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V WHEN PEOPLE BOUGHT THEIR HOMES Homeowners 1 ownership 3
Homeowners took out mortgages with banks and other lenders.
2 Banks
Every time the title of a loan was traded, local property laws required forms to be approved and notarized. Instead, firms used MERS to trade much faster and in larger volumes by tracking the ownership of the loans electronically.
WHEN HOMES FELL INTO FORECLOSURE Homeowners ? Banks 5 SOURCE: Staff reports
Te legal standing of MERS has been called into question, and if courts invalidate the foreclosures because of the lack of clear titles, banks could face lawsuits from homeowners and from those who invested in the securities.
Investors 4
When banks foreclosed on the homes, the ownership of the mortgages was unclear because of the lack of a paper trail.
? Trusts Investors funded the trusts
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How MERS blurred the ownership of homes Mortgage giants created the Mortgage Electronic Registration Systems (MERS) to speed up the loan securitization process, but as millions of homes fell into foreclosure, the lack of a paper trail leſt the ownership of mortgages in question.
Mortgages were bundled into mortgage-backed securities and then purchased by trusts, companies set up to profit from the securities. Sometimes they were traded multiple times.
Trusts U TREASURY
$1.3 trillion deficit a slight improvement Thefederalbudgetdeficit fell to
nearly $1.3 trillion this year — slightly lower than last year’s re- cordof$1.4trillion—as the costof a federal bank bailout came in much lower than expected and corporate profits rebounded sharply, congressional budget an- alysts saidThursday. The budget gap for the fiscal
year that ended Sept. 30 was the second-largest on record since 1945, at nearly 9 percent of gross domestic product, according to the nonpartisan Congressional BudgetOffice. But itwas lower than either the
CBO or theWhiteHouse had pre- dictedearlier this year, suggesting that thewave of red ink propelled by the recession that began in 2007has finallypeaked. The numbers are preliminary;
the Treasury Department will re- lease official spending and reve- nue figures later this month. But they offer a first glimpse at the forces shaping thenation’sbudget picture. According to the CBO, revenue rose for the first time in 2010 after
MARKETS
Dowretreats after nearing 11,000 Stocks edged lower Thursday,
ALICIA PARLAPIANO AND ALBERTO CUADRA /THE WASHINGTON POST
In middle of foreclosure chaos, local firm keeps popping up
TRACKS LOANS, NOTONPAPER
MERS helps companies movemortgages quickly
BY BRADY DENNIS AND ARIANA EUNJUNG CHA
As courts across the country
face a wave of foreclosures, a name little known to the public has cropped up on thousands of court filings as a stand-in for prominent banks, lenders and mortgage servicers. Mortgage Electronic Registra-
tion Systems (MERS), headquar- tered in a nondescript office building in Reston Town Center, has flourished quietly over the past decade, saving financial firms hundreds of millions of dollars by helping themavoid the time and expense of filing mort- gage documents and paying fees each time a loan changes hands. Its motto: “Process loans, not
paperwork.” But lawyers throughout the
country increasingly are chal- lenging that approach, question- ingwhether the company has the legal right to foreclose on homes, on the grounds that it doesn’t actually ownmortgages. And the argument is gaining traction with some judges. Yet without proper paperwork
to establish ownership, banks and other lenders have also faced legal difficulties with seizing homes when borrowers default. The result in some cases has been the use of flawed and fraudulent documents in foreclosure cases. Concerns about improper pa-
perwork have prompted some of the nation’s largest lenders and several states to halt foreclosures until companies can provide proof that they own themortgag- es and have a right to seize the homes. The MERS headquarters is
tucked amid chain restaurants and retail stores near Dulles International Airport. But the firm’s reach extends far beyond this slice of suburbia. The company is an integral
part of the system that emerged during the global housing boom, when mortgages were created and sold, sliced and diced, pack- aged and repackaged so quickly that financial firms had neither the time nor the patience to file paperwork in local courthouses as the loans were traded. By
usingMERS, lenderswere able to reassign loans quickly and cheaply. But often the chain of ownership was not accompanied by an official paper trail. The MERS registry tracks
more than 65 million mortgages throughout the country and con- tinues to facilitate rapid-fire transfers that keep the market for mortgage-backed securities humming. But if courts increasingly be-
gin to nullify theMERSmodel — different judges have issued dif- fering rulings — this could call into question the legitimacy of millions of mortgages, wreak havoc on the real estate market, spur costly litigation againstWall Street banks and ultimately harm the broader financial sys- tem.
