The mortgage securitization industry has just had a new major front open on its battle with those who are less than happy with the way it has run roughshod over the law. While there are a significant number of court rulings questioning foreclosures in the name of MERS or other practices commonly associated with the use of MERS (for instance, in Oregon, its violation of recording requirements mandated at the state level), no major regulator or public official (beyond county registers of deeds) has gone after MERS in a serious way (New York’s AG has opened an investigation, but it has not led to any litigation).
This has changed with the Delaware attorney general Beau Biden’s filing. The suit takes the interesting angle of pursuing MERS for engaging in deceptive consumer practices. Nevada’s attorney general has also used the deceptive practices argument in suing Countrywide for violation of HAMP procedures.
The damages sought are substantial, $10,000 per violation. Since MERS is a tiny company, with under 50 employees and many of its operations outsourced (and no reason for it to maintain a substantial balance sheet), success in court would almost certainly mean bankruptcy for MERS. In theory, a new consortium or private investors could buy the database out of bankruptcy, but how would one structure its operations so as to not run afoul of the law? Yet with so many mortgages recorded in the MERS database (the registry has claimed over 60 million) the banks will need to find a way to keep it going and operate it in an above-board manner.
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I’ve not yet seen the claim, but DelawareOnline gives an overview of the case:
Delaware joined what is becoming a growing legal battle against the mortgage industry today, charging in a Chancery Court suit that consumers facing foreclosure were purposely misled and deceived by the company that supposedly kept track of their loans’ ownership.
By operating a shadowy and frequently inaccurate private database that obscured the mortgages’ true owners, Merscorp made it difficult for hundreds of Delaware homeowners to fight foreclosure actions in court or negotiate new terms on their loans, the suit filed by the Attorney General’s Office said.
Yves here. Notice the emphasis on the opacity and inaccuracy of the system. Back to the overview:
Because it purported to act as a “common agent” for whichever MERS member owns the mortgage loan at a given point, the company was frequently listed as the owner of record in foreclosure cases. And because it tracks ownership among members electronically, it is able to avoid the transfer fees that traditionally were paid to county Recorder of Deeds offices in such transfers.
Several governments have filed suit against MERS over that fee issue, but Delaware chose to challenge the firm through the state’s Uniform Deceptive Trade Practices Act, alleging that consumers were the ones shortchanged by its system.
Because changes in ownership are recorded only in MERS’ private database, there is “no public trail by which anyone can identify the principals or verify the propriety of the transfer,” the suit charges. The opaque nature of the database also makes it difficult for consumers “to know of or challenge inaccuracies in the MERS System.”
And when MERS foreclosed in its own name, the borrower’s ability to raise defenses was impaired, the suit charges.
So interestingly, Biden considered the filing fee issue but decided the deceptive practices angle was more germane. The dollar amounts that could be obtained under a recording-fee action are a fraction of the ones at issue here. Recording fees saved were typically in the range of $35, and the use of MERS would have saved typically 2 or 3 recording fees, or $70 to $105 per mortgage, versus the $10,000 civil penalty for each consumer violation here. It is still mind-boggling that the securitization industry saw it fit to run roughshod over the property records of this country to save such small amounts over money (over an entire 5000 mortgage securitization, the savings would be $350,000 which in all likelihood was ripped out in more fees rather than passed on to consumers).
Bloomberg adds some details:
Biden asked the court to bar MERS from initiating any foreclosure actions in the company’s name, from acting as a nominal mortgage lender when it didn’t have a “beneficial interest” in the property and from recording such mortgages in the company’s name.
Biden also asked the court to stop MERS from assigning or taking any other actions on Delaware mortgages until the company’s system has been “audited and corrected,” according to the complaint. The court should order MERS to correct the chain of title on Delaware mortgages that were recorded in county offices, Biden said.
Unless MERS gets injunctive relief, these two provisions effectively stop foreclosures in MERS’s name in Delaware. MERS has repeatedly said it does not hold any interest in the property or note in depositions. And the mortgage registry system had also quietly put out a notice to members months ago telling members to stop foreclosing in the name of MERS. Not allowing MERS members (servicers, banks, and their foreclosure attorneys) to assign mortgages out of MERS will stop the foreclosure apparatus cold. This is a legitimate legal strategy to get a foreclosure freeze and force the servicing industry to the table to negotiate a much bigger fix.
Consumers are very upset about MERS (I find it resonates with readers more than many of the other securitization abuses). The sketchy details of the 50 state attorney general draft settlement release leaked thus far suggest that it would include actions related to the creation of mortgage securities, which may well be construed to include the use of and reliance on MERS.
This is going to get interesting. This action raises the embarrassment level and political risk of any state signing on to the so-called 50 state attorney general mortgage settlement. It also points out the degree to which the Federal bank regulator eight week investigation into mortgage securitizations and subsequent actions have been a cover-up. There were plenty of legal theories the Feds, HUD, and the DoJ could have used to apply pressure to get real reform and fix a broken securitization model. But that was never the intent of this exercise. I hope readers will write Biden’s office and thank him for his action at [email protected]
Update 11:20 PM: Reader Barbara W pointed us to the claim on the Delaware website, which we somehow missed when we wrote the post this afternoon. There are two items in the pleading that stood out. One was that the AG did a small scale study of 100 foreclosures in a single county and found that 21 the party listed in the filing did not match the information on MERS’s website. Second, the case makes an interesting use of the chain of title argument. It points out that the mortgages may not have made their way to the securitization trust, and so any filing or action done in via MERS in the name of a trust may be invalid.