Central District Consumer Bankruptcy Attorney's Association

April 24, 2009
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."
M. Erik Clark
Borowitz, Lozano & Clark, LLP
100 N. Barranca Avenue, Suite 250
West Covina, CA 91791
www.BLClaw.com
Office: (626) 332-8600
Fax: (626) 332-8644
Board Certified in Consumer Bankruptcy
American Board of Certification
April 24, 2009Tracking
Loans Through a Firm That Holds MillionsBy MIKE McINTIREJudge Walt
Logan had seen enough. As a county judge in Florida, he had28 cases pending
in which an entity called MERS wanted to foreclose onhomeowners 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 notesoriginally issued by banks. Judge Logan summoned a MERS
lawyer to thePinellas County courthouse and insisted that that fundamental
questionbe answered before he permitted the drastic step of seizing
someone'shome."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'snot reasonable, often that's going to be impossible."Judge Logan
had entered the murky realm of MERS. Although the averageperson has never
heard of it, MERS - short for Mortgage ElectronicRegistration Systems -holds 60 million mortgages on American homes,through a legal maneuver that
has saved banks more than $1 billion overthe last decade but made lifemaddeningly difficult for some troubledhomeowners.Created by lenders
seeking to save millions of dollars on paperwork andpublic recording fees
every time a loan changes hands, MERS is aconfidential computer registry for
trading mortgage loans. From anoffice in the Washington suburbs, it played
an integral, if unsung, rolein the proliferation of mortgage-backed
securities that fueled thehousing boom. But with the collapse of the housing
market, the name ofMERS has been popping up on foreclosure notices and on
court docketsacross the country, raising many questions about the way
thiscontroversial but legal process obscures the tortuous paths of
mortgageownership.If MERS began as a convenience, it has, in effect,
become a corporatecloak: no matter how many times a mortgage is bundled,
sliced up orresold, the public record often begins and ends with MERS. In
the lastfew years, banks have initiated tens of thousands of foreclosures in
thename of MERS - about 13,000 in the New York region alone since 2005-confounding homeowners seeking relief directly from lenders and
judgestrying to help borrowers untangle loan ownership. What is more, the
wayMERS obscures loan ownership makes it difficult for communities
toidentify predatory lenders whose practices led to the high
foreclosurerates that have blighted some neighborhoods.In Brooklyn,
an elderly homeowner pursuing fraud claims had to go tocourt to learn the
identity of the bank holding his mortgage note, whichwas concealed in the
MERS system. In distressed neighborhoods ofAtlanta, where MERS appeared as
the most frequent filer of foreclosures,advocates wanting to engage lenders
"face a challenge even findingsomeone with whom to begin the conversation,"
according to a reportbyNeighborWorks America, a community development
group.To a number of critics, MERS has served to cushion banks fromthefallout of their reckless lending practices."I'm convinced that
part of the scheme here is to exhaust the resourcesof consumers and their
advocates," said Marie McDonnell, a mortgageanalyst in Orleans, Mass., who
is a consultant for lawyers suinglenders. "This system removes transparency
over what's happening tothese mortgage obligations and sows confusion, which
can only benefitthe banks."A recent visitor to the MERS offices in
Reston, Va., found thereceptionist answering a telephone call from a
befuddled borrower: "I'msorry, ma'am, we can't help you with your loan."
MERS officials say theyfrequently get such calls, and they offer a phone
line and Web pagewhere homeowners can look up the actual servicer of their
mortgage.In an interview, the president of MERS, R. K. Arnold, said that
hiscompany had benefited not only banks, but also millions of borrowerswhocould not have obtained loans without the money-saving efficienciesitbrought to the mortgage trade. He said that far from posing a hurdleforhomeowners, MERS had helped reduce mortgage fraud and imposed order on
asprawling industry where, in the past, lenders might have gone out
ofbusiness and left no contact information for borrowers
seekingassistance."We're not this big bad animal," Mr. Arnold said.
"This crisis thatwe've had in the mortgage business would have been a lot
worse withoutMERS."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 largestlenders, including Citigroup, JPMorgan Chase and Wells
Fargo. It was thebrainchild of the Mortgage Bankers Association, along with
Fannie Mae,Freddie Mac and Ginnie Mae, the mortgage finance giants, whoproduced awhite paper in 1993 on the need to modernize the trading of
mortgages.At the time, the secondary market was gaining momentum, and
Wall Streetbanks and institutional investors were making millions of dollars
