Is MERS the Weak Link in Mortgage Recording

Alarms are being raised in the mortgage investment industry as courts dismiss foreclosure cases because of the bank’s inability to prove ownership.

Cases in point:

The recent federal judge’s decision to dismiss fourteen foreclosure actions by the Deutsche Bank. Deutsche Bank was seeking to collect on securitized subprime mortgages it had acquired. The judge decided that since there was no “proof of ownership” on the loans in question. The bank acquired the loans after defaults had already taken place. Because the proof required by the court was not on hand, the judge dismissed the actions and gave the bank thirty days to come up with credible legal documentation that showed ownership.

A state judge in Cincinnati dismissed a foreclosure lawsuit brought by Wells Fargo Bank because the bank filed the suit before it had acquired the mortgage.

There may be a problem with the Mortgage Electronic Registration System (MERS). It started as a tracking system and avoidance to pay local fees for mortgage registration. The mortgage lien was recorded locally to MERS. MERS was responsible for tracking and reporting the historical data on the mortgage. It did not matter what lending entity was ultimately entitled to the proceeds. Locally, the mortgagee on record is MERS. Ohio law specifies foreclosures can only be executed by the lien holder on record.

In the examples given, one lender attempted to foreclose on a debt before they owned it and recorded it, the other after they acquired it but before it had been in default to them. In both cases the lender failed to establish they were the lender on record and entitled to foreclose.

In the future, MERS will look like a total villain because of the number of mortgages they have registered to them. Foreclosure notices published in local newspapers show MERS acting as agent for the lenders, but MERS is not the lender. Factual lien recording will need to restore local records, mortgage documents presented either hard or digital format, and establish proof of mortgage liens.

Editor’s Note: This article was originally written in December 2007. We now see so many MERS lawsuits in 2012 that mortgage professionals and large law firms cannot keep up with them.