Faster, easier The land title systemthatwent
largely unchallenged in the Unit- ed States for centuries became an obstacle in the 1990s. That’s when financial firms began to ramp up a process called securiti- zation, bundling and selling pools of home loans to sell to investors. Each time the loans were reassigned, the new owner had to record the transfers with local clerks. Several executives in themort-
gage industry came up with a faster, easier approach: MERS. The list of MERS shareholders includes an array of banks, lend- ers and title companies. Among them: Fannie Mae, Freddie Mac, Bank of America, GMAC, Wash- ington Mutual, Wells Fargo and AIG’s United Guaranty Corp. Here’s how MERS works:
When a home buyer closes on a house, the paperwork signed at settlement often appoints MERS as a “nominee” for the lender and for whomever the lender might sell the mortgage to down the road. Each time the loan is sold and resold, MERS tracks the reassignment in its computer system, without generating pa- perwork. The company says such an
arrangement benefits all parties — consumers, lenders and inves- tors. “WithoutMERS,” the company
says, “mortgage data would be less accurate and title informa- tion [would] be less reliable.” But after the MERS computer
system went live in 1997, some county recording offices com- plained that the company was bypassing the legal process and raking inmoney by charging fees that were lower than those charged by municipalities. They were largely ignored.
“It wasn’t like Congress or
state legislators did anything,” said Christopher L. Peterson, a law professor at the University of Utah who has consulted in cases against MERS. “The mortgage industry just changed how the land title systemworked without getting anyone’s okay.” MERS has consistently
claimed authority to act as a representative, or “nominee,” on behalf of banks and lenders. But as millions of homes have
fallen into foreclosure, Peterson said, “the MERS system doesn’t provide a substitute for all the recordkeeping” that never took place during the boom years. “MERS created the illusion of record keeping when it wasn’t really done.” To convince courts that they
have the right to foreclose on homes, banks and lenders have often found it difficult — when challenged — to provide the pa- perwork showing they indeed own the loans. Financial firms, which bought mortgages from other companies, have also been challenged in court over whether MERS even had the legal right to reassign the loans. These problems contributed to
the use of flawed and fraudulent paperwork, including backdated assignments and forged docu- ments, that have prompted firms such as Ally Financial, J.P. Mor- gan Chase and Bank of America to halt foreclosures.
Lawsuits against MERS As the banks and lenderswres-
tle with those problems, MERS also finds itself under attack in courts across the country. The company faces class-ac-
tion lawsuits in California, Arizo- na and Nevada—three states hit hard by the foreclosure crisis. The suits on behalf of homeown- ers facing foreclosure allege that, as a result of the MERS system, parties seeking to seize their homes don’t have legal standing to do so. Another suit alleges that
MERS and its members owe California $60 billion to $120 billion for circumventing land recording fees.That case is set for a hearingTuesday, thoughMERS, Bank of America, Citibank,Wells Fargo and others named as de- fendants are seeking to have it dismissed. In Arkansas, Kansas and
Maine, state supreme courts have ruled that MERS can’t foreclose on homes, because it doesn’t own the loans. The Kansas Supreme Court called the company’s rela- tionship with lenders “akin to that of a strawman.”
In May, Judge Arthur Schack
of Brooklyn, N.Y., threw out a foreclosure case after ruling that the assignment of a loan to a bank by MERS was “defective.” He said an attorney’s explana- tions for it were “so incredible, outrageous, ludicrous and disin- genuous that they should have been authored by the late Rod Serling, creator of the famous science-fiction television series, The Twilight Zone.”He dismissed the case. Challenges continue to come. In Kentucky, lawyer Heather
Boone McKeever recently filed a state class-action suit and a fed- eral civil-racketeering suit, both namingMERS. She argued in one filing that banks and lenders used MERS to facilitate “illegal mortgage registration, transfer and wrongful foreclosures” and that MERS “was created for the unlawful purpose of hiding and insulating the brokers and origi- nators of predatory toxic loans fromaccountability and liability.” “I’mvery cynical at this point,”
McKeever said in an interview. “I think it was created to commit fraud.” In rejecting these allegations,
MERS points to numerous in- stances in which judges, state and local officials, and ratings agencies have recognized its le- gitimacy. “These days, we have seen a
growing trend by lawyers using the tactic of alleging that MERS is engaging in various types of wrongdoing to stall or prevent foreclosures,” spokeswoman Kar- mela Lejarde said. “This tactic has proven time and again to be unsuccessful.” Lejarde pointed to cases in
Arizona and Missouri in which judges ruled in the company’s favor. The MERS Web site men- tions other cases that the firm says demonstrate its right to act on behalf of lenders. Several years ago, on a mes-
sage board still active on the MERS Web site, one participant accused the company of partici- pating in fraud and concealing the transfer of loans from public scrutiny. The company’s president and
chief executive, R.K. Arnold, re- sponded by insisting that MERS actually increased the transpar- ency of themortgage systemand reduced the cost of homeowner- ship by making the industry more efficient. “We’re not perfect,” Arnold
wrote, “but there’s nothing sinis- ter about who we are and what we do.”
dennisb@washpost.com chaa@washpost.com
CARLOS OSORIO/ASSOCIATED PRESS
MichiganGov. Jennifer Granholm (D) greets workers at the Orion Assembly facility in Orion Township, near Detroit.GeneralMotors announced that it would build a newcompact Buick at the plant.
