Fight over who has legal right to foreclose makes mess worse

When Randy Persten's mortgage was foreclosed in 2008, he looked at the paperwork and found a mystery. A company he'd never heard of — called Mortgage Electronic Registration Systems, or MERS — was bringing the foreclosure action against him.

Something didn't seem right. So he got a lawyer and fought the foreclosure, arguing that MERS couldn't foreclose because it didn't own the mortgage note he'd signed promising to pay.

Persten ultimately succeeded in getting the action dropped, only to see a new action brought by a different company that says it is the true owner of his mortgage note. Persten still isn't sure who owns his mortgage.

"Who was this MERS? Now we have no idea who owns the paperwork," says Persten, an appliance salesman in West Palm Beach, Fla. "If I won the lotto, I'd pay off my mortgage, but I don't know who to pay."

Persten's confusion is shared by other homeowners who are fighting foreclosure by challenging the legal powers of MERS, a company set up by the mortgage industry that is behind scores of foreclosures. Some homeowners are crying foul in lawsuits alleging MERS lacks the legal right to pursue foreclosures and in some cases they allege MERS has filed flawed documents to show it has the right to take a house.

The disputes over MERS are erupting into a second battleground over the mortgage industry's business practices, just as states and the federal government are opening examinations into whether mortgage servicers failed to properly verify and notarize legal papers to get court approvals of foreclosures in some states. Dozens of state attorneys general are expected to announce this week a joint investigation into alleged paperwork deficiencies, Ohio Attorney General Richard Cordray said Sunday.

The coming investigations and reviews threaten to extend the nation's foreclosure crisis, delaying the completion of many foreclosures against delinquent homeowners whether or not they win in the end. GMAC Mortgage said last week that even if "procedural mistakes" occurred, there was no disputing that borrowers had defaulted and it has the right to foreclose. JPMorgan Chase and GMAC Mortgage have suspended foreclosures in 23 states while they review their procedures, and on Friday, Bank of America widened its suspension from those 23 to all 50 states.

The MERS challenges are turning into a pitched legal battle playing out in the courts.

MERS was set up in 1997 by the country's largest banks to electronically register mortgage title transfers rather than filing them in county offices. The Reston, Va.-based company tracks more than 64 million mortgages, and 60% of all new mortgages.

MERS may not be well known to homeowners, but its name turns up on the papers that most borrowers sign at closing.

At that closing, two documents are created. One is the promissory note explaining the terms of the loan. The second is the mortgage showing there's a lien on the property and who holds it.

In the past, when a mortgage was sold, the new owner filed mortgage documents with county offices showing it now held the lien and paid recording fees.

But as the volume of refinanced mortgages grew in the late 1990s, the mortgage industry sought to reduce its fee expenses and speed up the process of re-assigning mortgage liens as mortgages were being rapidly bought and sold.

By having MERS hold mortgage liens for the owners, MERS eliminated the need for servicers to file paper documents reporting a lien holder change each time a mortgage was sold. MERS gives loans identification numbers, which are used to track changes in loans' servicers and owners.

"Without MERS the current mortgage crisis would be even worse," MERS said in a statement.

But critics, like North Carolina bankruptcy lawyer O. Max Gardner, say the MERS database isn't always up to date, leading to uncertainty about the lien holder's identity. "Sometimes MERS members enter the information, and sometimes they don't."

MERS says it has the legal right to foreclose when the owner of the loan chooses to make MERS the holder of the promissory note and gives it the right to enforce the mortgage if it goes into default. But lawyers representing homeowners disagree, saying MERS doesn't have the legal right to foreclose because it doesn't actually own the mortgage loan.

'It's a mess'

It could become a major entanglement for the housing industry. If judges rule that MERS has no legal grounds to foreclose on homeowners because it doesn't own the mortgage, homeowners could start challenging current foreclosures or past ones.

"This will be resolved legally. Will it take years? I don't know," says Guy Cecala, of Inside Mortgage Finance. "Like everything else, it's a mess."

Some state court judges have ruled that MERS can't foreclose on homeowners because it doesn't own the loans. In August, for example, an appellate court judge in Maine ruled MERS could not bring a foreclosure action because it lacked legal standing to do so. The judge found the borrower had never assigned the mortgage note to MERS and that MERS had not been harmed when the borrower didn't make payments.

MERS says that because it acts on behalf of the servicer that collects on loans, it has the authority to bring foreclosures.

MERS' position has found legal support in some states. Minnesota has a law upholding MERS' right to bring foreclosure actions. In Arizona, a state judge this year dismissed a class action by homeowners, ruling that the MERS system was not fraudulent.

MERS says the new lawsuits are baseless and that it's not true that banks that use MERS make it more difficult to find out who owns mortgages. MERS makes mortgage data more accurate and title information more reliable, it says. "The assertions involving MERS are false and utterly without merit. We will vigorously defend against these accusations and are confident that we will prevail," MERS said in a statement.

MERS' holding of mortgages isn't the only contentious issue against the company. Charges about faulty foreclosure papers that have been leveled against mortgage servicers have also been made about MERS.

In March, a Florida judge dismissed a foreclosure case after reviewing documents signed by a MERS agent. The Pasco County judge found the paperwork was fraudulently backdated in an intentional effort to mislead the court.

In Ohio, Secretary of State Jennifer Brunner is asking a federal prosecutor to look into whether officials who signed foreclosure documents on behalf of MERS were really authorized to do so.

"We're talking about people losing their homes," Brunner says. "This is serious."

New lawsuit in Kentucky

This month, homeowners in Kentucky filed a civil-racketeering class action against MERS, saying it conspired with Ally Financial's GMAC Mortgage unit, Citigroup and other banks to illegally foreclose on them. They say the banks are wrongly foreclosing on homes through MERS, which lacks titles to the houses.

"Their entire reason for existing was and still is — until they are shut down — to hide from the public record, creditors and the homeowners, the identity of the parties who could claim an interest in the mortgage loans recorded in their name," says Heather Boone McKeever, a lawyer in Lexington representing the Kentucky homeowners.

With lawsuits against MERS seeking class-action status in Arizona, California and Nevada, judges' rulings could have major ramifications for the housing industry. If they rule against MERS, foreclosures across the country could be challenged.

Fannie Mae changed its policy in May, stating that MERS must not be named as a plaintiff in any foreclosure action on a mortgage loan owned or securitized by Fannie. Its policy is that the loan's servicer should foreclose, according to MERS.

Meanwhile, homeowners who'd never heard of MERS until they were foreclosed on are raising questions.

Luis Fitzgerald, 58, of Orlando, has been fighting JPMorgan in a foreclosure since 2008. His mortgage is held by MERS. Since he was foreclosed on, he's been living in hotels. The home he had owned is vacant. He says the battle has left him with tension headaches, and he prays each night for help.

"MERS broke the old system and has fooled the courts into believing they have the right to foreclose and have the note," says Fitzgerald, who makes art for greeting cards. "It's not right."

By Stephanie Armour, USA TODAY

Source: USA TODAY