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MERS, The Foreclosure Documentation Mess and The Elephant in the Room!

Peter Giardini
3 min read

Unless you are Rip Van Winkle, it’s hard to not know about the latest foreclosure mess hovering over the housing market.  This mess has to do with the manner in which lenders handled and processed the paperwork needed to proceed through various courts to obtain a foreclosure. 

As you know, most lenders were taking drastic short cuts in the review process and they got caught!  And in typical fashion they all scrambled to fix the issue, review the paperwork and declare they won’t let this happen again.

So… I guess we can all move along as there is nothing more to see regarding this latest mess.  Right?

Well… perhaps this mess is fixed… if you are willing to overlook the ELEPHANT in the room.

What elephant you might ask?

Mortgage Electronic Registration Systems – better known as MERS

If you haven’t heard of MERS a quick Google search will bring you up to date quickly.  In essence, MERS is a company unilaterally established by the large lenders to track the purchase and sale of mortgages between lenders while allowing them to avoid recording fees and transfer taxes when a loan is sold.  One expert puts it this way… “MERS is nothing more then a gigantic Excel spreadsheet used to track specific data for over 60 million mortgages.”  And, if you check most loan documentation MERS is defined as the entity (nominee) who is also listed on the deed.  In other words MERS is at the center of just about every mortgage and deed in existence.  Yet, it doesn’t manage anything.  How could it, it has less then 70 employees!

Because the action to establish MERS was unilateral, without the benefit of any law or regulation, its very existence is now challenging over 800 years of well established and settled property ownership laws.

And that is the Elephant in the room!

Without getting into the boring aspects of ownership law… a simple fact remains… our system of property ownership works because established laws have defined how the chain of title is to be modified and maintained.  Simply put, if lien holders expect to have rights regarding a property in which they have a financial stake, then they must show up on the deed… and to make that happen requires recording fees and sometimes transfer taxes to be paid. 

The lenders who created MERS hoped to be able to get around these laws and avoid having to pay the various fees and taxes every time a mortgage was bought or sold.  Think about it… if you have a mortgage that was sold you would expect to see the new “servicer” to take a position on the deed.  That has not been happening.  Instead MERS is listed on the deed with the lenders hoping no one would notice.  And most people have not… At least not until a couple of smart lawyers and a couple of concerned judges stuck their nose under this tent.

To date, where a foreclosure has been challenged when MERS is the foreclosing entity, MERS has lost.  I am sure you will agree, that is not a very good track record. 

The Million dollar question(s) is this… what impact will this have on the housing market specifically or the economy in general?

Well, as with most elephants, when they start roaming around they mess things up.  Lets explore the impacts.

  1. Assuming MERS continues to lose in court (a good assumption) the lender(s) who should have been recorded on the deed will most likely have to placed on the deed to have legal “status” to foreclosure.  This is going to cost a lot of money!
  2. Many foreclosures will get tied up in the sure to materialize legal mess as homeowners and lenders using MERS duke it out in court… further delaying hitting a true housing bottom and moving towards a housing recovery.
  3. Of course if I wanted to put on my doomsday hat, this one situation could take every lender to its knees as they realize that they have no legal standing to foreclose on a property and instead of what was thought to be a mortgage now becomes an unsecured debt.  Just like a credit card.  While this would look like a free gift to many homeowners, the real impact would felt further down the financial line by all of those entities that purchased mortgage backed securities… to only now find out they have nothing but a bunch of unsecured paper.  OUCH! and DOUBLE OUCH!

I have only just covered the surface of this latest debacle.  And to be totally honest, no one that I can find has any real sense how to fix this problem.  It is just ugly no matter how you look at it.

So… what’s my bottom line?

Keep you eye on this, it is unpredictable and the consequences of it being in our presence could be very unfortunate . . and I will provide periodic updates as this starts to sort itself out.

Photo: Brian Snelson

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.