Foreclosures Turn Up Heat on Mers

With mortgage foreclosures on the rise, Merscorp Inc., which operates an electronic loan registry used by thousands of companies, has found itself the target of an increasing number of lawsuits — several of which challenge its basic business model.

At least four suits have been filed this year, two last year, and three others from 2000 to 2003, against the Vienna, Va., company. All of them contest the firm's authority to foreclose on behalf of lenders.

When a home loan is written these days, more often than not the party listed in the public record as holding the mortgage is not the lender, but a Merscorp subsidiary: Mortgage Electronic Registration Systems Inc. The registry tracks the sales of loans, or the right to service them, for 3,500 member companies, which pay annual dues and a fee for every transaction recorded. But the unit remains the owner of record throughout the life of the loan.

The electronic registry has undoubtedly saved the industry time and money on secondary-market transactions by reducing paperwork and filing fees. Created in 1996, it now covers 60% of originations, and in May it registered its 50 millionth loan. But consumer advocates argue it is unfair to obscure the mortgage's true owner from consumers.

Homeowners facing foreclosure may need this information, the critics say, to determine whom to contact to negotiate settlements — or whom to sue for predatory practices. (When borrowers contact Merscorp, it will tell them only who the servicer is.) Not surprisingly, county clerks have also fought the designation of "Mers as original mortgagee" (or "Mom"), because they miss out on assignment fees.

Unlike a servicer, the unit cannot work out or modify troubled loans, its critics have noted. But two appellate courts recently have upheld its right to foreclose, on the grounds that the documents signed by the borrowers listed it as the mortgage lien holder and the noteholder. A proposed class action filed last year in Florida is trying a different tack by arguing Merscorp should be licensed as a debt collector or lender if it is to initiate foreclosure proceedings.

Merscorp is 60% owned by Fannie Mae, though Freddie Mac, more than a dozen lenders, five insurance companies, three trade groups, and the company's eight executives also hold shares. The registry's members include the top 100 originators and servicers. Dues range from $264 to $7,500, depending on a member's size.

Bill Hultman, a senior vice president at the company, said that the registry has helped consumers by simplifying the recording process.

Previously mortgage "assignments would not get recorded or were rejected by a county because they were improperly prepared, and the chain of title often would be broken," he said. "It was very difficult for the borrower when they went to pay off a loan, or a closing would get held up and a borrower could not get a loan released." The registry eliminated "all of those missing assignments."

Also, the costs of multiple loan transfers often were passed on to borrowers indirectly, Mr. Hultman said. "It's cheaper to pay the Mers fee of $4.95 than the assignment fee of $30."

The main reason noteholders and servicers use the name "Mortgage Electronic Registration System Inc." in foreclosure proceedings is because of the delay if they have to go back and record an assignment with a county clerk, he said.

The servicer or investor can still foreclose in its own name, and some prefer to do so, Mr. Hultman said. "In some ways, it's better for us, because if the borrower has a complaint against a servicer or an investor, we don't get involved."

In 2001, Merscorp sued Edward Romaine, then the clerk of Suffolk County, N.Y., who for several years refused to record it as the mortgage holder.

Mr. Romaine argued in court that the company had no real ownership interest in the loans and did not maintain a chain of title that listed the names and dates when a mortgage had been transferred. Merscorp won the case on appeal in 2005.

Richard Cahn, a member of Cahn & Cahn LLP in Melville, who represented Mr. Romaine in the case, said it highlighted the need to examine 200-year-old real estate laws that were enacted "to provide transparency to interested members of the public" in important transactions.

"There is no way for the public or a landowner to know who has an interest in their property," he said.

Though the four appellate judges voted unanimously in favor of Merscorp, Chief Judge Judith Kaye wrote in a partial dissent that its registry reduces the amount of public data on the industry and "may also function, perhaps unintentionally, to insulate a noteholder from liability, mask lender error, and hide predatory lending practices."

The lack of disclosure "may create substantial difficulty when a homeowner wishes to negotiate the terms of his or her mortgage or enforce a legal right against the mortgagee and is unable to learn the mortgagee's identity," Judge Kaye wrote.

According to her dissenting opinion, the registry cost Suffolk County $1 million of revenue last year.

Sharon Horstkamp, a vice president and the general counsel at Merscorp, said borrowers typically receive "hello" and "goodbye" letters from their lender and are then told who their servicer is. "That's who they would be contacting if they have questions on their mortgage loans."

Mortgage notes "have to be able to move freely," so lenders can recoup their money by selling the notes and lending to other borrowers, Ms. Horstkamp said.

The proposed class action filed last year in the U.S. District Court for the Middle District of Florida in Jacksonville accuses Merscorp of unfair trade practices.

The suit says that Merscorp identifies itself as a creditor but has failed to register as a consumer collection agency in Florida and does not have a license as a mortgage lender that would allow it to act on behalf of its members.

"They're collecting a debt that they don't have a right to collect and in a manner to which they're not legally entitled to collect," said April Charney, a senior attorney at Jacksonville Area Legal Aid Inc., who represents nine borrowers in the proposed class action.

Moreover, "the point of having a recording system is so everyone, including the consumer, can know who owns the mortgage," she said. "Mers is an attempt to evade that. Why should they be listed instead of the party that actually owns the note? That lack of transparency makes it very difficult for consumers to even know whom to serve process on."

Mr. Hultman said property statutes were created to provide notice to third parties that there is a lien on a house, "not necessarily who the owner of the lien is" or what entity owns the loan.

"There's no requirement anywhere that any of these documents be recorded in the land record, so it's not true that the statutes are there for full disclosure. They're to protect third parties from fraudulent transfers," he said. "There are people in the mortgage industry that took advantage of borrowers, and somehow we got caught up in this, because our name is on the foreclosure papers, and that we're somehow trying to hide things from the world, and that's just not the case."

Mr. Hultman said that the proposed class action hinges on a technicality, and that he thinks it will be dismissed.

"There's this misnomer that people have that we're not the mortgagee of record, even though the borrower makes us the mortgagee when they sign their mortgage, and that's a matter of contract rights between the borrower and the lender," he said.

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