ImMERSed: Mortgage Electronic Registration Systems in Louisiana
Thousands of mortgages in the Capital Region are held by an entity that has brought foreclosures to a standstill in some states.
Mortgage Electronic Registration Systems is a private cyber registry that claims to hold the title to about 60 million mortgages across the country. MERS was founded 16 years ago by Fannie Mae, Freddie Mac and some of the largest lenders in the nation, including JPMorgan Chase, Wells Fargo and Bank of America.
Its purpose: speed up the securitization process, enabling banks to quickly bundle, buy and sell mortgages in secondary financial markets by circumventing the tedious—and costly—process of filing land ownership paperwork with county and parish clerks.
“With securitization, the ownership of the mortgaging and the servicing rights change hands several times,” says Darin Domingue,
deputy chief examiner with the Louisiana Office of Financial Institutions. “My understanding [of] how MERS was developed was to eliminate all the necessity of filing in all the courthouses all those changes.
“MERS would be assigned as the beneficiary of the mortgage documents, and as changes would go with their members—the individual lenders and servers—they could change ownership through their system without having to file the documents in the individual courthouses.”
Although MERS has yet to prove troublesome in Louisiana, its legal authority has been called into question in some states. Homeowners nationwide are fighting foreclosure proceedings on the grounds that MERS doesn’t have a legitimate claim to their mortgages; some of them are winning.
Sales of hundreds of foreclosed homes in Oregon have been halted or withdrawn after federal judges repeatedly questioned their legality because of MERS. The Arkansas Supreme Court ruled last year that MERS could no longer file foreclosure proceedings in that state because it doesn’t make or service any loans. In Utah, a local judge did not recognize MERS’ standing and allowed a homeowner to rip up his mortgage and walk away debt-free.
A U.S. bankruptcy judge in New York, Robert E. Grossman, ruled that “the very foundation” of the MERS business model is “absurd, at best.” He decided it could no longer act as an “agent” for the owners of mortgage notes, even if the ruling eroded the basis of the mortgage business.
And county clerks in some states are now suing MERS, seeking billions of dollars in unpaid recording fees associated with home loans that have been bought, sold and securitized since 1998, on the grounds that state laws require the records be kept in the courts. One case alleges that MERS owes California as much as $120 billion in unpaid fees.
Fred Sliman, public information officer with the East Baton Rouge Parish Clerk of Court, says currently there are no plans to pursue back fees here.
The problem with MERS, critics say, is that homeowners have a difficult time contesting foreclosures because of the challenge in identifying what parties hold title to distressed mortgage loans and are truly authorized to negotiate. MERS doesn’t maintain the mortgage or deed of trust, or the promissory note. The issue also means that many land transactions are no longer a matter of public record.
Alan White, a law professor at Valparaiso University’s School of Law in Indiana, last year matched MERS’ ownership records against those in the public domain. Accuracy was lacking, to say the least.
“Fewer than 30% of the mortgages had an accurate record in MERS,” White told the New York Times. “I kind of assumed that MERS at least kept an accurate list of current ownership. They don’t. MERS is going to make solving the foreclosure problem vastly more expensive.”
Just walk away
So does this mean Louisiana homeowners in financial trouble might not have to pay the piper if MERS is listed on their mortgage? Probably not.
Malcolm A. Meyer, a real estate transactions attorney and adjunct professor of real estate and ethics at Tulane University Law School, says he doesn’t expect to see a stymied foreclosure situation in Louisiana.
“By and large, Louisiana foreclosure attorneys have done everything proper, as far as I have seen,” he says. “If anything arises, it certainly won’t be to this same level” seen in other states.
LOFI’s Domingue says many of the legal cases involving MERS have questioned whether the foreclosures at issue lacked the necessary documentation. That doesn’t mean the lender still can’t foreclose on the home.
“I would caution anybody who reads about these lawsuits having been dismissed not to think that the debt has been discharged,” he says. “It may not have. The litigant may come back and do an amended filing or a new filing with the promissory note itself and actually assert a claim against the property.
“Some other cases also claim that MERS wasn’t the proper party to bring suit because they weren’t the holder of the debt. In that case, there’s nothing in there that will necessarily preclude the holder of the debt itself from coming back and filing suit themselves.”
Since these legal questions have arisen, MERS in February sent out a notice advising its members not to foreclose in MERS’ name, and suggested they record mortgage transfers in county records, even if state law does not require it. Freddie Mac has told servicers managing its loans that they can no longer foreclose in the name of MERS, effective April 1.
Additionally, courts in New York, Massachusetts, Georgia, Hawaii, New Hampshire, California, Utah, Kansas and Wyoming have upheld the legality of MERS.
MERS spokeswoman Karmela Lejarde did not return a call requesting information about MERS in Louisiana.
“Lawsuits alleging baseless attacks on MERS will not be tolerated in the court system any longer,” she says in a recent company news release. “We have proven over and over again in courts around the country that MERS can be a mortgagee. We are very transparent in what we do and will continue to defend against other meritless lawsuits.”
In a letter to the New York Times in March, MERS President/CEO Paul Bognanno says the corporation “plays an important role in America’s mortgage finance system, and we are committed to continue working with our partners and regulatory authorities to improve the home mortgage process.”
A troubled industry
The MERS controversy is just the latest trouble for the mortgage industry. Attorneys general in Louisiana and 49 other states, mortgage regulators and federal agencies are investigating the practices of the nation’s largest servicing entities.
LOFI is investigating four mortgage servicing entities licensed to do business in Louisiana, none of which are based in the state.
The investigation centers on servicing and foreclosure procedures, as well as allegations of robo-signing, in which overloaded loan servicing representatives authorized tens of thousands of court papers each month without verifying the information contained in the paperwork, such as foreclosure amounts and assessments.
“I think a lot of the problems are in servicing generally,” Domingue says. “MERS is obviously a part of that, since its members hold such a large percentage of the market. I think a lot of it is going to be shaking out in the next several months. You’re going to see amended filings in courthouses, and I’m sure there are going to be plenty of lawsuits as well.”
He says it’s too early to tell how Louisiana will be impacted. The state historically has had an above-average delinquency rate but a high default cure rate. Overall, that means the state has a low foreclosure rate compared to other states.
Domingue advises homeowners facing foreclosure or financial problems to consult an attorney, especially if they suspect wrongdoing in their loan. Anyone who claims the ability to modify a loan must be licensed by LOFI. The office has a consumer complaint hotline at  525-9414.
“Anytime you have an economic downturn or something, you have to be concerned about people who are going to try to take advantage of those who find themselves in a difficult situation,” he says. “I would caution borrowers who are approached by anyone who says they can get you out of your mortgage or help you avoid foreclosure. It’s best to consult an attorney before taking any action.”