer where it goes to the servicer's master loan file. The promissory note is sent to a custodian (usually a regulated depository institution) and is typically bought and sold (and thus trades hands) in the normal course of financial activity."

MERS holds just a small subset of information about a mortgage loan. It's simply meant to provide a means by which bank members and the public (including homeowners) can find out the note owner and servicer for a registered loan.

"When a mortgage is transferred from one servicer to another, we keep track of that," Lejarde says. "We act as an agent for all our members when they file loans between each other." She notes that MERS is not meant to be part of the foreclosure process. "Foreclosure is not a main part of our business," she says. Banks use the database to track loans; to fight fraud -- a bank might ping the system to see if a potential borrower has undisclosed liens; and to eliminate the need to file assignment. Counties use the system when they are concerned about vacant properties and want to find out who is responsible for maintaining a property, she says.

Lejarde also says the company is revising its systems and procedures to protect against legal and compliance challenges to itself and its members. "Consistent with this approach we have enhanced our certifying officer systems and instituted related policies and procedures designed to strengthen MERS' business practices and limit compliance risks," she says. "At times, some MERS members have failed to follow those procedures and/or established state foreclosure rules, or to properly explain MERS and document MERS relationships in legal pleadings; in these cases, MERS (predictably) was not successful. However, these cases are outliers, reflecting case-specific problems in process, and did not repudiate the MERS business model."

One lesson seems to be emerging from the mess around MERS: banks need to maintain their own mortgage records and documents and be less dependent on MERS. The time is now for banks to make sure their mortgage systems are up to date and accurate and that their mortgage recordkeeping could stand up in court.

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