When the subprime housing bubble burst, homeowners across the country started learning about how their piece of the American dream tied in to a complex world of mortgage-backed securities, collateralized-debt obligations, and credit-default swaps. Among the tangled terms is a database known as MERS, Mortgage Electronic Registration Systems. Back in the ’90s, a consortium of lenders and mortgage industry players created a holding company called Merscorp to build MERS, which helps Wall Street keep track of how it buys and sells loans in the process of bundling them in mortgage securities. Instead of recording each transaction in local property-record offices, lenders list the registry as a stand-in and then track subsequent transfers internally on the MERS database. Whether that placeholder designation was kosher is being tested in court cases around the country. In Pennsylvania, a new federal ruling has allowed a challenge to proceed.
MERS has been under attack for at least two years since the robo-signing scandal raised questions about its role in banks’ questionable foreclosure practices. As my colleagues reported at the time, homeowners questioned whether the database obscured who or what owned their mortgage and therefore had the right to take their homes in foreclosure. Almost a year ago, I wrote about how some county recorders were staging revolts against MERS by filing suit. They hoped to clear up their records—and recoup lost recording fees. The story focused on Nancy Becker, recorder of deeds in Montgomery County, Pa., outside Philadelphia. Becker filed suit against MERS last November, seeking class action status on behalf of all her peers in the state; she claimed that MERS, in essence, constitutes a private tracking system that bypasses the recording required by state laws. MERS sought to have the case dismissed on two main arguments: that the state didn’t require the recording of each mortgage assignment and that Becker didn’t have standing to sue.
On Oct. 19, federal Judge J. Curtis Joyner sided with Becker, shooting down MERS’s efforts to dismiss the case. He wrote that Becker’s suit can proceed because “the recording statute does require recordation of all conveyances,” and said that Becker has the right to sue under a part of the law that allows “quiet title actions,” which relates to compelling someone to record documents that may clear up property ownership. The judge did reject Becker’s claim that MERS maliciously conspired to subvert the law.
MERS says it will continue to defend against Becker’s suit. “We believe that we will prove that the MERS does comply with Pennsylvania law,” spokesman Jason Lobo wrote in an e-mail.
As Joyner noted in his ruling in Becker’s case, several county officials across the country have sued MERS, and the outcomes have varied depending on individual state recording laws. Joyner cited cases in Kentucky, Florida, and Iowa, which have all been dismissed; cases in Texas and Ohio are winding through the courts. MERS faces lawsuits on other fronts, too. Some homeowners are challenging MERS’s right to foreclose on their homes in its own name.
Part of the original idea behind MERS was to make it easier for banks to buy and sell loans for a national market that churned out mortgage securities. After all, each state had different recording requirements that would slow down the process of bundling loans—and can cost as more than $50 per transfer. As the MERS cases make their way through courts, though, it looks as if the database’s future may in part be decided by state laws that it sought to sidestep.