Sep 28, 2009
Securitized mortgages — hard to foreclose?
28 Sep 2009
Posted by Andrew Kantor
An interesting story here from Kansas that has the potential to affect a lot of homeowners facing foreclosure.
Here’s the gist:
Many home mortgages have been securitized — split up into pieces and packaged like stocks. And like stocks, those mortgages can be traded. The company that handles much of that is called MERS, for Mortgage Electronic Registration Systems.
The New York Times described it thusly:
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.
Because MERS handles something like 60 million loans, it’s often the closest a homeowner can come to finding out who actually owns the note on his property. Quoting the Times again, “[N]o matter how many times a mortgage is bundled, sliced up or resold, the public record often begins and ends with MERS.”
And if it came time to foreclose on a property “held” by MERS, it was MERS that filed the paperwork. And that caused some problems:
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.
Sorry to bury the lede, but here’s the interesting part. In a case called Landmark National Bank v. Kesler, the Kansas Court of Appeals said that no, MERS cannot foreclose on someone’s home because it doesn’t hold the actual note — only a deed of trust.
“Only the holder of the note is entitled to payment of the underlying obligation,” the court said. “The mortgage loan becomes ineffectual when the note holder did not also hold the deed of trust.”
What does that mean? Well, it could be really interesting, according to economics and financial guru Barry Ritholtz, who writes:
To start, it potentially gives a powerful weapon to homeowners who are being foreclosed upon. If their mortgage is held by MERS, they certainly have a strong basis for challenging the action on the grounds of standing.
Ellen Brown, author of seems to think the ruling has even more surprising consequences:
The significance of the holding is that if MERS has no standing to foreclose, then nobody has standing to foreclose – on 60 million mortgages.
I’m not going to guess whether Ritholtz or Brown are right or wrong, but the Kansas court’s decision — which will likely affect more than Kansas — is certainly something to take note of.