MERS ruling should mean back to mortgage basics

Put yourself in the hot seat of any mortgaged homeowner. You have defaulted on your payments, and your bank is ready to take action. But what is this? Foreclosure is initiated against you, not by the bank, but by a third party — some acronymic entity called MERS.

In fact, MERS — Mortgage Electronic Registration Systems — is at the heart of the latest crisis to hit the the banking industry. Created in 1993, MERS is a private company that enables banks to buy and sell mortgages without registering the transfer with the home county.

Why would banks want to do that? MERS saves them huge expenses in the paperwork and minutia of mortgage management. And foreclosure is the key issue in a recent Michigan Appeals Court ruling and dozens of other similar rulings across the nation.

The problem in Michigan stems from a state law that requires a foreclosing party to have a stake in the mortgage. However, MERS has no ownership stake in the mortgages it handles.

One Jackson homeowner — Corey Messner of Summit Township — defaulted on his mortgage in 2008. He sued when he learned that MERS began foreclosing on behalf of his bank. And now the state appellate court has ruled in his favor. The court ruled that MERS has no standing to foreclose unless it owns the debt, which it doesn’t. It merely acts as agent for the banks.

The ruling has created havoc in the real estate market, halting some home sales and further stalling foreclosures in which MERS had been involved. MERS initiated 744 foreclosures in Jackson County in the past five years, and hundreds of others elsewhere in Michigan. That’s a major problem for the banks.

In Ingham County, where MERS initiated 469 foreclosures, Register of Deeds Curtis Hertel was blunt in his assessment: “People were robbed of due process and time. It would have taken more money and more time to foreclose on the citizens and that’s what [banks] avoided by using MERS.”

But it isn’t just in Michigan that MERS-linked mortgage foreclosures are a problem. Similar court rulings have come down in Maine, Kansas and California.

So what is the remedy? Ideally, the return to a basic principle of mortgage contracts — that is, if you are in default on a mortgage, then foreclosure — the ultimate penalty — can only be initiated by the financial institution to which you are indebted. Perhaps there would be more incentive to work with homeowners under such a system.

We also realize, though, that this would introduce more expense into the mortgage business at a time when banks are burdened with unprecedented numbers of foreclosures. Indeed, Minnesota lawmakers passed a law explicitly giving MERS the right to undertake foreclosures. An official with the American Securitization Forum said, “If you don’t allow electronic transfers of mortgages, it takes us back to the stone ages.”

It is easy for a court to read the law and conclude of MERS-initiated foreclosures, “These aren’t legal.” It will prove far more challenging to devise a system that both protects homeowner rights while minimizing banks’ administrative cost burdens.