fromthe creative bundling and reselling of loans. But unlike common
stocks,whose ownership has traditionally been hidden,
mortgage-backedsecurities are based on loans whose details were long
available inpublic land records kept by county clerks, who collect fees for
eachfiling. The "tyranny of these forms," the white paper said, was
costingthe industry $164 million a year."Before MERS," said John A.
Courson, president of the Mortgage BankersAssociation, "the problem was that
every time those documents or a filechanged hands, you had to file a paper
assignment, and that becomesterribly debilitating."Although several
courts have raised questions over the years about thesecrecy afforded
mortgage owners by MERS, the legality has ultimatelybeen upheld. The issue
has surfaced again because so many homeownersfacing foreclosure are dealing
with MERS.Advocates for borrowers complain that the system's secrecy
makes itimpossible to seek help from the unidentified investors who owntheirloans. Avi Shenkar, whose company, the GMA Modification Corporation
inNorth Miami Beach, Fla., helps homeowners renegotiate mortgages,
saidloan servicers frequently argued that "investor guidelines"
preventedthem from modifying loan terms."But when you ask what those
guidelines are, or who the investor is soyou can talk to them directly, you
can't find out," he said.MERS has considered making information about
secondary ownership ofmortgages available to borrowers, Mr. Arnold said, but
he expresseddoubts that it would be useful. Banks appoint a servicer tomanageindividual mortgages so "investors are not in the business of
dealingwith borrowers," he said. "It seems like anything that bypassestheservicer is counterproductive," he added.When foreclosures do
occur, MERS becomes responsible for initiating themas the mortgage holder of
record. But because MERS occupies that role inname only, the bank actually
servicing the loan deputizes its employeesto act for MERS and has its
lawyers file foreclosures in the name ofMERS.The potential forconfusion is multiplied when the high-tech MERS systemcollides with thepaper-driven foreclosure process. Banks using MERS toconsummate mortgage
trades with "electronic handshakes" must later provetheir legal standing to
foreclose. But without the chain of title thatMERS removed from the public
record, banks sometimes recreate paperassignments long after the fact or try
to replace mortgage notes lost inthe securitization process.This
maneuvering has been attacked by judges, who say it reflects acavalierattitude toward legal safeguards for property owners, andexploited by
borrowers hoping to delay foreclosure. Judge Logan inFlorida, among thefirst to raise questions about the role of MERS,stopped accepting MERSforeclosures in 2005 after his colloquy with thecompany lawyer. MERS
appealed and won two years later, although it hasasked banks not to
foreclose in its name in Florida because of lingeringconcerns.Last
February, a State Supreme Court justice in Brooklyn, Arthur M.Schack,
rejected a foreclosure based on a document in which a Bank ofNew York
executive identified herself as a vice president of MERS.Calling her "amilliner's delight by virtue of the number of hats shewears," Judge Schack
wondered if the banker was "engaged in asubterfuge."In Seattle, Ms.
McDonnell has raised similar questions about bankerswith dual identities and
sloppily prepared documents, helping to delayforeclosure on the home ofDarlene and Robert Blendheim, whose subprimelender went out of business and
left a confusing paper trail."I had never heard of MERS until thishappened," Mrs. Blendheim said."It became an issue with us, because the bank
didn't have the paperworkto prove they owned the mortgage and basicallyrecreated what theyneeded."The avalanche of foreclosures - three
million last year, up 81 percentfrom 2007 - has also caused unforeseenproblems for the people who runMERS, who take obvious pride in their
unheralded role as a fulcrum ofthe American mortgage industry.In
Delaware, MERS is facing a class-action lawsuit by homeowners whocontend it
should be held accountable for fraudulent fees charged bybanks that
foreclose in MERS's name.Sometimes, banks have held title to foreclosed
homes in the name ofMERS, rather than their own. When local officials call
and complainabout vacant properties falling into disrepair, MERS tries to
track downthe lender for them, and has also created a registry to locate
propertymanagers responsible for foreclosed homes."But at the end of
the day," said Mr. Arnold, president of MERS, "ifthat lawn is not getting
mowed and we cannot find the party who'sresponsible for that, I have to get
out there and mow that lawn."

M.
Erik ClarkBorowitz, Lozano & Clark, LLP100 N. Barranca Avenue, Suite
250West Covina, CA 91791www.BLClaw.comOffice:
(626) 332-8600Fax: (626) 332-8644Board Certified in Consumer Bankruptcy
American Board of

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