State
court ruling deals blow to U.S. bank mortgage systeM
(Reuters) - The highest court in the state of
Washington recently ruled that a company that has foreclosed on millions of
mortgages nationwide can be sued for fraud, a decision that could cause a new
round of trouble for the nation's banks.The
ruling is one of the first to allow consumers to seek damages from Mortgage
Electronic Registration Systems, a company set up by the nation's major banks,
if they can prove they were harmed.
Legal
experts said last month's decision from the Washington Supreme Court could
become a precedent for courts in other states. The case also endorsed the view
of other state courts that MERS does not have the legal authority to foreclose
on a home.
"This
is a body blow," said consumer law attorney Ira Rheingold. "Ultimately the MERS
business model cannot work and should not work and needs to be
changed."
Banks
set up MERS in the 1990s to help speed the process of packaging loans into
mortgage-backed bonds by easing the process of transferring mortgages from one
party to another. But ever since the housing crash, MERS has been besieged by
litigation from state attorneys general, local government officials and
homeowners who have challenged the company's authority to pursue foreclosure
actions.
A
spokeswoman for MERS said the company is confident its role in the financial
system will withstand legal challenges.
The
Washington Supreme Court held that MERS' business practices had the "capacity to
deceive" a substantial portion of the public because MERS claimed it was the
beneficiary of the mortgage when it was not.
This
finding means that in actions where a bank used MERS to foreclose, the consumer
can sue it for fraud. If the foreclosure can be challenged, MERS' involvement
would make repossession more complicated.
On
top of that, virtually any foreclosed homeowner in the state in the past 15
years who feels they have been harmed in some way could file a consumer fraud
suit.
"This
may be the beginning of a trend," says Elizabeth Renuart, a professor at Albany
Law School focusing on consumer credit law.
The
company's history dates back to the 1990s, when banks began aggressively
bundling home loans into mortgage-backed securities. The banks formed MERS to
speed up the handling of all the paperwork associated with recording the filing
of a deed and the subsequent inclusion of a mortgage in an entity that issues a
mortgage-backed security.
MERS
allowed the banks to save time and money because it permitted lenders to bypass
the process of filing paperwork with the local recorder of deeds every time a
mortgage was sold.
Instead,
banks put MERS' name on the deed. And when they bought and sold mortgages, they
just recorded the transfer of ownership of the note in the MERS
system.The MERS' database was supposed to keep track of where those loans went. The company's motto: "Process loans, not paperwork."
But the foreclosure crisis revealed major flaws with the MERS database.
The
plaintiffs in the Washington case, homeowners Kristin Bain and Kevin Selkowitz,
argued that the problems with the MERS database made it difficult, if not
impossible, to determine who really owned their loan. It's an argument that has
been raised in numerous other lawsuits challenging the ability of MERS to
foreclose on a home.
"It's
going to be very easy for consumers to say they were harmed because it's
inherently misleading," says Geoff Walsh, an attorney with the National Consumer
Law Center. If consumers can't identify who owns their loan, then they don't
know whom to negotiate with, and can't even be certain of the legitimacy of the
foreclosure.
In
a statement, MERS spokeswoman Janis Smith noted that banks stopped using MERS'
name to foreclose last year. She added that the opinion will "create confusion"
for homeowners in the state of Washington while the trial courts consider its
effect on pending cases.
Meanwhile,
MERS is attempting to remake itself. The company has a new chief executive and a
new branding campaign. In Washington D.C. federal lawmakers have recognized the
need to create a national mortgage-recording database that would track all U.S.
mortgages. MERS is lobbying to build it.
The
case is Bain (Kristin), et al. v. Mortg. Elec. Registration Sys., et al.,
Washington Supreme Court, No. 86206-1.
(Editing
by Dan Wilchins and Prudence Crowther)
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