With more borrowers filing legal challenges to foreclosure, many mortgage lenders have turned their back on using Merscorp, which operates an electronic loan registry, to bring foreclosure actions.
Some lenders are even returning to the old-fashioned, paper-based system of physically recording mortgage assignments at county recorder offices to ensure an unbroken chain of title.
The reversal by lenders stems from the need to avoid yet another round of expensive legal challenges to foreclosures.
Lawsuits against MERS are not new. But the legality of the private loan registry was called into question again Wednesday when Washington Attorney General Peter Nickles said foreclosures cannot proceed in the District of Columbia unless a mortgage deed is recorded in public land records.
Nickles said he may consider bringing enforcement actions to stop foreclosure proceedings brought in the name of MERS, and seek restitution for consumers.
Since its creation in 1996, the Merscorp subsidiary has been used to foreclose on behalf of its 3,500 lender-members, including Fannie Mae and Freddie Mac, which pay annual dues and a fee for every transaction recorded.
Tom Deutsch, the executive director of the American Securitization Forum, said Nickles' interpretation of the district's law was "overly broad." Most states do not have a mandatory requirement to publicly file a mortgage assignment, he said.
"They believe there is a notice requirement, which is quite distinct from challenging the actual ownership of the mortgage," he said.
Consumer advocates have long argued that it is unfair to obscure the underlying owner of the mortgage from consumers. Many have tried to invalidate the ability of MERS to foreclose in the name of its lender-members.
However, last month a district court in Arizona dismissed a broad-based class action challenging MERS' right to foreclose.
So far, only four states — Arkansas, Kansas, Maine and Missouri — have said MERS lacked the legal standing to bring foreclosure actions against borrowers.
While lenders may still use the MERS registry, many began filing foreclosure actions in their own name after Fannie Mae told them to do so in late 2006 in judicial states.
In April, Fannie Mae told servicers to file foreclosures in their own name in nonjudicial states as well.
"Generally you're seeing more lenders file in their own name or in the name of the trust to have additional protections, but that does not challenge or undermine the validity of a MERS registration," Deutsch said.
But MERS finds itself in more than just legal crosshairs these days. When the registry was created, the mortgage industry argued that county recorders had failed to properly record mortgage assignments, recorded them at a slow pace and often broke the chain of title.
Now the same argument is being made against MERS.
Christopher Peterson, an associate dean and law professor at the University of Utah, said that while MERS purports to track ownership rights, it only does so based on information put into its system by its own members.
"Financial institutions have been cavalier about informing Merscorp. of changes in servicing and ownership rights of mortgages because they believe there are no legal penalties for neglecting to make this information available," Peterson said.
"We now have a fairly significant gap in tracking the true ownership interest in property registered on the MERS system."
Candace Caley, partner at SolomonEdwards Group, a consulting firm in Wayne, Pa., agreed that there are gaps because MERS members failed to record assignments.
"MERS creates a false sense of security," Caley said. "If the transfers between assignments were not recorded properly, then technically a lender does not have the right to foreclose. MERS is only as good as the institutions recording the information."
MERS also has raised concerns similar to those about robo-signing, the practice in which servicers and foreclosure law firms used low-level employees to endorse affidavits without verifying the information or having a notary present, Peterson said.
Typically, MERS will designate that a servicer or an employee of a law firm be named a vice president of MERS so they can sign and record documents including mortgage assignments and substitution of deed of trust trustees.
"This corporate structure leads to inconsistent positions, conflicts of interest and confusion," Peterson said.
Many banks and servicers say there is no need to be concerned about who owns the underlying mortgage note, because payments are tracked by the servicer and forwarded to investors.
But gaps in MERS' system could create further risks if banks cannot prove they are the note holder.
"Banks thought MERS was keeping track of this for them," Peterson said. "Maybe the risk is not that great because the records kept by the financial institutions are sound — let's hope so."
With foreclosure attorneys challenging banks, disputes over land ownership that once were resolved by county recorders could become far more prevelant.
"For the first time, there is no longer an authoritative, public record of who owns land in each county," Peterson said.
MERS did not return calls seeking comment