This story accompanies a special report on foreclosures
which can be seen here:
By Scot J. Paltrow
NEW YORK, July 18 A little-known institution in
Reston, Virginia, has done much to help loan servicers produce
foreclosure documents of questionable legitimacy, according to
multiple recent court rulings and deposition testimony.
Mortgage Electronic Registration Systems, or MERS, has only
about 50 full time employees. Yet it claims to own about half of
all mortgages in the United States, roughly 60 million loans,
and is involved in about 60 percent of new mortgages issued.
Fannie Mae, Freddie Mac and several large banks established
MERS in 1995, as a registry meant to speed up the recording and
transfer of mortgages. Until then, this had to be done in
individual county clerks offices and the process was glacial.
The founders went ahead even though no state laws authorized
them to bypass the required filing with clerks.
The purpose of MERS was simple: to make it possible to track
the owner and servicer of each individual mortgage, and to make
it easier to rapidly transfer mortgages. Lenders designated MERS
as either the mortgagee (the legal holder of a mortgage, even
though MERS had never paid a penny to obtain it), or as
"assignee" (an entity to which a mortgage is entrusted). In
either case, MERS was granted power to assign mortgages as they
changed hands from one real owner (such as a bank) to another
(such as a mortgage security trust) - even though MERS itself
didn't have a financial interest in any of the mortgages. MERS
also claims the right to transfer promissory notes, even though
it doesn't own them.
In deposition testimony beginning in 2009, it emerged that
MERS's own employees did little but maintain the computer
database. The real work was done by loan servicers -- banks and
other companies that do routine work for trusts that own the
mortgages, including collecting and tracking payments from
homeowners and filing to foreclose when a borrower defaults. For
a $25 fee, employees of any of the 3,000 loan servicers that
belonged to MERS could get themselves designated as a MERS "vice
president" or "assistant secretary," authorized to sign official
documents on behalf of MERS.
This April, upon announcing settlements with 14 lenders over
allegedly improper foreclosure practices, federal bank
regulators required MERS too to sign an agreement to reform. The
regulators said MERS had failed to establish adequate internal
controls, and "engaged in unsafe or unsound practices" in
transferring mortgages. Like the 14 lenders, MERS neither
admitted nor denied wrongdoing.
In practice, when servicers needed to create mortgage
assignments to replace missing ones for foreclosure cases, their
own employees, signing as MERS officials, printed out newminted
documents and signed their names to them. MERS has served in
effect as an instant teller machine for mortgage assignments.
Servicers simply have their own employees sign the needed
documents as MERS officials.
For some time, most courts around the country rejected
homeowners' challenges to MERS and upheld the mortgage
assignments. But recent decisions by state and federal appellate
courts have been ruling that MERS doesn't have the right to
transfer promissory notes and mortgages. A New York State
appellate court in June ruled that MERS, because it does not own
the notes, has no power to transfer to servicers the right to
foreclose. Federal district and bankruptcy courts in multiple
states recently have issued similar rulings. (Bank of New York v
Silverberg, 2011 Slip Op 05002, New York State Appellate
Division, Second Department.)
A spokeswoman noted that judges in multiple states continue
to uphold MERS powers. In response to pressure from regulators
and the courts, MERS had said it is redrafting some of its
(Editing by Michael Williams)