NY Times Exposes MERS

Tracking Loans Through a Firm That Holds Millions

By MIKE McINTIRE

Judge Walt Logan had seen enough. As a county judge in Florida, he had 28 cases pending in which an entity called MERS wanted to foreclose on homeowners even though it had never lent them any money.

MERS, a tiny data-management company, claimed the right to foreclose, but would not explain how it came to possess the mortgage notes originally issued by banks. Judge Logan summoned a MERS lawyer to the Pinellas County courthouse and insisted that that fundamental question be answered before he permitted the drastic step of seizing someone’s home.

“You don’t think that’s reasonable?” the judge asked.

“I don’t,” the lawyer replied. “And in fact, not only do I think it’s not reasonable, often that’s going to be impossible.”

Judge Logan had entered the murky realm of MERS. Although the average person has never heard of it, MERS — short for Mortgage Electronic Registration Systems — holds 60 million mortgages on American homes, through a legal maneuver that has saved banks more than $1 billion over the last decade but made life maddeningly difficult for some troubled homeowners.

Created by lenders seeking to save millions of dollars on paperwork and public recording fees every time a loan changes hands, MERS is a confidential computer registry for trading mortgage loans. From an office in the Washington suburbs, it played an integral, if unsung, role in the proliferation of mortgage-backed securities that fueled the housing boom. But with the collapse of the housing market, the name of MERS has been popping up on foreclosure notices and on court dockets across the country, raising many questions about the way this controversial but legal process obscures the tortuous paths of mortgage ownership.

If MERS began as a convenience, it has, in effect, become a corporate cloak: no matter how many times a mortgage is bundled, sliced up or resold, the public record often begins and ends with MERS. In the last few years, banks have initiated tens of thousands of foreclosures in the name of MERS — about 13,000 in the New York region alone since 2005 — confounding homeowners seeking relief directly from lenders and judges trying to help borrowers untangle loan ownership. What is more, the way MERS obscures loan ownership makes it difficult for communities to identify predatory lenders whose practices led to the high foreclosure rates that have blighted some neighborhoods.

In Brooklyn, an elderly homeowner pursuing fraud claims had to go to court to learn the identity of the bank holding his mortgage note, which was concealed in the MERS system. In distressed neighborhoods of Atlanta, where MERS appeared as the most frequent filer of foreclosures, advocates wanting to engage lenders “face a challenge even finding someone with whom to begin the conversation,” according to a reportby NeighborWorks America, a community development group.

To a number of critics, MERS has served to cushion banks from the fallout of their reckless lending practices.

“I’m convinced that part of the scheme here is to exhaust the resources of consumers and their advocates,” said Marie McDonnell, a mortgage analyst in Orleans, Mass., who is a consultant for lawyers suing lenders. “This system removes transparency over what’s happening to these mortgage obligations and sows confusion, which can only benefit the banks.”

A recent visitor to the MERS offices in Reston, Va., found the receptionist answering a telephone call from a befuddled borrower: “I’m sorry, ma’am, we can’t help you with your loan.” MERS officials say they frequently get such calls, and they offer a phone line and Web page where homeowners can look up the actual servicer of their mortgage.

In an interview, the president of MERS, R. K. Arnold, said that his company had benefited not only banks, but also millions of borrowers who could not have obtained loans without the money-saving efficiencies it brought to the mortgage trade. He said that far from posing a hurdle for homeowners, MERS had helped reduce mortgage fraud and imposed order on a sprawling industry where, in the past, lenders might have gone out of business and left no contact information for borrowers seeking assistance.

“We’re not this big bad animal,” Mr. Arnold said. “This crisis that we’ve had in the mortgage business would have been a lot worse without MERS.”

About 3,000 financial services firms pay annual fees for access to MERS, which has 44 employees and is owned by two dozen of the nation’s largest lenders, including Citigroup, JPMorgan Chase and Wells Fargo. It was the brainchild of the Mortgage Bankers Association, along with Fannie Mae, Freddie Mac and Ginnie Mae, the mortgage finance giants, who produced a white paper in 1993 on the need to modernize the trading of mortgages.

At the time, the secondary market was gaining momentum, and Wall Street banks and institutional investors were making millions of dollars from the creative bundling and reselling of loans. But unlike common stocks, whose ownership has traditionally been hidden, mortgage-backed securities are based on loans whose details were long available in public land records kept by county clerks, who collect fees for each filing. The “tyranny of these forms,” the white paper said, was costing the industry $164 million a year.

“Before MERS,” said John A. Courson, president of the Mortgage Bankers Association, “the problem was that every time those documents or a file changed hands, you had to file a paper assignment, and that becomes terribly debilitating.”

Although several courts have raised questions over the years about the secrecy afforded mortgage owners by MERS, the legality has ultimately been upheld. The issue has surfaced again because so many homeowners facing foreclosure are dealing with MERS.

Advocates for borrowers complain that the system’s secrecy makes it impossible to seek help from the unidentified investors who own their loans. Avi Shenkar, whose company, the GMA Modification Corporation in North Miami Beach, Fla., helps homeowners renegotiate mortgages, said loan servicers frequently argued that “investor guidelines” prevented them from modifying loan terms.

