Friday, February 3, 2012

Banks should not be allowed to use an Inaccurate Data-base to evict Homeowners

Earlier this week, Safe and Fair Finance Blog wrote about Hernando de Soto’s article on the need to clean up public registries of assets, in particular the US electronic registry of mortgages known as MERS. The registry remains a mess. It holds an estimated 60 percent of all residential mortgages in the U.S., i.e. about 70 million individual loans. Yet the MERS records are widely believed to be less than accurate.

On Friday, New York State Attorney General Eric Schneiderman filed a lawsuit against MERS and three banks -- Bank of America, J.P. Morgan Chase and Wells Fargo. The complaint accuses MERS and the banks of engaging in “deceptive and fraudulent practice.”

The complaint under the lawsuit identifies six specific ways in which homeowners and the public have been harmed by MERS.
  1. By bringing foreclosures without proper legal standing, MERS subjected homeowners to improper foreclosures;
  2. By submitting to the court invalid assignments of mortgages, MERS obtained foreclosure judgments through fraudulent and illegal means;
  3. By making misrepresentations regarding the identity of the holder of mortgage notes, MERS undermined the integrity of the court system and impeded the ability of homeowners to present legal defenses;
  4. By creating foreclosure  judgments for entities that did not hold the notes, the actions of MERS created invalid liens and clouds on title, thus subjecting foreclosure victims to the risk of monetary judgments by the true holders of the notes;
  5. By creating mortgage assignments by MERS employees who were not adequately trained or supervised, MERS misled and deceived homeowners and the courts; and
  6. By obscuring the identity of the beneficial owners of mortgages and the chain of title, MERS deprived homeowners and the public of the ability to determine true property ownership through publicly available records.
One wonders how it was the MERS was created – and allowed to continue to operate.

Financial innovation in the 1990s allowed residential mortgages to be easily bought and sold by financial institutions. The traditional way of recording changes in ownership was a visit to the county clerk, where for a fee of $30 or so, the seller could record the sale of the mortgage to a buyer. With the securitization of residential mortgages into mortgage-backed securities, such re-registrations became cumbersome. The major mortgage banks got together and created a private registry – Mortgage Electronic Registration Systems or MERS – to act as the holder of record of the mortgages. The problem was that MERS had weak governance. With a staff of under 100 employees, and no legal responsibility to ensure the accuracy of its records, MERS hired employees from its member firms to certify the loan documentation.

However MERS remains a private registry. Even homeowners cannot obtain reliable information from MERS on which financial institution legally holds their mortgage. So when it is time to try to find someone in the bank who is authorized to discuss a modification of the loan … there is no one to be found. More accurately, there is often no one who is sure which financial institution has the authority to modify the loan.

In this environment, no amount of financial incentives will be effective in helping homeowners renegotiate their home loans.

In the opinion of Safe and Fair Finance Blog, this is simply a mess. Surely as a starting point, a public registry should be established for all new residential mortgages. The registry should be run by a government agency, operating with clear rules of corporate governance and an electronic data-base accessible to the public at no charge.

For the existing mortgages, financial institutions should be obliged to accurately reconstruct the legal records before initiating any foreclosures. Alternatively financial institutions might be encouraged to offer all existing clients a discount on the monthly payment if they are willing to provide the legal documentation for the mortgage and submit it to the new public registry. Finally all mortgage lenders should be obliged to set up special departments to deal with existing murky mortgages until all have finally been repaid. 

If nothing is done, it is likely that the threat of foreclosures -- invalid or not -- will continue to hang over the residential real estate market. Such uncertainly makes it difficult for the real estate market to become efficient. It is also a question of fairness in the way that financial institutions treat their retail customers.

Safe and Fair Blog would be interested to hear your views on how to solve this problem in a way that helps financial consumers while maintaining the soundness of the financial sector. This is a problem that certainly will not go away very easily.
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