Washington’s highest court rules MERS cannot foreclose on homeowners

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Washington’s highest court rules MERS cannot foreclose on homeowners

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Piggybankblog posted on 08/16/12

Cross linked with oregonlive.com

The Washington Supreme Court ruled unanimously today that the mortgage industry’s controversial document-recording system lacked authority to start out-of-court foreclosures and might have violated state consumer protection laws.

The state’s highest court ruled that lenders could not foreclose on homeowners in the name of the Mortgage Electronic Registration Systems Inc. It found that MERS did not meet Washington’s definition of a beneficiary and could not foreclose on behalf of a lender that holds the mortgage note.

“Simply put, if MERS does not hold the note, it is not a lawful beneficiary,” the court wrote in an opinion written by Justice Tom Chambers and released today.

The Oregon Supreme Court also is considering whether MERS can be a beneficiary under Oregon law, said Rick Fernandez, an attorney in Lake Oswego whose cases are before the court.

In July, the Oregon Court of Appeals ruled that lenders could not use MERS to skirt state law requiring that all mortgage sales be recorded in county offices before launching out-of-court foreclosures.

Washington’s court today also found that MERS’s involvement in robo-signing mortgage documents, among other behaviors, appeared to violate Washington’s Consumer Protection Act. But consumers must try such claims on a case-by-case basis, the court said MERS was created by the mortgage industry to bundle and sell loans to investors without having to record every assignment with county clerks. It is involved in most mortgages across the country, but does not take payments from borrowers or negotiate on behalf of lenders.

MERS spokeswoman Janis Smith noted that Thursday’s decision applies only to non-judicial foreclosures done outside a courtroom, the process lenders typically use. MERS voluntarily changed its rules in July 2011 to stop foreclosures in its name, she said.
Melissa Huelsman, a Seattle attorney, represented homeowner Kristin Bain in one of the cases against the court. Bain had sued Metropolitan Mortgage Group, Indymac Bank, Fidelity National Title and MERS.

Huelsman said the ruling cleared the path for homeowners to recover damages and attorneys fees from lenders found to have wrongfully foreclosed. She called the decision a victory for the rule of law.

“Too often we’ve seen courts twisting themselves into knots to get to a decision that’s inconsistent with the statute,” Huelsman said.

Attorneys said they were still evaluating how the decision impacts existing cases and already completed foreclosures.

“I would guess that lenders will approach out-of-court foreclosures involving MERS much more cautiously,” Fernandez said.

Washington Attorney General Rob McKenna and the National Consumer Law Center had submitted briefs supporting the cases of Bain and homeowner Kevin Selkowitz. The Washington Bankers Association had supported MERS.

In its ruling, the court noted the confusion MERS had caused distressed homeowners who were trying to identify and negotiate modifications with the true owner of their mortgage.

“While not before us, we note that this is the nub of this and similar litigation and has caused great concern about possible errors in foreclosures, misrepresentation, and fraud,” the opinion said.

“Under the MERS system, questions of authority and accountability arise, and determining who has authority to negotiate loan modifications and who is accountable for misrepresentation and fraud becomes extraordinarily difficult.”

It called the debate over whether MERS could foreclose without owning the mortgage as “a simple question” under Washington law: “… if MERS never ‘held the promissory note’ then it is not a ‘lawful beneficiary.’”

The court cited previous federal court rulings in Washington in favor of MERS as “not well taken.”

The justices declined to evaluate the legal impact of their ruling, as U.S. District Court Judge John C. Coughenour asked them to last year when he sought their opinion.

Under the state’s Consumer Protection Act, MERS’s characterization of itself on deeds of trust as a beneficiary could be considered an unlawful deceptive practice, the court said.

“The fact that MERS claims to be a beneficiary, when under a plain reading of the statute it was not, presumptively meets the deception element of a CPA action,” the court said.

So could MERS’s participation in robo-signing mortgage documents, the court said.

“MERS’s officers often issue assignments without verifying the underlying information, which has resulted in incorrect or fraudulent transfers,” the court said. “Actions like those could well be the basis of a meritorious CPA claim.”

The court also said MERS could not show that it acted as an agent for parties who owned Bain and Selkowitz’s loans, which are often sold repeatedly to other investors. MERS also failed to identify the parties that control and are accountable for its actions, the court said.

MERS spokesman Jason Lobo said it will be able to show a trial court which lenders it represented in those cases. 

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Fighting the Mortgage Mess

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Piggybankblog posted on 08/29/12

Cross linked story with counterpunch.org

Two landmark developments on August 16^th give momentum to the growing interest of cities and counties in addressing the mortgage crisis using eminent domain:

(1) The Washington State Supreme Court held in Bain v. MERS, et al., that an electronic database called Mortgage Electronic Registration Systems (MERS) is not a “beneficiary” entitled to foreclose under a deed of trust; and

(2) San Bernardino County, California, passed a resolution to consider plans to use eminent domain to address the glut of underwater borrowers by purchasing and refinancing their loans.

MERS is the electronic smokescreen that allowed banks to build their securitization Ponzi scheme without worrying about details like ownership and chain of title. According to trial attorney Neil Garfield, properties were sold to multiple investors or conveyed to empty trusts, subprime securities were endorsed as triple A, and banks earned up to 40 times what they could earn on a paying loan, using credit default swaps in which they bet the loan would go into default. As the dust settles from collapse of the scheme, homeowners are left with underwater mortgages with no legitimate owners to negotiate with. The solution now being considered is for municipalities to simply take ownership of the mortgages through eminent domain. This would allow them to clear title and start fresh, along with some other lucrative dividends.

