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Fighting MERS could lead to credit card rates for mortgages

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[Update 1: Aristar Funding Corp. comment] If local governments succeed in the fight against how banks have recorded the transfer of mortgage notes through the Mortgage Electronic Registration Systems, home loans could become as expensive as credit cards, K&L Gates Partner Laurence Platt said Wednesday. At the last panel of the Mortgage Bankers Association summit on the future of mortgage servicing, Platt and Adam Levitin, an associate professor at Georgetown University Law Center, discussed the validity of MERS. The company was created by major lenders to become the single title holder of a mortgage as the owners of the note made transfers back and forth through securitization. This, Platt said, was a solution to "antiquated filing systems" at the local level. In Chicago's Cook County, for example, it can take up to a year for a lender to receive a recorded mortgage back at the time of foreclosure, prepayments and other actions. But local jurisdictions such as the states of California and Virginia are fighting to void foreclosures completed where the lender lays claim to the enforceability of the credit – meaning if the lender can use MERS to prove it has the right to foreclose – on two basis, Platt said. One, MERS replaces the fees lenders used to pay to local governments for recording these notes, and these governments are claiming the banks still have to pay fees for the transfers. Second, Platt said, they are trying to score political points, which will only end up hurting borrowers in the future. "My biggest concern is that local jurisdictions are enacting laws that change the centuries old law on recorded assignments in their locales, and that would void all mortgages in their jurisdiction," Platt said. "But Virginia didn't require assignments in the past. So, if that law passes, you will not be able to foreclose in the commonwealth in Virginia. It's turning real property law on its head." But Levitin pointed out the inaccuracies and full-out holes in the MERS system. In cases he looked up, often the investor or the servicer on the MERS system did not match what was on the note. "MERS ceases to track transfers once the loan is moved into another system," Levitin explained. J.T. Smith, executive vice president and chief investment officer of Aristar Funding Corp., a boutique investment-baking firm based in Florida, said Platt overstates the situation and effect. "The issue is assigned or endorsed in blank does not allow for proper tracking of ownership and was also designed to avoid paying transfer taxes. I think we can all agree that in an advanced society we should not be laying claims to real estate ownership based on who is 'bearing' the note," Smith said. "There is no reason we cannot have full endorsements and transfer taxes paid on every loan sale. Nobody has to wait for the recordation to take place, to resell or package the loan into RMBS, just do the assignments correctly and all is well." Platt admitted there were issues with the system, but he warned that scoring short-term political points could be the end of affordable housing. "They are making secured credit unenforceable," Platt said. "If you think you're going to get 4% mortgages on unsecured loans, you're wrong. You're going to get credit card rates. MERS was designed to make it easy to transfer assignments in modern economics." Write to Jon Prior. Follow him on Twitter: @JonAPrior

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