There are more headlines every day about banks using shortcuts and questionable paperwork to push through foreclosures. A group of 40 state attorneys general is expected to announce an investigation this week into the mortgage servicing industry, while calls for a nationwide moratorium on foreclosures — an idea the White House opposes — have grown louder.
It’s not easy to follow, so we’ve dived in again to explain things.
If you’re just catching up on all this and are looking for more background, CNBC just published a helpful primer about the foreclosure documents crisis, why it’s complicated, and why the issue has recently grabbed public attention, even though homeowners have experienced some of the same problems for years. (And if you like charts, here’s another primer.)
You can also read our Q&A with attorney Geoff Walsh of the National Consumer Law Center, a legal advocacy group for consumers. He helps explain what the foreclosure process should have looked like, and why the problems with robo-signers — individuals signing off without verification on thousands of foreclosure documents that assert, among other things, a right to foreclose — are linked to the problems with the loan modification programs, which we’ve also covered extensively.
Walsh emphasized that the furor over the discovery of robo-signing is a piece of a larger problem that extends beyond sloppy paperwork. The way he sees it, it’s part of a larger pattern that shows banks and servicers have an “intent not to comply with laws.”
CNBC’s primer also raises this possible explanation of why the sloppy paperwork and robo-signing could be just scratching the surface of a bigger problem:
Now, if the problem truly is just sloppy work on the part of robo-signers, banks can likely resume foreclosures before too long. But many suspect that the reason banks were falsifying their knowledge about the possession of loan documents is that the banks do not actually have the documents and don’t know where to find them. This could permanently impair their ability to foreclose on some properties. … The most damaging thing that could happen to banks would be the discovery that they simply cannot prove they hold a mortgage on a house.
News of this kind of trouble has been bouncing around since the housing market first hit trouble three years ago (reg.). Banks' selling off mortgages to Wall Street resulted not only in loosened lending standards, it also seems to have resulted in loosening bookkeeping practices. A key player in that part of the story has been the little-known Mortgage Electronic Registration Systems, or MERS.
The little-known company in the middle of major chaos
MERS is essentially a confidential directory created and owned by banks to keep track of mortgage paperwork. It has tracked (or failed to, depending on whom you ask) exactly who holds owns the mortgage and has the right to foreclose on millions of American homes, should the homeowners default.
For instance, check out this 2009 New York Times graphic, which shows why MERS — which was designed to “reduce paperwork” and provide “clarity, transparency and efficiency” to the housing finance system — in some cases had the opposite effect. More from the Times, which reported in 2009 that MERS has saved banks more than $1 billion in the last decade, while making life “maddeningly difficult for some troubled homeowners”:
If MERS began as a convenience, it has, in effect, become a corporate cloak: no matter how many times a mortgage is bundled, sliced up or resold, the public record often begins and ends with MERS. In the last few years, banks have initiated tens of thousands of foreclosures in the name of MERS — about 13,000 in the New York region alone since 2005 — confounding homeowners seeking relief directly from lenders and judges trying to help borrowers untangle loan ownership. What is more, the way MERS obscures loan ownership makes it difficult for communities to identify predatory lenders whose practices led to the high foreclosure rates that have blighted some neighborhoods.
Over the weekend, MERS defended its practices and its CEO, R.K. Arnold, said in a statement that “MERS helps the mortgage finance process work better.”
The company also noted that courts have ruled in favor of MERS “in many lawsuits, upholding MERS legal interest as the mortgagee and the right to foreclose.”
But that’s not always been the case, and the company is now, more than ever, likely to be challenged by homeowners on that front.
A draft report on MERS released earlier this month — before the furor over foreclosure documentation really took hold — raised some ongoing questions about the legality of MERS’ role in mortgage lending and foreclosures.
The report’s author, University of Utah law professor Christopher Lewis Peterson, noted that the common practice of using MERS as both a record-keeper and an entity having the right to foreclose on a property for the banks is legally incoherent. According to Peterson, it usurps a longstanding tradition of local governments' retaining records on property ownership. It also saves the banks money by allowing them to skirt recording fees that would otherwise go to these county and state governments.