Reston-based company MERS in the middle of foreclosure chaos

By Brady Dennis and Ariana Eunjung Cha
Washington Post Staff Writers
Friday, October 8, 2010; 12:01 AM

As courts across the country face a wave of foreclosures, a name little known to the public has cropped up on thousands of court filings as a stand-in for prominent banks, lenders and mortgage servicers.

Mortgage Electronic Registration Systems, headquartered in a nondescript office building in Reston Town Center, has flourished quietly over the past decade, saving financial firms hundreds of millions of dollars by helping them avoid the time and expense of filing mortgage documents and paying fees each time a loan changes hands.

Its motto: "Process loans, not paperwork."

But lawyers throughout the country increasingly are challenging that approach, questioning whether the company has the legal right to foreclose on homes, on the grounds that it doesn't actually own mortgages. And the argument is gaining traction with some judges.

Yet without proper paperwork to establish ownership, banks and other lenders have also faced legal difficulties with seizing homes when borrowers default. The result in some cases has been the use of flawed and fraudulent documents in foreclosure cases.

Concerns over improper paperwork have prompted some of the nation's largest lenders and several states to halt foreclosures until companies can provide proof that they own the mortgages and have a right to seize the homes.

(USER POLL: Is a national moratorium on foreclosures a good idea?)

The MERS headquarters is tucked amid chain restaurants and retail stores near Dulles International Airport. But the firm's reach extends far beyond this slice of suburbia.

The company is an integral part of the system that emerged during the global housing boom, when mortgages were created and sold, sliced and diced, packaged and repackaged so quickly that financial firms had neither the time nor the patience to file paperwork in local courthouses as the loans were traded. By using MERS, lenders were able to reassign loans quickly and cheaply. But often the chain of ownership was not accompanied by an official paper trail.

The MERS registry tracks more than 65 million mortgages throughout the country and continues to facilitate rapid-fire transfers that keep the market for mortgage-backed securities humming.

But if courts increasingly begin to nullify the MERS model - different judges have issued differing rulings - this could call into question the legitimacy of millions of mortgages, wreak havoc on the real estate market, spur costly litigation against Wall Street banks and ultimately harm the broader financial system.

Faster, easier

The land title system that went largely unchallenged in the United States for centuries became an obstacle in the 1990s. That's when financial firms began to ramp up a process called securitization, bundling and selling pools of home loans to sell to investors. Each time the loans were reassigned, the new owner had to record the transfers with local clerks.

Several executives in the mortgage industry came up with a faster, easier approach: MERS. The list of MERS shareholders includes an array of banks, lenders and title companies. Among them: Fannie Mae, Freddie Mac, Bank of America, GMAC, Washington Mutual, Wells Fargo and AIG's United Guaranty Corp.

Here's how MERS works: When a homeowner closes on a house, the paperwork signed at settlement often appoints MERS as a "nominee" for the lender and for whomever the lender might sell the mortgage to down the road. Each time the loan is sold and resold, MERS tracks the reassignment in its computer system, without generating paperwork.

The company says such an arrangement benefits all parties - consumers, lenders and investors.

"Without MERS," the company says, "mortgage data would be less accurate and title information [would] be less reliable."

But after the MERS computer system went live in 1997, some county recording offices complained that the company was bypassing the legal process and raking in money charging fees that were lower than those charged by municipalities. They were largely ignored.

"It wasn't like Congress or state legislators did anything," said Christopher L. Peterson, a law professor at the University of Utah who has consulted in cases against MERS. "The mortgage industry just changed how the land title system worked without getting anyone's okay."

MERS has consistently claimed authority to act as a representative, or "nominee," on behalf of banks and lenders.

But as millions of homes have fallen into foreclosure, Peterson said, "the MERS system doesn't provide a substitute for all the recordkeeping" that never took place during the boom years. "MERS created the illusion of record keeping when it wasn't really done."

To convince courts that they have the right to foreclose on homes, banks and lenders have often found it difficult - when challenged - to provide the paperwork showing they indeed own the loans. Financial firms, which bought mortgages from other companies, have also been challenged in court over whether MERS even had the legal right to reassign the loans.

These problems contributed to the use of flawed and fraudulent paperwork, including backdated assignments and forged documents, that have prompted firms such as Ally Financial, J.P. Morgan Chase and Bank of America to halt foreclosures.

Lawsuits against MERS

As the banks and lenders wrestle with those problems, MERS also finds itself under attack in courts across the country.

The company faces class-action lawsuits in California, Arizona and Nevada - three states hit hard by the foreclosure crisis. The suits on behalf of homeowners facing foreclosure allege that, as a result of the MERS system, parties seeking to seize their homes don't have legal standing to do so.

Another suit alleges that MERS and its members owe California $60 billion to $120 billion for circumventing land recording fees. That case is set for a hearing Tuesday, though MERS, Bank of America, Citibank, Wells Fargo and others named as defendants are seeking to have it dismissed.

In Arkansas, Kansas and Maine, state supreme courts have ruled that MERS can't foreclose on homes, because it doesn't own the loans. The Kansas Supreme Court called the company's relationship with lenders "akin to that of a straw man."

In May, Judge Arthur Schack of Brooklyn, N.Y., threw out a foreclosure case after ruling that the assignment of a loan to a bank by MERS was "defective." He said an attorney's explanations for it were "so incredible, outrageous, ludicrous and disingenuous that they should have been authored by the late Rod Serling, creator of the famous science-fiction television series, The Twilight Zone." He dismissed the case.

Challenges continue to come.

In Kentucky, attorney Heather Boone McKeever recently filed a state class-action suit and a federal civil-racketeering suit, both naming MERS. She argued in one filing that banks and lenders used MERS to facilitate "illegal mortgage registration, transfer and wrongful foreclosures" and that MERS "was created for the unlawful purpose of hiding and insulating the brokers and originators of predatory toxic loans from accountability and liability."

"I'm very cynical at this point," McKeever said in an interview. "I think it was created to commit fraud."

In rejecting these allegations, MERS points to numerous instances in which judges, state and local officials, and ratings agencies have recognized its legitimacy.

"These days, we have seen a growing trend by lawyers using the tactic of alleging that MERS is engaging in various types of wrongdoing to stall or prevent foreclosures," spokeswoman Karmela Lejarde said. "This tactic has proven time and again to be unsuccessful."

Lejarde pointed to cases in Arizona and Missouri in which judges ruled in the company's favor. The MERS Web site mentions other cases that the firm says demonstrate its right to act on behalf of lenders.

Several years ago, on a message board still active on the MERS Web site, one participant accused the company of participating in fraud and concealing the transfer of loans from public scrutiny.

The company's president and chief executive, R.K. Arnold, responded by insisting that MERS actually increased the transparency of the mortgage system and reduced the cost of homeownership by making the industry more efficient.

"We're not perfect," Arnold wrote, "but there's nothing sinister about who we are and what we do."

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