MERS Goes Down in Flames: 3 Judge Panel Rips Industry Practices

Judge’s ruling deals blow to national mortgage servicer

A Las Vegas bankruptcy judge has dealt a blow to an obscure but critical piece of the mortgage enforcement machinery that could slow foreclosures.

After a rare hearing in front of three judges last year that initially encompassed 27 cases, U.S. Bankruptcy Court Judge Linda Riegle has ruled that the Mortgage Electronic Registration System (MERS) could not represent lenders seeking to foreclose on delinquent homeowners already in bankruptcy unless it could produce the actual loan note. This goes to the heart of how home lending has evolved over the past two decades, with a loan rarely staying on the books of the originator but often being sold several times to other institutions or investment groups. As a result, producing a loan document is far more complex than opening a drawer in a filing cabinet.

MERS, a joint venture of numerous lenders launched in 1993, is a database tracking an estimated 60 million mortgages and promising to take responsibility for functions such as foreclosure as long as a mortgage stays with a MERS member. To reach this point, en route to its self-professed goal of “register(ing) every mortgage loan in the United States,” it has fought off court challenges to its status across the country and challenged the argument that it must possess a loan document to have legal standing. MERS has represented hundreds of different lenders in Las Vegas in recent years.

For that reason, MERS quickly appealed Riegle’s decision in April. Although not commenting directly on the case, a MERS spokeswoman points to other states such as Florida, where MERS lost at the trial-court level but ultimately won on appeal.

The case has attracted industrywide attention. Writing last October in the American Bankruptcy Institute newsletter, Johnathan Bolton, a bankruptcy attorney with the Houston firm of Fulbright & Jaworski, noted that the local case “could have a great impact on the ability to enforce mortgages in the United States.”

“Since Nevada is a nonjudicial foreclosure state, this issue is only now coming to a head,” said Bill Uffelman, president of the Nevada Bankers Association. “If in fact you can’t produce the note, it puts the whole thing (a foreclosure) into abeyance.”

But for people with homes worth far less than the loan balance or without the income to cover monthly payments, the ruling may buy only a few months of breathing room.

“Whether this changes the outcomes of foreclosures remains to be seen,” said Henderson attorney Robert Massi, who represents debtors. “But it does buy time and gains some negotiating leverage” even before a bankruptcy.

Lenard Schwartzer, a private attorney and a bankruptcy trustee who won the case, has come to doubt its practical significance.

“In most cases, it buys an additional three to six months,” he said. “But not many people seem to care.”

Because people tire of living under the threat of a forced move-out, especially when a house has negative equity, he now describes his work on the case as “50 to 100 hours of wasted legal time.”

The ruling comes amid swelling complaints that mortgage servicers have exacerbated the deluge of foreclosures in the past couple of years. Assembly Speaker Barbara Buckley has introduced a bill in the current legislative session to allow financially besieged homeowners to request arbitration of a default, partly to bypass servicers and force lenders to the table.

MERS claims credit for an integral role in the widespread expansion of mortgage lending options for consumers by providing the mechanism not only to follow loans from owner to owner but avoid tens of millions of dollars of recording fees every year and the piles of paperwork that come with it. MERS highlights one section of a Florida court decision that called it “an innovative instrument of commerce.”

Nevertheless, Riegle’s ruling not only parsed federal and state law but at least implicitly rapped MERS on the knuckles for its practices. For example, she noted that MERS acted as the attorney on several loans in Las Vegas even after they were transferred to non-MERS members.

She also rejected the argument that lenders who belong to MERS and designated it to be their legal representative should be good enough for the court. Without the loan papers, she concluded, MERS’ terms and conditions for its members do not give it any rights to foreclose under Nevada law.

“To reverse an old adage,” she wrote, “if it doesn’t walk like a duck, talk like a duck and quack like a duck, then it’s not a duck.”

Contact reporter Tim O’Reiley at or 702-387-5290.

2 Responses

  1. june 23 2009

    is mers now legal to f/c in florida

  2. Hi,

    What is your take on foreclosures that have already been processed by MERS (and other imposters) and the families have already moved out, the home sold, etc.


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