Critics say MERS foreclosure halt shows broken business model
A note from Mortgage Electronic Registration Systems telling servicers to no longer foreclose on properties under the MERS name is being seized by the firm's critics to suggest the registry's legal issues are finally being recognized. Data systems expert Daniel Pennell previously testified before the Virginia House of Representatives and criticized MERS for clouding the chain of title by separating mortgage notes from the mortgages themselves. He said a New York bankruptcy judge already held that MERS cannot assign a mortgage, so Pennell explains, if they can't make the assignment, they are not going to be able to legally assign the mortgage out of MERS and back to servicers as part of this recent change, he said. Now that MERS has said servicers can no longer foreclose under the MERS name, Pennell believes it has potentially opened itself up to a myriad legal issues. At the same time, Tonya Marsh, a law professor at Wake Forest University School of Law, said while MERS has received several negative opinions in state courts -- including New York -- this area of the law is complicated and how these decisions are interpreted and applied depends on the individual jurisdiction. So, she says, some are interpreting these decisions very narrowly and as trouble for MERS, while other interpretations in different jurisdictions might view MERS and their business model in a different light, Marsh explained. In fact, MERS said just this week, a bankruptcy court in Massachusetts granted Aurora Loan Services a motion for relief from a stay after ruling that MERS' assignment allowed the servicer to foreclose on the loan.
"The mortgage specifically identifies MERS as the mortgagee under the instrument and granted it and its ‘successors and assigns’ a power of sale," Judge William Hillman wrote in the opinion.MERS was built by Fannie Mae, Freddie Mac and major lenders as an electronic registry of mortgage records, essentially allowing the entity to hold mortgages traded in the secondary market while servicers and lenders changed the notes "like a baseball card," Pennell said. In response to questions about the announcement and its business model, MERS said Thursday, it "has made this announcement to strengthen business practices, and minimize reputation, legal and compliance risk to MERS and its members," said Dan McLaughlin, MERS executive vice president. Marsh explained that the New York judge held that MERS could not function as both mortgagee of record and nominee. She said that case was a difficult one for MERS because the court essentially said MERS didn't hold the debt, so it could not be the mortgagee of record. That only leaves them the opportunity to function as a nominee, she said. However, in that role in New York, MERS would not have the ability to assign the mortgage as just a nominee. She said this ruling created a situation in the New York jurisdiction "where they lost rights," and then have "no remedy." The other major problem Pennell argues is "you are never allowed to separate the note from the mortgage," but in MERS that's just what they did. "They have structurally separated the mortgage from the note," he added. "Therefore, the ownership of the two have already been separated." A spokeswoman for the home loan division of Bank of America (BAC), which services loans previously held by Countrywide, said the bank does not foreclose in the MERS name. JPMorgan Chase's (JPM) Home Lending unit, which functions as servicer for 75% of the loans in its system, has a policy dating back two years that essentially takes the loan out of the MERS name before it goes into foreclosure, a spokesperson for the company said. Wells Fargo (WFC) and Citigroup (C) were not immediately available for comment. The MERS change will not impact the state of Florida since the registry implemented the same rule in the Sunshine State three years ago, forbidding a foreclosure under its own name, said foreclosure defense attorney Tom Ice, founding partner of Ice Legal P.A., in Palm Beach, Fla. Ice says that change happened after a court found that MERS could bring a foreclosure action if they could prove they were the actual note holders. While that decision was technically made in MERS' favor, giving them legal wiggle room, Ice said it left a very important question on the table: Could MERS actually prove it was the actual holder of the note? "What's astounding about this proposed rule is that finally MERS is acknowledging there are problems with its business model of claiming to be the owners and holders of these notes," Ice said. "In that sense, it casts a shadow over cases in the past where MERS got the judgment and the title passed, using their name rather than the true name of the trust or servicer." Critics and supporters of MERS don't know what the final outcome will be, but they say the dilemmas are not going away. "I think it has the potential of slowing things down even more," said Ice when discussing the rulings impact on foreclosure processing. Write to Kerri Panchuk.