As investors look to capitalize on distressed mortgage portfolio opportunities, loan document questions and the role of MERS continue to arise.
A panel during the National Mortgage News Buying and Selling Distressed Mortgage Portfolios Conference in New York Tuesday discussed the importance of the proper chain of custody must be demonstrated through documents properly filed in municipal land records.
Complicating matters with public recording officials is the use of the MERS System, the private note ownership registry maintained by Mortgage Electronic Registration Systems. MERS members only file assignments in county records when a note is sold to a nonmember, which creates a discrepancy in the assignment chains on a loan’s promissory note and mortgage or deed of trust.
Mike Wileman, president and CEO of Orion Financial Group, cited Property Records Industry Association data from 2004 estimating that the mortgage industry had a 12.5% rejection rate with land recording documents, which cost the industry $600 million per year—a figure that doesn’t include the added costs of repairing chain of title and re-record, new compliance training, as well as delays in selling loan pools and executing foreclosures.
Most states follow the rule of thumb that the “mortgage follows the note,” and Wileman said that “in the old days, the assignment chains didn’t have to match, but they had to end up in the same place.”
But as challenges to MERS continue and the industry defends the practice before judges, there’s still confusion. “Nothing stops something faster than when the two diverge,” he said.
“We built a legal process with a great deal of flexibility to investors to avoid liability,” Wileman added. “The downside of that is it’s created a lot of issues.”
Barry Johnson, an attorney who heads the consumer finance department at the SettlePou law firm, said there are about eight strategies debtors use to contest MERS in court and his firm has developed templates for legal briefings that it uses to successful defend such challenges. “I even took a white board into court to explain things to a judge one time,” he said.
“I’ve not seen many MERS cases be successful, but I’ve seen MERS slow down progress,” Johnson continued. “MERS is a speed bump to me and most litigators in that I have to stop, get some face time with the court and explain how MERS works and then things generally work out.”
“When I talk to people who are acquiring loans and mortgage portfolios, when you’re doing the due diligence on a sale, you need to find everything you need to prove in court in the paper that you find in the file or in the electronic images,” he added.
Despite the ongoing challenges, Wileman believes the tide is turning on MERS.
“It’s a point of contention that can get brought up if MERS was involved, but it’s much better that it was before in terms of the resolution,” he said.
