The nation's largest electronic mortgage-tracking system, MERS, cannot foreclose on a homeowner in Washington state, the state's highest court ruled Thursday.
The nation’s largest electronic mortgage-tracking system cannot foreclose on a homeowner in Washington state, the state’s highest court ruled Thursday.
In a unanimous opinion, the Washington Supreme Court said that Mortgage Electronic Registration Systems (MERS) can’t begin a foreclosure itself because it doesn’t hold the note the homeowner signed with the lender. The ruling means banks or other noteholders will have to initiate foreclosures instead of relying on MERS.
Observers said the opinion could have a broader impact on other court cases alleging wrongful foreclosures in Washington. The ruling also leaves the door open for those who were wrongfully foreclosed to claim damages under state consumer-protection law — but it doesn’t mean those homeowners in default are off the hook from paying their loans.
“They gave clarity to lawyers,” said Fred Corbit, senior attorney in King County for the Northwest Justice Project and adjunct law professor at Seattle University.
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“Will this make the foreclosure process a little more expensive? Not much,” he said. “It’s just they can’t take this shortcut.”
One of the two King County plaintiffs involved in Thursday’s ruling, Kristin Bain, bought a home in Tukwila in 2007. After Bain fell behind on payments, MERS asked a trustee to start a foreclosure on behalf of now-defunct IndyMac Bank, and local consumer attorney Melissa Huelsman filed suit to stop an auction of Bain’s home.
The case was later transferred to federal court, which asked the state’s high court to interpret the state law.
The state Supreme Court didn’t rule on whether Bain and the other plaintiff, Kevin Selkowitz, will avoid foreclosure; the federal court will rule on their cases.
MERS was created during the late 1990s when the buying and selling of mortgages became a big business for Wall Street — much like the electronic buying and selling of stocks and bonds.
Before MERS, every time an investor sold a mortgage loan to another investor, documents had to be filed in the county where the property was located.
The MERS system avoided that paperwork and saved the mortgage-finance industry millions in county recording fees, but the company that runs the massive database doesn’t actually keep the loan documents; the loan servicers do, and MERS has argued in courts around the country that that is sufficient.
From 1999 to 2011, MERS initiated at least 900 foreclosures in King County on behalf of banks, according to county records. The court said MERS has the right to represent a bank, but failed to do this in the two cases because it couldn’t identify the actual noteholders.
There’s the “nub” of the larger problem with MERS, the justices wrote:
“Under the MERS system, questions of authority and accountability arise, and determining who has authority to negotiate loan modifications and who is accountable for misrepresentation and fraud becomes extraordinarily difficult.”
MERSCORP Holdings, the Virginia-based private company that runs MERS, minimized the ruling’s significance, saying it had stopped initiating foreclosures in its own name more than a year ago.
“The opinion will, however, create confusion for Washington homeowners while the trial courts consider its effect on pending cases,” said Janis Smith, a spokeswoman for MERSCORP, in a statement. “We remain confident that MERS’ role in the U.S. housing-finance system is valid and will withstand legal challenges.”
Huelsman and Corbit both said the state Supreme Court ruling should dispel confusion rather than create it.
Federal courts in some other foreclosure cases have ruled MERS can start foreclosure proceedings as an agent for the noteholder, but those rulings apply in states with different deed-of-trust statutes.
“This clearly says you have to be the noteholder, and it doesn’t just apply to MERS,” Huelsman said.
And if a foreclosure is brought in the name of a bank and that bank doesn’t hold the note, the ruling suggests that the bank could be sued for damages under state consumer-protection law, she said.
Attorney General Rob McKenna’s office, which filed a brief in support of Bain, hailed Thursday’s ruling.
“We believe this will promote honesty in the foreclosure process,” said spokeswoman Janelle Guthrie. “Homeowners will be able to know, without a doubt and without having to dig through land records or legal files, exactly who claims to have the right to foreclose on their home.”
The Washington Bankers Association, which filed a brief supporting MERS, had no immediate comment on the ruling.
Douglas Davies, the local attorney who represented MERS, said the court imposed “the literal language of a dated statute,” reaching a decision that didn’t benefit either borrowers or lenders.
“The Supreme Court has created a chaotic situation and essentially left it to a taxed legislature to come up with a solution,” Davies said in an e-mail late Thursday. “The only certainty that will come from this decision is a plethora of lawsuits that will overburden an already burden[ed] judicial system.”
Sanjay Bhatt: 206-464-3103 or firstname.lastname@example.org