AUTOMOTIVE
GMand union reach wage-cut agreement GeneralMotors and theUnited
AutoWorkershave reachedacost- cutting deal that could accom- plish what once seemed impossi- ble: Turning a profit on subcom- pact cars made in the United States. The deal could cut in half the
hourly wage of some longtime UAWworkersatafactory inOrion Township,Mich., the first time the union has agreed to a pay cut for workerswho arenotnewhires.
GM says it will make a profit
selling the Chevrolet Aveo, a re- vamped subcompact to be built at the plant starting next year. As part of the bargain, the company announced Thursday that the plant alsowill build a small Buick sedancalledtheVerano. Mostother automakers, includ-
ing rival Ford Motor, build sub- compacts inMexicoorothercoun- tries with far lower labor costs. Automakers based in the United States have struggled for years to makemoney onsmall cars. —AssociatedPress
backing away fromearly gains, as uncertainty grew ahead of a key report of Friday’s unemployment report from the Labor Depart- ment. TheDowJones industrial aver-
age came within two points of 11,000 before turning lower for most of the day. The Dow has not traded above that level sinceMay
4, about a week after reaching its highestpoint of the year. Slightly better news on claims
forunemployment insurancegave stocks anearly lift. Earnings reporting season got
underway for U.S. companies whenAlcoa became the firstDow- listedcompanytoreportquarterly results. Alcoa’s net income fell 21 percent because of lower metals prices, but the results still beat analysts’ expectations. —AssociatedPress
FRIDAY, OCTOBER 8, 2010
10-YEARTREASURY UP$1.70PER$1,000,2.38%YIELD
CURRENCIES $1=82.40YEN; EURO=$1.392
DIGEST
two years of declines, driven by a significant increase in tax collec- tions oncorporateprofits. The Treasury also received dra-
matically higher earnings from theFederalReserve,whichisreap- ing the rewards of the larger and riskier investments it made to combat the recession, the CBO said. Meanwhile, federal spending
fell slightly compared with 2009, mainly due to signficantly lower costs for the Troubled Assets Re- lief Program, otherwise known as the bank bailout, which ended Sunday.Payments tomortgage-in- surance giants Fannie Mae and FreddieMac also fell, as did FDIC payouts to cover deposits in trou- bledbanks. Excluding those programs,
spending rose by about 9 percent in 2010— “somewhat faster than inrecent years,” theCBOsaid.The increase was driven primarily by the rising cost of unemployment benefitsandotherprograms relat- ed to last year’s $814 billion eco- nomic stimuluspackage. —LoriMontgomery
Faster Forward ROB PEGORARO Excerpt from
voices.washingtonpost.com/fasterforward B
ecause somanyhave asked,here iswhat I knowabout the odds of aVerizoniPhone.Thatperpetual rumor subject is once againin thenews, courtesy of aWall Street Journal story thatdeclares:
“Apple Inc. ismaking a versionof its iPhone thatVerizonWirelesswill sell earlynext year, according topeople familiarwiththematter.” •TheWSJ’spiece ismore specific thanothers—after a revisionthat
changedit fromreferring to aniPhone running onVerizon’sCDMA wireless technology tonamingVerizonupfront. • Ihavenodirect evidenceproving ordisproving theWSJ’s story. • Idon’tputmuchvalue inanythingVerizonWirelessmight say
today. If the company is really getting the thing, of course itwill say nothing.Apple,meanwhile,willmaintainits customary, sphinx-like silence. • I suspect thatApplehashadtestCDMAversions of the iPhone for
years, just as ithadtest versions ofMacOSXrunning onIntel processors for years before it announceditwouldswitchfromPowerPC chips to Intel’s. •Don’t forget that every single storypredicting the arrival of a
VerizoniPhone onadatepreceding todayhas beenwrong.That is a nearlyunmatchedrecordof forecasting futility. • If youwant toholdonto anantiquephone inthehope thatVerizon
willpull aniPhone out of itshat sometime earlynext year, youmight as well go ahead.But I reserve the right topoint andlaughat youif your optimismprovesunwarranted.
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