A landmark ruling in a recent Kansas Supreme Court case may have given millions of distressed homeowners the legal wedge they need to avoid foreclosure. In Landmark National Bank v. Kesler, 2009 Kan. LEXIS 834, the Kansas Supreme Court held that a nominee company called MERS has no right or standing to bring an action for foreclosure. MERS is an acronym for Mortgage Electronic Registration Systems, a private company that registers mortgages electronically and tracks changes in ownership. The significance of the holding is that if MERS has no standing to foreclose, then nobody has standing to foreclose – on 60 million mortgages. That is the number of American mortgages currently reported to be held by MERS. Over half of all new U.S. residential mortgage loans are registered with MERS and recorded in its name. Holdings of the Kansas Supreme Court are not binding on the rest of the country, but they are dicta of which other courts take note; and the reasoning behind the decision is sound.
via Landmark Decision: Massive Relief for Homeowners and Trouble for the Banks.
This is a potentially gigantic story. It seems that a court has ruled that about half of the mortgage market has been run as a criminal enterprise for years, which would invalidate any potential forelosure proceedings for about, oh, 60 million mortgages. The court ruled that the electronic transfer system used by the private company MERS — a clearing system for mortgages, similar to a depository, that is used for about half the mortgage market — is fundamentally unreliable, and any mortgage sold and/or transferred through MERS can’t be foreclosed upon, at least not in Kansas.
Update with reply from McBlogger, who definitely knows more about this than I do.
The Landmark ruling in KS still resulted in the foreclosure of the home to satisfy the first lien. At issue was the second lien which Sovereign did not properly perfect, at least not according to the KS supreme court. The decision will likely be altered when Sovereign properly proves it's interest, but it'll be futile since I doubt the sherriff's sale of the property resulted in enough proceeds to even begin to satisfy the first lien. Still, it will straighten out the relationship.
MERS is never, in my experience, a party itself in the event of foreclosure so I don't know where that's coming from. Further, servicers retain the right, on behalf of security holders and acting as their agents in fact (i.e., in their capacity as servicer) to foreclose even on homes that have mortgages that were securitized. MERS usually doesn't even act as a custodian, that's usually the servicer. MERS just tracks the physical location of the collateral package, the servicer on the obligation and who owns the obligation. In the event the note is securitized, the owner would be Fannie Mae Trust 1998-02 with 1998-02, being the second securitizion of 1998 issued by FNMA and held in trust for the investors. They would not have an individual interest in the mortgage, they would have an individual interest in FNMA Trust 1998-02.
It would be the servicer, acting as agent in fact for FNMA Trust 1998-02, that would foreclose. And they'll have no problem doing it.
The reality, however ugly, is that until the note is satisfied people are not homeowners, they are mortgagors. Since the mortgage is a debt instrument, it does not entitle the holder to an equity interest in the property (it's not a joint equity instrument) so if someone wants to sell a home for more than the current balance due on the note, they get to keep the difference due to their interest as mortgagor. If the home sells for less than the note amount, the borrowers owe the difference to the mortgagee. They signed the contract and they bear ultimate responsibility for it.
This is going to sound nasty, but I have little sympathy for homeowners or for investors in all this. And I have real problems with the originator fraud issue as that is usually the complaint you hear now in the event of foreclosure. When you dig down, you find that all documentation was executed properly and that the customer understood, per affidavit. They wanted the house and glossed over the terms of the debt they were taking on.
As for the investors, no one did any due diligence to figure out what should have been obvious... the insurance policies (the CDS) on this shit were juicing the credit quality and no one asked if the issuer of the policy had the wherewithal to pay in the event of a claim.
This aside, I am a 1 believer in securitization. Without it, our interest rates would be, at a minimum, 2-3% higher and we would not be able to take on some of the risks we take on in terms of borrower credit quality. I LOVE the way what was hailed a miracle four years ago for expanding homeownership in the US is now the red-headed stepchild that is constantly bitchslapped by people like Taibbi who really only have the vaguest idea what the fuck they're talking about.