Why MERS Is Center of Foreclosure Mess

MERSNews stories placing the Mortgage Electronic Registration Systems (MERS) at the center of the foreclosure storm make MERS the villain in this financial crises. While it's true MERS does enable foreclosures, the problem is a lot bigger than the electronic mess at MERS.

Courts in some states are refusing to foreclose on homes because of the lack of paperwork to prove who actually holds title to the property.

For example, as early as June 2009 the Missouri Court of Appeals ruled that MERS lacked the authority to assign a mortgage from one servicer to another. Since the transfer has no force, the court ruled, the owner of loan could not pursue the delinquent borrower. Thousands of more cases involving MERS and its rights are making their way through the courts.

So what is MERS? MERS is a huge electronic database that tracks more than 60 percent of the residential mortgages in the U.S.
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with a registry of 67 million mortgages on file. Its staff consists of just 45 people in Reston, Va. Yet the company is listed in local land records as the mortgage holder of these 67 million mortgages.

How do 45 people manage millions of foreclosures?

They don't. In trying to come up with a solution, MERS authorized 22,000 mortgage servicers, debt collectors and foreclosure law firms to identify themselves in cases filed with the courts as "vice president" or "assistant secretary" of MERS. But what gave MERS the right to do that and will it stand up in the courts? In many states, banks are finding out that it won't. That's one of the key reasons behind the foreclosure moratoriums.

You may wonder how we got into such a mess in the first place. Banks wanted to find some way to quickly transfer the ownership of mortgages from one investor to another in order to more easily sell the mortgages. They packaged these mortgages into securities. As these securities changed hands, MERS was supposed to serve as the electronic database for who owns what.

MERS was designed in the 1990s with the idea that it would maintain a vault for keeping original documents, but that idea was quickly scrapped and MERS left the responsibility of guarding the original mortgage (or deed of trust) and the promissory note (or IOU) with the originating lender. As the housing bubble burst, many of these originating lenders went bust as well, and the original paperwork was lost.

Next, mortgage bankers decided they could cut more corners and simplify record keeping by making MERS the "nominee" for the mortgage holder in local land records. That way when mortgages changed hands, the new owner just had to record the change in MERS's electronic database and not record the change in county records. That saved billions of dollars, but left homeowners in the position where they may not be able to find out who really holds their loan.

MERS allows investors to withhold their names from being displayed in the database. There are also some questions about whether all the transfers of each property is accurate. One real estate expert told theWashington Post, "Nobody at MERS is responsible for due diligence, to go back and question whether the information they're getting is accurate. It's just like a computer program. If you're going to put garbage in, you're going to get garbage out."

Not only are consumers hurt by this electronic maze, but counties have lost billions in property transfer fees. Lawsuits have been filed in 17 states alleging that banks cheated counties out of billions of dollars.

Rep. Marcy Kaptur, an Ohio Democrat, introduced a bill in the last Congress that would prohibit Fannie Mae and Freddie Mac from using MERS. That bill failed to get any traction in the 111th Congress. As more information becomes known about this electronic maze, this type of legislation may gain traction in the next Congress. If it succeeds, it would kill MERS.

Lita Epstein has written more than 25 books including The 250 Questions You Should Ask to Avoid Foreclosuresand The Complete Idiot's Guide to Personal Bankruptcy.

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