“But when you ask what those guidelines are, or who the investor is so you can talk to them directly, you can’t find out,” he said.

MERS has considered making information about secondary ownership of mortgages available to borrowers, Mr. Arnold said, but he expressed doubts that it would be useful. Banks appoint a servicer to manage individual mortgages so “investors are not in the business of dealing with borrowers,” he said. “It seems like anything that bypasses the servicer is counterproductive,” he added.

When foreclosures do occur, MERS becomes responsible for initiating them as the mortgage holder of record. But because MERS occupies that role in name only, the bank actually servicing the loan deputizes its employees to act for MERS and has its lawyers file foreclosures in the name of MERS.

The potential for confusion is multiplied when the high-tech MERS system collides with the paper-driven foreclosure process. Banks using MERS to consummate mortgage trades with “electronic handshakes” must later prove their legal standing to foreclose. But without the chain of title that MERS removed from the public record, banks sometimes recreate paper assignments long after the fact or try to replace mortgage notes lost in the securitization process.

This maneuvering has been attacked by judges, who say it reflects a cavalier attitude toward legal safeguards for property owners, and exploited by borrowers hoping to delay foreclosure. Judge Logan in Florida, among the first to raise questions about the role of MERS, stopped accepting MERS foreclosures in 2005 after his colloquy with the company lawyer. MERS appealed and won two years later, although it has asked banks not to foreclose in its name in Florida because of lingering concerns.

Last February, a State Supreme Court justice in Brooklyn, Arthur M. Schack, rejected a foreclosure based on a document in which a Bank of New York executive identified herself as a vice president of MERS. Calling her “a milliner’s delight by virtue of the number of hats she wears,” Judge Schack wondered if the banker was “engaged in a subterfuge.”

In Seattle, Ms. McDonnell has raised similar questions about bankers with dual identities and sloppily prepared documents, helping to delay foreclosure on the home of Darlene and Robert Blendheim, whose subprime lender went out of business and left a confusing paper trail.

“I had never heard of MERS until this happened,” Mrs. Blendheim said. “It became an issue with us, because the bank didn’t have the paperwork to prove they owned the mortgage and basically recreated what they needed.”

The avalanche of foreclosures — three million last year, up 81 percent from 2007 — has also caused unforeseen problems for the people who run MERS, who take obvious pride in their unheralded role as a fulcrum of the American mortgage industry.

In Delaware, MERS is facing a class-action lawsuit by homeowners who contend it should be held accountable for fraudulent fees charged by banks that foreclose in MERS’s name.

Sometimes, banks have held title to foreclosed homes in the name of MERS, rather than their own. When local officials call and complain about vacant properties falling into disrepair, MERS tries to track down the lender for them, and has also created a registry to locate property managers responsible for foreclosed homes.

“But at the end of the day,” said Mr. Arnold, president of MERS, “if that lawn is not getting mowed and we cannot find the party who’s responsible for that, I have to get out there and mow that lawn.”

Judges are starting to “Get It”

What keeps us going here? Spending days interacting directly and indirectly with homeowners who are under such duress, in danger of losing so much, honestly I must confess it weighs on Neil and I some days. We understand it is not just a “piece of property” or an “asset,” but that the “home” is a refuge for most people …the fabric of family and emotional security are intertwined often across three generations of parents, children and grandparents. The emotional impact on marriages and the “children of foreclosure” will last long after the financial impact has been resolved.

Our mission with the blog was originally to “spread the message” that the securitization scheme of recent years had opened up numerous affirmative defenses and potential counterclaims that could be asserted that didn’t exist in the last century. The genius’ on Wall Street forgot that the asset we are dealing with here is “Real Property.” Black letter law that has been on the books for a hundred years nothing new and fancy, the Uniform Commercial Code(UCC). Getting the message and the information out to both homeowners and lawyers is part of the objective, providing tools and a forum for them both to use has spawned a movement here that could not have been imagined a year ago.

Our mission with the Lawyers Workshops was to surface those lawyers who “get it” so we would have local counsel to refer homeowners to for competent representation. It has always been our position that you should have representation by licensed local counsel. However, we cannot ignore the fact that the current system necessitates some homeowners represent themselves because of either financial limitations or the inability to find any lawyer that would take their case even if they could afford to pay them.  Likewise, we too are dedicated but not rich, hence the “Donation Forms” you find posted on the blog site. What keeps us going? Some days it is getting emails like those below:

Hello Gentleman,

I just wanted to send you an email and let you know what the judge said at court Thursday. At first I did ask for a continuance. The attorney for “Ocwen” objected and said I had plenty of time. The judge asked about the situation she said it was a simple “unlawful detainer”, I said it was not a simple situation. He asked if it was due to foreclosure she said “yes”…December 27, 2007. He asked me, and I explained to him that “they” had contacted me, “they” stopped my payments, and then foreclosed while I was waiting to get the paperwork in line……….He asked who “Ocwen” was, she didn’t seem to know the answer, she was representing REO Properties….( I knew, but kept my mouth shut…her confusion was beautiful) ….The judge said…So you don’t even know if this company is still in business? They could be closed up by now. Given the way these things have been sold and sliced up and resold it’s hard to tell who owns this thing. This note could be in a box somewhere with hundreds of other notes, or sitting on “someone’s” desk somewhere…we don’t know. Given the current state of this country’s economy I will grant your continuance, I don’t want to put a judgment on you if you have a case here. It seems if there weren’t something to this, they would have had you out by now.

