High Noon: Banks vs. The Law (Mortgage Foreclosures) – Part 4

We start to get at the root of the problems in the foreclosure crisis with this article from the Washington Post.  Essentially, the big banks decided that in the 1990’s that the existing laws governing real estate transactions and deed recording were inconvenient.  They thought they had a better way.  But rather than pushing for the law to be changed (which they could easily do with their formidable lobbying resources), the banks decided they didn’t have to conform to existing laws.  They decide to create their own (emphasis is mine):

The land title system that went largely unchallenged in the United States for centuries became an obstacle in the 1990s. That’s when financial firms began to ramp up a process called securitization, bundling and selling pools of home loans to sell to investors. Each time the loans were reassigned, the new owner had to record the transfers with local clerks.

Several executives in the mortgage industry came up with a faster, easier approach: MERS. The list of MERS shareholders includes an array of banks, lenders and title companies. Among them: Fannie MaeFreddie MacBank of America, GMAC, Washington Mutual, Wells Fargo and AIG’s United Guaranty Corp.

Here’s how MERS works: When a homeowner closes on a house, the paperwork signed at settlement often appoints MERS as a “nominee” for the lender and for whomever the lender might sell the mortgage to down the road. Each time the loan is sold and resold, MERS tracks the reassignment in its computer system, without generating paperwork.

The company says such an arrangement benefits all parties – consumers, lenders and investors.

But after the MERS computer system went live in 1997, some county recording offices complained that the company was bypassing the legal process and raking in money charging fees that were lower than those charged by municipalities. They were largely ignored.

“It wasn’t like Congress or state legislators did anything,” said Christopher L. Peterson, a law professor at the University of Utah who has consulted in cases against MERS. “The mortgage industry just changed how the land title system worked without getting anyone’s okay.”

MERS has consistently claimed authority to act as a representative, or “nominee,” on behalf of banks and lenders.

But as millions of homes have fallen into foreclosure, Peterson said, “the MERS system doesn’t provide a substitute for all the recordkeeping” that never took place during the boom years. “MERS created the illusion of record keeping when it wasn’t really done.”

To convince courts that they have the right to foreclose on homes, banks and lenders have often found it difficult – when challenged – to provide the paperwork showing they indeed own the loans. Financial firms, which bought mortgages from other companies, have also been challenged in court over whether MERS even had the legal right to reassign the loans.

These problems contributed to the use of flawed and fraudulent paperwork, including backdated assignments and forged documents, that have prompted firms such as Ally Financial, J.P. Morgan Chase and Bank of America to halt foreclosures.

For more on this crisis, which is admittedly rather complex if you’re not a real estate lawyer, see Part 1, Part 2, and Part 3.