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Monday, February 14, 2011

Entire MERS process ruled illegal

It's been a while since we talked about the US Foreclosure Crisis. And while there hasn't been much news, the issue hasn't gone away.

A detailed overview of the issue is outlined in this post.

As you may recall, serious questions were raised last year about MERS, the electronic clearing house for mortgage titles established by the real estate industry in the US.

The Mortgage Electronic Registration Systems (MERS) digitized the land title process to make thing 'simpler' for banks. By 'simpler', I mean 'cheaper' because it allowed big banks and to by-pass local state real estate laws, process and fees for title transfer.

Critics chared that MERS illegally broke the 'chain of title' process for mortgages in the US.

When a homebuyer signs a mortgage, the key document is the note, the actual IOU of the mortgage. In order for the mortgage note to be sold or transferred to someone else (and therefore turned into a mortgage-backed security), this document has to be physically endorsed to the next person. All of these signatures on the note are called the ‘chain of title.’

You can endorse the note as many times as you please... but you have to have a clear chain of title right on the actual note: I sold the note to Moe, who sold it to Larry, who sold it to Curly, and all our notarized signatures are actually, physically, on the note, one after the other.

If for whatever reason any of these signatures is skipped, then the chain of title is said to be broken. Therefore, legally, the mortgage note is no longer valid. That is, the person who took out the mortgage loan to pay for the house no longer owes the loan, because he no longer knows whom to pay.

To repeat: if the chain of title of the note is broken, then the borrower no longer owes any money on the loan.

MERS has argued that, under it's membership rules, that it can act as a ‘common agent’ for undisclosed principals and make the tranfers though it's database.

As reported by Bloomberg, U.S. Bankruptcy Judge Robert E. Grossman in Central Islip, New York, in a decision he said he knew would have a “significant impact,” wrote that the membership rules of the company’s Mortgage Electronic Registration Systems, or MERS, don’t make it an agent of the banks that own the mortgages.

In short, MERS lacks the rights to transfer mortgages.

The key to all of this, of course, is that as mortgages were slice, diced and bundled into mortgage backed securities... the transfer of ownership was never done (legally) and now banks lack the legal standing to foreclose on these properties.

As posted last year, this is a major, significant story.

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