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Lawmaker Questions Power to Foreclose

By ROBBIE WHELAN
Wall Street Journal
Nov. 1, 2010

A Virginia lawmaker asked the state's attorney general to launch an investigation of Mortgage Electronic Registration Systems, the middleman firm in millions of court filings that helps keep the mortgage-securitization machine moving.

Robert G. Marshall, a Republican member of the Virginia House of Delegates, requested that Virginia Attorney General Ken Cuccinelli determine whether the Reston, Va., company violates state law because it doesn't pay a fee every time a loan changes hands.


Opinions differ as to whether MERS must pay local fees every time it sells an interest in a loan.
"There are too many people getting foreclosed on not properly," said Mr. Marshall, who represents two counties near Washington, adding that he is drafting a Virginia law that would require lenders to pay county fees before being allowed to proceed with foreclosures.

"The disdain with which the conditions of law have been treated by those who want to make money too fast is very troubling to me."

Brian J. Gottstein, a spokesman for Mr. Cuccinelli, said the attorney general is required to produce an opinion on the matter but declined to comment "on any particular industry participant right now."
R.K. Arnold, MERS's chief executive, said the company's activities are legal in all 50 states and have held up under previous scrutiny.

The challenge is the latest sign lawmakers and lawyers for borrowers are taking aim at MERS as the foreclosure mess drags on. Created 13 years ago by Fannie Mae, Freddie Mac and several large U.S. banks as an electronic registry of land records, the company's name is listed as the agent for mortgage lenders on documents for 65 million home loans. But that same streamlining has made MERS a target of critics who say the company might not have the legal right that it claims to foreclose on borrowers.

In a state-court lawsuit filed in Georgia last week seeking class-action status, lawyer David Ates says MERS isn't a secured creditor, meaning it lacks the power to foreclose on behalf of lenders, mortgage servicers or other parties.

Mr. Ates said he is seeking to have all Georgia foreclosures by the company "be declared invalid and the title be returned to the debtor."

Mr. Arnold said the company's role in foreclosing on a mortgage is unquestionable because every time a loan is registered with MERS, the borrower must sign a document saying the company assumes all rights and responsibilities on behalf of the creditor or lender.

"The legal concept is as sound as any concept in America: You made a loan to a homeowner," Mr. Arnold said in an interview. "They granted you a mortgage, and that's recorded in the land records, and the company that has the mortgage and can foreclose is MERS."

Mr. Arnold added: "We can foreclose in all 50 states, and we will continue to do that."
Tom Kelly, a spokesman for J.P. Morgan Chase, said last month that the New York bank hasn't used the MERS record-keeping system since at least 2008 to foreclose in the bank's name because "some local courts wouldn't accept MERS." J.P. Morgan still uses MERS for mortgages originated by other banks or brokers.

MERS spokeswoman Karmela Lejarde said the company doesn't keep track of how many users have stopped using the electronic filing system. MERS declined to say how many lawsuits have been filed against the company since foreclosure troubles erupted in midSeptember.

On its corporate website, MERS says its goal is "to register every mortgage loan in the United States." During the housing boom, the company helped lenders transfer ownership of home loans quickly and at low cost, making it easier to bundle loans into pools that are then morphed into securities.

Christopher L. Peterson, a law professor at the University of Utah who has criticized the record-keeping company's business model in scholarly articles, says the foreclosure furor is a serious challenge to MERS because the documentation problems show the company is doing an end run around hundreds of years of American property law.

"By having all the mortgage loans recorded in the name of one entity, the records don't mean anything anymore," Mr. Peterson said. "We used to have the records that showed the true economic interest of who owns the land in the public system. Now we just have one proxy, and we can't tell which lender or which trust owns the right to foreclose, because virtually every securitized loan is recorded in the name of MERS."

There is no sign county governments across the U.S. are pursuing a wide-scale effort to recover fees from MERS. And while state supreme courts in Arkansas, Kansas and Maine have thrown out individual foreclosure cases on the grounds MERS didn't have the right to bring the actions on behalf of banks, no nationwide consensus has emerged.

"MERS is on the mortgage. It's a condition to the loan. The borrower agreed to that.
We're foreclosing on behalf of the company that holds the promissory note," said Mr. Arnold,
MERS's CEO. "At the end of the day, it's going to wind up in the favor of MERS."

Also last week, the District of Columbia's attorney general, Peter Nickles, issued a statement saying no D.C. homeowner can be foreclosed upon unless the security interest of the note holder has been physically recorded with the district's Recorder of Deeds, a condition that electronic assignments through MERS don't meet.


MERS said in a statement that its transfers of interest in a property were valid because MERS's name is on the original documents when the loan is made and recorded.

Write to Robbie Whelan at robbie.whelan@wsj.com