Foreclosures Facing More Court Challenges

June 15, 2011

Recent court rulings are raising some uncertainties when it comes to Mortgage Electronic Registration Systems (or MERS), which electronically tracks and transfers millions of loans and has been in use by the mortgage industry since the 1990s.

Borrowers who have been foreclosed upon using MERS have fought back in court--with mixed success--challenging the legality of MERS and arguing that it doesn’t own the mortgage and therefore, doesn’t have the right to foreclose on them.

The industry is keeping a close watch on recent court rulings since the results could have a big impact on reshaping the mortgage industry and potentially throwing the validity of thousands foreclosures into question, The Washington Post reports. MERS holds 65 million loans in its registry.

A New York appellate court ruled last week that MERS did not have the right to foreclosure on a property it doesn't own. However, an appeals court in California recently ruled that MERS did have the power to act on behalf of lenders. In Minnesota, lawmakers passed a law stating that MERS had the right to undertake foreclosures.

However, earlier this year, a Michigan court of appeals ruledthat MERS lacks authority to foreclose. Following the court decision, the ruling practically brought closings on REOs to a halt there and called into question foreclosures already sold in the city.

In March, MERS requested banks and mortgage servicers stop using the MERS name to foreclose on homes.

"We know that MERS is a problem; we don't know exactly what that's going to mean," says Adam Levitin, a Georgetown University law professor. "We still don't have really definitive law on any of the issues involved. It's going to take awhile before we really know the answers."

A MERS spokeswoman disagrees. "The court decisions have overwhelmingly leaned in favor of MERS and validating MERS's business model," says Janis Smith, vice president of corporate communications for MERSCORP. "Overall, the record is pretty clearly established."

Source: “Courts May Reshape Mortgage Industry,”Washington Post (June 15, 2011)