A Reality Check on Mortgage Modification

By GRETCHEN MORGENSON

WE are almost two years into the housing storm and foreclosure floodwaters continue to rise. A record 800,000 homes received a default or auction notice in the first quarter, an increase of 9 percent from the fourth quarter of 2008, according to RealtyTrac. And one in five mortgage loans exceeded the value of the underlying property at the end of 2008, according to data from American CoreLogic Inc.

With figures like these, it’s only natural that many in Congress want to lend a hand to troubled borrowers. And so legislators have put together the Helping Families Save Their Homes Act of 2009, a bill that aims, among other things, to prod financial companies into modifying more troubled home loans.

Mortgage modifications are, in theory, appealing. But in reality, the most popular types of modifications — where delinquent amounts are simply tacked onto the mortgage — tend to default again later with distressing regularity.

Still, pushing loan modifications is a Congressional priority. The bill, which passed the House on March 5, may soon come to a vote in the Senate.

Unfortunately, the bill would not only pay institutions handsomely for each modification they do — at $1,000 each, a bounty that could reach $10 billion — but it would also create opportunities for mortgage servicers to profit at the expense of investors who own the loans.

And who are these investors? Sure, they include big-time speculators and market sophisticates. But because so many of these securities also found their way into portfolios of mutual funds and other professionally managed accounts, individual investors could be harmed if the bill becomes law.

Mortgage securities have covenants — known as pooling and servicing agreements — that define their terms. They require loan servicers to act in the best interests of investors when they make decisions about how much forbearance to give troubled borrowers. This requirement has led some servicers to reject loan modifications. Changing the terms of the mortgages, they contend, can hurt investors by reducing interest payments. Lawsuits could follow.

To deal with this, the new Congressional bill would protect servicers from potential suits brought by mortgage investors if loans were modified. The bill also says that servicers wouldn’t be obligated to repurchase loans from a pool because of a modification.

The danger, some investors and securitization lawyers say, is that these provisions might allow some financial companies that engaged in improper lending — and also happen to be loan servicers — to escape legal punishment.

For example, if the servicer of an abusive loan was also the initial lender, the bill would take that company off the hook for any future predatory lending suits. The safe harbor, therefore, could encourage servicers to modify their most poisonous loans, even if they are not yet near default, just to reduce their legal exposures.

And allowing servicers to void buyback requirements on loans they modify would eliminate any liability for breaches in representations and warranties on the loans they made to investors who subsequently bought into the pools.

“Main Street investors need to know that banks who received their tax money through government bailouts are going to profit again from the safe-harbor loan modification provisions at the expense of their mutual funds, 401(k)’s and pension investments,” said Thomas C. Priore, chief executive of ICP Capital, an investment firm that specializes in credit markets.

Another perverse incentive that the bill would create involves the problem of conflicting interests among investors who own the first mortgage on a property and holders of the second liens. First liens of any kind take priority and are supposed to be paid off before secondary obligations are. But many of the companies servicing loans today own second liens on the same properties whose first mortgages are held by investors in securitizations.

By removing any liability associated with modifying the first mortgage, the banks that own the second liens can expose investors to losses or reduced income while keeping their own interests in the second lien intact.

There is a lot of money riding on this conflict. Of the roughly $12 trillion mortgage market, $1 trillion is in second liens. The bulk of those liens — 70 percent — are held by banks, analysts say. And while the top four servicers administered 55 percent of first liens in the fourth quarter of 2008, they also held $440 billion in second liens.

“In corporate bankruptcies, banks are enforcing their positions as senior lien holders,” Mr. Priore said. “Yet they want mortgage investors who hold first liens to take a back seat to their subordinate interests.”

In addition to these downsides, it is not even clear that a safe harbor for servicers would encourage prudent loan modifications. Mortgage pool documents don’t restrict such changes. Typically, lawyers say, these agreements allow servicers to change the terms of a mortgage loan if it is in default or in imminent danger of defaulting.

Because servicers’ actions are dictated by the best interests of the investors in the mortgage pools, loan modifications that minimize the kinds of losses typically seen in foreclosure should be an easy sell. That may be why investor suits against servicers have been so rare.

James B. Lockhart III, director of the Federal Housing Finance Agency, said that while he has not taken a position on the bill or its safe-harbor provision, servicers can and should do far more in the way of loan modifications.

“There are definitely unintended consequences” to the legislation, Mr. Lockhart said. “We would hope that the servicers use the flexibility they already have in the pooling and servicing agreements and make the modifications they can. That is the No. 1 thing.”