Friday, March 11, 2011

MERS: Methinks the government has bailed out the wrong people.

On October 13. 2010, Reuters’ Factbox: The role of MERS in foreclosure furor provided a succinct explanation of ongoing problems with MERS. We should have seen the tidal wave coming.

MERS is a consortium comprised of Lenders and Title Insurance Companies who have sought technological solutions to lower costs in labor-intensive industries. The registration system in MERS is intended to replace the burdensome maintenance of paper records by lenders, escrow, title and settlement companies – and the increased labor cost and overhead to process the same.

The idea looked good on paper. But there it ends.

As with the illegal offshore outsourcing of title insurance functions by Big Insurance in California, nobody bothered to consider state laws when cobbling the system together. In most states, foreclosures require a physical paper trail of documents in order to validate a non-judicial foreclosure. Otherwise, the lender must go to court in order to foreclose. Since MERS beneficiaries may not be interested in fronting the cost of a court case to repossess an upside-down piece of real estate, the foreclosure processes are stalled.

And loan modifications are impossible. 

In this upside-down market, borrowers can negotiate with direct lenders to reduce their principal via loan modification – even without incurring additional tax liabilities. The lenders will write off the losses and then get renewed payments at a lower rate. With MERS loans, modifications are nearly impossible – especially when the loans have been repackaged and securitized.

“They didn’t do the deep homework…So as far as anyone can tell their real theory was: ‘If we can get everyone on board, no judge will want to upend something that is reasonable and sensible and would screw up 70 percent of loans.’ ”

But it is not reasonable to throw Americans out on the street because they can no longer pay on loans made during the time of real estate value inflation. But that is the only servicing option available to MERS borrowers, apparently. But without adequate documentation as to the present ownership of the loans to be foreclosed, non-judicial foreclosures can be legally challenged in most states. 

So now state courts are being strong-armed into rubberstamping MERS non-judicial foreclosure actions. Notwithstanding the recent and questionable Appellate Court’s decision in  JOSE GOMES v.  COUNTRYWIDE HOME LOANS, INC., et al.,  non-judicial foreclosures of MERS loans – even in California – are subject to ongoing challenges until the US Supremes finally rule on this matter. 

MERS was not such a good idea after all. The product of a bunch of executive clubhouse fat-boys from the lending and title industries was a bad idea to start with. Now they are crying to us because they did not want to expend the manpower to do their jobs. Wah-wah-wah! Let them dip into their hidden reserves and return to a normal system of mortgage documentation. For most of us, the home is our single biggest investment, and the MERS creators’ efforts to cheap-out on the loan documentation process is a slap in our face.

Finally, the great irony is that a some whose MERS foreclosures have been stalled are the very folks who had been laid off following the implementation of this system. I hope they get their loans modified before they are kicked to the curb.

Methinks the government has bailed out the wrong people.   

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