At issue in many cases in Rhode Island and elsewhere is the privately held MERS’ right to foreclose on property owners or assign the mortgage to another company so it can, in turn, foreclose. Shoddy paperwork in which the transfer of mortgage ownership from one holder to the next is a central issue. In many cases, the property owner admittedly is in default but is challenging the paper trail. [...]
[L]awyers Todd S. Dion and Babcock argue that cities and towns are losing millions in recording fees as a result of the process, and that MERS is allowing mortgages to be sold without complying with state law.
The backbone of American real estate law is a network of state-run registries, which track who owns what properties and whether the property is subject to any encumberances such as a mortgage. In the 1990s, however, the banking industry created MERS as an alternative, privatized registry that would allow banks to transfer mortgages more quickly in order to facilitate the creation of the kind of mortgage-backed securities that were a centerpiece of the recent economic crisis.
The result has been a disaster. One study found that “[f]ewer than 30 percent of the mortgages had an accurate record in MERS.” To make matters even worse, MERS functions based on a legal slight of hand that treats it as the technical owner of roughly half of all home mortgages in the country. As a result, approximately one-third of all home mortgages are caught in a vortex of uncertainty. The homeowner doesn’t know who owns their debt obligation, and the courts have no idea who actually has the legal right to foreclose.
MERS’ attorneys essentially argue that it should be above legal scrutiny because it is too big to enjoin. Shutting down MERS’ ability to foreclose on properties could throw half of the nation’s foreclosures into legal limbo, and there’s no telling what impact this could have on the nation’s housing market. Several judges, however, have ignored MERS’ scare tactics. The Arkansas Supreme Court held last year that MERS can no longer bring foreclosure proceedings in that state. A federal bankruptcy judge in New York held that “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.” Last week’s Rhode Island decision is only the latest warning shot over the banking industry’s bow.
As a final note, it will be interesting to see whether the banking industry attempts to discredit last week’s decision by noting that it was handed down by newly-confirmed Judge John McConnell. The Chamber of Commerce led a blistering campaign of obstruction against McConnell’s nomination because he committed the unforgivable sin of trying to hold lead paint companies and the tobacco industry accountable to their consumers. McConnell’s assignment to a high-profile foreclosure case is no doubt exciting the banking industry’s PR department, even if they have no one to blame for MERS’ problems but themselves.