Life on MERS: Archive is at center of mortgage mess

This story accompanies a special report on foreclosures which can be seen here:

NEW YORK (Reuters) - 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 to 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 procedures.

Editing by Michael Williams