Banks' legal right to foreclose is questioned in testimony before House panel
Thursday, December 2, 2010; 8:20 PM
The system of pooling and selling mortgages around the world has caused widespread confusion about who owns the loans and raises questions about whether banks in some cases have the legal standing to foreclose, a state judge and consumer attorneys testified before Congress on Thursday.
New York State Supreme Court Justice Dana Winslow said that "standing has become such a pervasive issue" in the cases he sees "that I frequently use the term 'presumptive mortgagee' " to describe the entity trying to foreclose.
Rep. John Conyers Jr. (D-Mich.), chairman of the House Judiciary Committee, emphasized that as of last year, about 2.5 million homes were lost to foreclosure and that projections estimate that as many as 13 million homes will be lost to foreclosure by the time the crisis abates.
"Yet the big Wall Street firms, other mortgage lenders and servicers, and Fannie Mae and Freddie Mac - all of whom received taxpayer bailouts to the tune of billions of dollars over the last couple of years - have in many instances turned a blind eye toward homeowners in similar financial distress," Conyers said.
Winslow, academics and attorneys defending homeowners described a fundamental problem that goes beyond recent revelations of shoddy paperwork and "robo-signing" in foreclosure cases. They said there is a much broader question about the legality of designating a single company, Mortgage Electronic Registration Systems (MERS), as the holder of mortgages and then trading these loans to investors around the world without updating the ownership documents in local clerk offices.
They said it is unclear whether using this system has stripped those investors of the right to foreclose on homeowners who miss their payments.
University of Utah law professor Christopher L. Peterson said MERS has a "problematic legal foundation" because it undermines state recording laws. Peterson called MERS a "deceptive" and "anti-democratic" institution because it also uses thousands of employees who work for mortgage lenders, servicers and law firms to sign mortgage paperwork in the name of MERS. That practice is also clouding the ownership of the loan, he argued.
"How is a homeowner to understand with whom they can negotiate a settlement, or from whom to obtain additional information, or how to distinguish a legitimate employee from the thousands of mortgage-related con artists and charlatans?" Peterson asked.
Merscorp, which owns MERS, and the financial services industry have said that numerous courts have upheld the legality of the system they use to track and transfer mortgages.
"The chain of title starts and stops with Mortgage Electronic Registration Systems, Inc. as the mortgagee. MERS, as the agent for the note-owner, holds legal title for the note-owner in the land records," the company said in a recent statement. "The use of MERS is in compliance with the statutory intent of the state recording acts."
Peterson called on Congress to bar Fannie Mae and Freddie Mac from purchasing MERS-recorded loans, echoing legislation introduced by Rep. Marcy Kaptur (D-Ohio) last month. The industry has designated MERS as its proxy in jurisdictions across the country, and the company's name appears on about 60 percent of all U.S. mortgages.
Fannie and Freddie own or guarantee the vast majority of mortgages that are originated today.