A New York appellate court ruled last week that a Reston-based company that electronically tracks and transfers millions of mortgages did not have the right to foreclosure on a property or assign a mortgage it doesn’t actually own. The decision came only days after an appeals court in California took a different view, ruling that the firm indeed has the power to act on behalf of lenders.
The two cases, like dozens of others already decided or playing out in courtrooms across the country, highlight a protracted legal wrestling match that could determine the validity of foreclosures already in the pipeline and shape the mortgage market for years to come.
The cases also underscore the uncertainty that continues to surround Mortgage Electronic Registration Systems, known as MERS, which has allowed the financial industry to transfer and reassign millions of mortgages quickly and cheaply since the 1990s. The company also has acted as a proxy for banks in many foreclosure proceedings.
The MERS business model has increasingly come under fire since revelations last fall of widespread problems in foreclosure filings around the country — including forged documents and lingering questions about who actually owns the homes being foreclosed. Embattled borrowers and their attorneys continue to challenge the legitimacy of MERS, which doesn’t actually own any of the 65 million loans in its vast registry.
Those challenges have had limited success so far. But as cases are reviewed on appeal, the rulings could call into question countless foreclosures that have taken place since the housing bust. Perhaps more significant, if judges ultimately deem the MERS model invalid, it could mean massive lawsuits against banks that improperly bundled and sold mortgages to investors and could hinder the private securitization market, making it tougher for average Americans to get home loans in the long run.
“We know that MERS is a problem; we don’t know exactly what that’s going to mean,” said Adam Levitin, a Georgetown University law professor. “We still don’t have really definitive law on any of the issues involved. It’s going to take awhile before we really know the answers.”
MERS, which was created by the mortgage industry in the 1990s and became a key component in the securitization process during the housing boom, has had a range of legal wins and losses.
“The law must not yield to expediency and the convenience of lending institutions,” Justice John M. Leventhal wrote in the New York appeals court ruling last week, adding, “Proper procedures must be followed to ensure the reliability of the chain of ownership.”
Earlier this year, a Michigan court of appeals ruled against MERS, saying state law requires a foreclosing party to have a stake in the loan itself, which the firm did not. Those decisions came after other blows to MERS from courts in Maine, Kansas and California. In March, the company asked banks and servicers to stop foreclosing in the MERS name.
These are “extra precautionary steps that we don’t think are legally necessary, but may reduce some of the administrative headaches,” Tom Deutsch, executive director of the American Securitization Forum, said of the decision to end MERS foreclosures. Still, he said, “I just don’t think it’s possible for the court system to roll back” the current system. “If you don’t allow electronic transfers of mortgages, it takes us back to the stone ages.”
At the same time, the company has won numerous victories in scores of other courtrooms, from Hawaii to Virginia — a tally that it publishes in quarterly and monthly publications. In Minnesota, legislators passed a law stating that MERS explicitly has the right to undertake foreclosures. And the company has spent more than $1 million in lobbying in recent years to garner support among lawmakers on Capitol Hill.
“The court decisions have overwhelmingly leaned in favor of MERS and validating MERS’s business model,” said Janis Smith, vice president of corporate communications for MERSCORP, the firm’s parent company. “Overall, the record is pretty clearly established.”
The company is fighting a multi-front war. It recently received a subpoena from the Delaware attorney general seeking information about its practices. New York’s attorney general also has undertaken an investigation into all aspects of the mortgage lending and securitization business, an examination that likely will involve inquiries into how mortgages were assigned and bundled.
In addition to its legal fight, MERS faces competition from Delaware-based Global Debt Registry, which plans to launch an alternative registry service this summer.
“The more we researched it, the more it seemed there was a need for an alternative” to MERS,” said Mark Parsells, the firm’s executive chairman. “We see the need for a proper alternative that alleviates any ambiguity” related to the ownership of the underlying mortgages.