A major snag in these proposals has been that to make them economically feasible, the mortgages would have to be purchased at less than fair market value, in violation of eminent domain laws. But for troubled properties with MERS in the title—which now seems to be the majority of them—this may no longer be a problem. If MERS is not a beneficiary entitled to foreclose, as held in Bain, it is not entitled to assign that right or to assign title. Title remains with the original note holder; and in the typical case, the note holder can no longer be located or established, since the property has been used as collateral for multiple investors. In these cases, counties or cities may be able to obtain the mortgages free and clear. The county or city would then be in a position to “do the fair thing,” settling with stakeholders in proportion to their legitimate claims, and refinancing or reselling the properties, with proceeds accruing to the city or county.

Bain v. MERS: No Rights Without the Original Note

Although Bain is binding precedent only in Washington State, it is well reasoned and is expected to be followed elsewhere. The question, said the panel, was “whether MERS and its associated business partners and institutions can both replace the existing recording system established by Washington statutes and still take advantage of legal procedures established in those same statutes.” The Court held that they could not have it both ways:

Simply put, if MERS does not hold the note, it is not a lawful beneficiary. . . .

MERS suggests that, if we find a violation of the act, “MERS should be required to assign its interest in any deed of trust to the holder of the promissory note, and have that assignment recorded in the land title records, before any non-judicial foreclosure could take place.” But if MERS is not the beneficiary as contemplated by Washington law, it is unclear what rights, if any, it has to convey. Other courts have rejected similar suggestions. [Citations omitted.]

If MERS has no rights that it can assign, the parties are back to square one: the original holder of the promissory note must be found. The problem is that many of these mortgage companies are no longer in business; and even if they could be located, it is too late in most cases to assign the note to the trusts that are being tossed this hot potato.

Mortgage-backed securities are sold to investors in packages representing interests in trusts called REMICs (Real Estate Mortgage Investment Conduits), which are designed as tax shelters. To qualify for that status, however, they must be “static.” Mortgages can’t be transferred in and out once the closing date has occurred. The REMIC Pooling and Servicing Agreement typically states that any transfer after the closing date is invalid. Yet few, if any, properties in foreclosure seem to have been assigned to these REMICs before the closing date, in blatant disregard of legal requirements.

The whole business is quite complicated, but the bottom line is that title has been clouded not only by MERS but because the trusts purporting to foreclose do not own the properties by the terms of their own documents. Legally, the latter defect may be even more fatal than filing in the name of MERS in establishing a break in the chain of title to securitized properties.

What This Means for Eminent Domain Plans

Under the plans that the San Bernardino County board of supervisors voted to explore, the county would take underwater mortgages by eminent domain and then help the borrowers into mortgages with significantly lower monthly payments.

Objections voiced at the August 16^th hearing included suspicions concerning the role of Mortgage Resolution Partners, the private venture capital firm bringing the proposal (would it make off with the profits and leave the county footing the bills?), and where the county would get the money for the purchases.

A way around these objections might be to eliminate the private middleman and proceed through a county land bank of the sort set up in other states. If the land bank focused on properties with MERS in the chain of title (underwater, foreclosed or abandoned), it might obtain a significant inventory of properties free and clear.

The county would simply need to give notice in the local newspaper of intent to exercise its right of eminent domain. The burden of proof would then transfer to the claimant to establish title in a court proceeding. If the court followed Bain, title typically could not be proved and would pass free and clear to the county land bank, which could sell or rent the property and work out a fair settlement with the parties.

That would resolve not only the funding question but whether using eminent domain to cure mortgage problems constitutes an unconstitutional taking of private property. In these cases, there would be no one to take from, since no one would be able to prove title. The investors would take their place in line as unsecured creditors with claims in equity for actual damages. In most cases, they would be protected by credit default swaps and could recover from those arrangements.

The investors, banks and servicers all profited from the smokescreen of MERS, which shielded them from liability. As noted in Bain:

Critics of the MERS system point out that after bundling many loans together, it is difficult, if not impossible, to identify the current holder of any particular loan, or to negotiate with that holder. . . . Under the MERS system, questions of authority and accountability arise, and determining who has authority to negotiate loan modifications and who is accountable for misrepresentation and fraud becomes extraordinarily difficult.

Like MERS itself, the investors must deal with the consequences of an anonymity so remote that they removed themselves from the chain of title.

On August 15^th, the Federal Housing Finance Agency threatened to take action against municipalities condemning federal property. But to establish its claim, the FHFA, too, would have to establish that the mortgages were federal property; and under the Bain ruling, this could be difficult.

Setting Things Right

Tags: Consumer Protection Act county clerks court rules court. Bain deception decision Fernandez Fidelity National Title and MERS. foreclosures fraudulent transfers homeowners Huelsman Indymac Bank Jason Lobo judicial foreclosures Justice Tom Chambers kaboom\bain vs. metropolitan mortgage group inc. et al Kevin Selkowitz Kristin Bain Lake Oswego Melissa Huelsman meritorious CPA claim mers mers cannot foreclose MERS cannot foreclose on homeowners MERS spokeswoman Metropolitan Mortgage Group misrepresentation modifications mortgage sales Oregon Court of Appeals Oregon Supreme Court oregonlive.com recover damages Rick Fernandez robo signing Seattle attorney state of washington state’s highest court U.S. District Court Judge John C. Coughenour Washington Attorney General Rob McKenna washington state Washington Supreme Court Washington’s Consumer Protection Act.