On July 1, a federal judge took away Robert Bellistri's house in Arnold, Mo.
Bellistri, who bought the house as an investment after it was seized for non-payment of taxes, failed to notify Mortgage Electronic Registration Systems Inc. of his purchase, the judge said. A state appeals court last year had ruled otherwise, finding Bellistri didn't need to tell MERS, a company that lets banks electronically register their sales of home loans so they can avoid trudging down to the county land-records office.
The case highlights a debate raging in courts on the role MERS has, if any, in home foreclosures. How it's resolved will determine whether MERS's involvement produced a defective process and clouded millions of property titles. A definitive ruling against MERS might slow any future bundling of mortgages into securities since the company played a role in that process.
"MERS is the central device by which the banks have tried to opt out of the legal system and the real-property record system," Rep. Alan Grayson, D-Fla., said in an interview. "They have taken it upon themselves, with the supposed consent of the borrowers, to violate a system of property record-keeping that we've had going back centuries."
Attorneys general of all 50 states opened a joint investigation into home foreclosures Oct. 13, saying they will seek an immediate halt to any improper practices at banks and mortgage companies. The announcement came after several banks, including Bank of America Corp., halted foreclosures in either all states or the 23 with judicial supervision of foreclosures.
MERS, whose parent company is Merscorp Inc., bills itself as a provider of "support services to the mortgage industry," specifically tracking the servicing rights and ownership interests in mortgage loans on its electronic registry.
Merscorp, based in Reston, Va., was created by industry leaders in 1995 to improve servicing after county offices couldn't deal with the flood of mortgage assignments, Karmela Lejarde, a spokeswoman for MERS, said in an interview.
"That bottleneck got mitigated," she said. The company's tagline is "Process Loans, Not Paperwork."
According to its website, MERS is owned by the largest lenders in the country including Bank of America, Citigroup, JPMorgan Chase and Wells Fargo, in addition to Fannie Mae and Freddie Mac, which own or guarantee more than half of the $11 trillion U.S. mortgage market.
The company's net operating revenue last year was $32 million, she said.
Under the MERS system, a borrower who takes out a loan agrees to allow the company to act as the lender's nominee, or agent, on the mortgage or deed of trust securing the property. That means MERS holds the lien, according to the company.
MERS continues to be the mortgagee of record as long as the note promising the borrower's repayment is owned by a MERS member. If it's sold to an outside entity, the assignment is recorded with the appropriate county.
About 60 percent of newly originated loans are on the MERS system, Lejarde said. Since its inception in 1995, it has carried 66 million loans and currently has between 23 million and 25 million active loans, she said.
"The problem with MERS is it takes a public function and puts it into a private entity that doesn't seem to have any clear accountability," said Alan White, a law professor at Valparaiso University in Indiana. "And it does it on legal grounds that seem tenuous."
MERS played a key role in the bundling of mortgages into securities that reached a frenzy before the economic decline of 2008, critics including Grayson said. It allowed banks to sell and resell home loans faster, easier and cheaper, he said.
"MERS was a facilitator of securitization," said Grayson, a member of the House Financial Services Committee.
MERS disagrees. It was created to provide clarity and transparency and not "to enable faster securitization," it said in an Oct. 9 statement.
"MERS probably served a necessary purpose given the volume of securitization that went on," Talcott Franklin, a lawyer in Dallas who represents investors in mortgage-backed securities, said in a phone interview.
A big selling point for the company is its cost savings. It charges $6.95 for every loan registered, Lejarde said. With an average cost of about $40 for filing a mortgage assignment with local counties, MERS has saved the industry about $2.4 billion, Merscorp Chief Executive Officer R.K. Arnold said in a September 2009 deposition in an Alabama suit.
The company is accused in two whistleblower suits filed this year of cheating California and Nevada counties out of millions of dollars in recording fees. In 2006, New York State's highest court told one county it had to record MERS mortgages against its wishes. The county said MERS cost it $1 million a year.
Several courts have expressed confusion that MERS positions itself as both mortgage owner and representative of a mortgage owner. That stems from its use of mortgage language that typically states it is both the mortgagee and "acting solely as nominee for Lender and Lender's successors and assigns."
Consumer advocates and bankruptcy attorneys who criticize MERS say it has no right to foreclose when it doesn't hold both the promissory note and the security instrument -- the mortgage or trust deed. The U.S. Supreme Court ruled in 1872 that a mortgage has no separate existence from the note, Peterson wrote.
"It appears that on a widespread and probably pervasive basis, they did not take the steps necessary to own the note," Grayson said in a Sept. 30 video he recorded about MERS, "which means that in 45 out of the 50 states they lack the legal right to foreclose."
MERS says it the right to foreclose because the borrower grants the company legal title to the mortgage and it forecloses as agent for the promissory-note holder. "Courts around the country have repeatedly upheld and recognized this right," MERS said in an Oct. 4 e-mailed statement.