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‘MERS morass’ is hanging up negotiations on foreclosure settlement

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State and federal officials negotiating a settlement with the nation’s biggest banks over shoddy foreclosure practices are hung up on how they should deal with a Reston-based company that has acted as a proxy for financial firms throughout the country for more than a decade.

Some officials refer to the dilemma as the “MERS morass,” referring to Mortgage Electronic Registration Systems, whose vast but controversial registry contains roughly 65 million mortgages.

The pending multibillion-dollar settlement with banks centers on “robosigned” documents and court filings and other problems related to mortgage servicing that caused a national uproar last fall. Much of that flawed paperwork flowed through MERS.

Meanwhile, the same system helped make possible the boom in mortgage-backed securities that fueled the housing crisis by allowing banks to quickly and cheaply transfer the ownership of loans. Questionable securitization practices have sparked other state and federal investigations, but they are not the focus of the current settlement talks.

Given the broad reach that MERS has into every aspect of the mortgage and foreclosure process, officials have been grappling with whether they can address one element of the MERS business model in the current settlement while leaving other aspects open to future investigation. In part, they say, the patchwork of conflicting laws and court decisions in different states makes a one-size-fits-all solution difficult. In addition, they are facing pressure from banks that already stand to pay billions of dollars in penalties and would prefer to steer clear of the MERS problem altogether in the current negotiations.

Several people familiar with the negotiations said that officials leading the talks have no intention of releasing MERS­CORP, the parent company of MERS, from liability claims. The trickier question is how to address MERS-related foreclosure cases that involve the banks under scrutiny.

“We’re really wrestling with MERS. Does it need to be part of this?” said one official who spoke on the condition of anonymity because the talks are ongoing. “MERS is a bit of a swamp.”

Illinois Attorney General Lisa Madigan acknowledged in an interview that the issue remains unresolved. She said there are “differing opinions” about how to deal with it.

The MERS quandary is one in a long line of thorny topics that state and federal officials have spent much of the past year wrestling with, as they seek to reach a settlement with five of the nation’s largest banks, including Bank of America. Other dicey issues have included how much they should demand in penalties — the current estimate stands at about $20 billion — as well as how the banks should overhaul their mortgage servicing procedures and whether they should be forced to write down loan balances for some troubled borrowers.

Just this week, a rift over how broad a release the banks should receive from future liability claims in exchange for agreeing to settle boiled over when Iowa Attorney General Tom Miller removed New York Attorney General Eric Schneiderman from the committee overseeing the talks on behalf of all 50 states, saying he had actively undermined the group’s efforts to reach a deal. Schneiderman and several others have resisted a quick settlement on servicing problems alone, arguing that all aspects of the mortgage crisis should face a full investigation before moving forward.

That personal tug of war and the other high-profile issues have kept the MERS problem under the radar. But a final settlement is unlikely to materialize until it is resolved.

Some attorneys general have said they would not support a settlement that grants immunity on issues related to MERS and securitization. Massachusetts Attorney General Martha Coakley has been among the most vocal and has undertaken an inquiry into MERS.

“We will make sure, at least here in Massachusetts, that we do not reach an agreement that, for instance, gives relief for securitization issues that still need investigation or for fraudulent servicing around the use of MERS,” Coakley said at a news conference this month. “We will not settle an issue until we know all of the facts and we know all of the damage.”

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