The greatest hurdle standing in the way of a complete housing recovery is the backlog of distressed properties that must be liquidated. The banks must release these properties to the market in a controlled fashion. If released too quickly, they will crush house values. If released too slowly, the recovery will be further delayed. However, the control of the flow may no longer be in the hands of the banks. The issue is rather complicated. It starts with the formation of Mortgage Electronic Registration Systems (MERS).
What is MERS?
According to a white paper by the National Association of Independent Land Title Association (NAILTA):
MERS is a creation of some of the most powerful forces in the real estate and mortgage banking industries. In the mid-1990’s mortgage bankers decided they no longer wanted to pay recording fees for assigning mortgages between institutions. This decision was driven by securitization – a process of pooling many mortgages into a trust and selling income from the trust to investors on Wall Street …To avoid paying county recording fees each time the mortgages were assigned, mortgage bankers and the title insurance industry formed a plan to create one shell company that would pretend to own all the mortgages in the country. By doing so, the mortgage bankers would never have to record assignments since the same company would always “own” all the mortgages. The company they created is now known as Mortgage Electronic Registration Systems, Inc. or MERS.
Why will this create a challenge with foreclosures?
We go back to the NAILTA report:
If MERS is just an agent or nominee, there are state land title recording acts that prevent shell companies, nominees or other forms of agents from holding title to real estate. Thus, however MERS “holds” a mortgage, the construction is, at best, problematic. Again, if it cannot hold title as a nominee, MERS and its lender assignees cannot enforce the mortgage.
A system designed to simplify a process might have instead complicated it further. Now the courts are uncertain as to whether or not they will recognize MERS as having the right to foreclose on said mortgages. Some have allowed it ; some have not.
Can the courts actually prevent MERS from foreclosing on mortgages?
DSNews reported on one such case:
A New York judge has ruled that Mortgage Electronic Registration Systems, Inc. (MERS) does not have the right to transfer mortgages on behalf of its members, meaning it does not have the right to file foreclosures on behalf of lenders.
The company has recently been under fire for the practice, but the company defended its actions saying that borrowers are required to sign documents stating that MERS can assume rights and responsibilities on behalf of creditors...
But Judge Robert Grossman ruled MERS does not have the authority to act on behalf of its members, and the actions of the company are actually illegal, no matter what papers MERS requires members sign. In his statement, Judge Grossman said:
“The court recognizes that an adverse ruling regarding MERS’s authority to assign mortgages or act on behalf of its members/lenders could have a significant impact on MERS and upon the lenders which do business with MERS throughout the United States."
How many mortgages are we talking about?
MERS currently is involved in almost half the mortgages in America. Can the courts stop foreclosures on all these mortgages? Judge Grossman addressed this exact point:
“The court must resolve the instant matter by applying the laws as they exist today. MERS and its partners made the decision to create and operate under a business model that was designed in large part to avoid the requirements of the traditional mortgage recording process. This court does not accept the argument that because MERS may be involved with 50 percent of all residential mortgages in the country, that is reason enough for this court to turn a blind eye to the fact that this process does not comply with the law.”
How has MERS reacted to this ruling?
MERS, in an announcement on their website dated 2/16/2011, alerted their clients to not foreclose in their name for the next 90 days:
MERS is providing the following guidance to all Members to strengthen business practices, and minimize reputation, legal and compliance risk to MERS and its Members. In recent months legal challenges have arisen regarding alleged inadequacies and improprieties in the foreclosure process including allegations of insufficient or incorrect supporting documentation and challenges to the legal capacity of parties’ right to foreclose. MERS is committed to reevaluate and strengthen its systems and procedures to protect against these types of legal challenges…
MERS is planning to shortly announce a proposed amendment to Membership Rule 8. The proposed amendment will require Members to not foreclose in MERS’ name. Consistent with the Membership Rules there will be a 90-day comment period on the proposed Rule. During this period we request that Members do not commence foreclosures in MERS’ name…
We encourage Members to bring foreclosures only in the name of the holder of the note, in the name of the trustee or the servicer of record acting on behalf of the trustee.
This definitely will again slow down the banks’ ability to bring foreclosures to market. That will be good news for home prices in the short term. It will also delay the recovery of the housing market.
It seems there will be further delays on many foreclosures. That gives sellers a window of opportunity to sell their home before many of these discounted, distressed properties come to market as competition.