Counties Team Up On MERS

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WE’RE HEARING...MERS is far from done spending time and money defending its right to serve as the official record of who owns mortgages and servicing rights.

Last month, the two largest counties in Minnesota—Hennepin and Ramsey—filed a lawsuit against MERS alleging that the electronic registry was depriving the counties of revenue from recording fees.

MERS has faced many legal battles in the past, most of them coming from borrowers or consumer activists who were challenging the rights of lenders to foreclose on homes that were recorded in the name of MERS. MERS has successfully defended itself against most of those claims. But with an increasing number of counties challenging MERS, the organization faces renewed legal threats that have the potential to cripple its operations.

John Choi, the Ramsey County attorney, told me that MERS has led to a “privatization” of the public land records. Nationally, backers of the Minnesota lawsuit say that MERS has deprived counties of some $7.2 billion in recording fees. Under Choi’s leadership (he was elected in 2010), the county is trying to develop an “affirmative litigation practice” around public law, he said.

“This is something we looked into, and we felt that bringing a cause of action was in the public interest,” Choi said.

While Minnesota does have a statute enacted in 2004 that authorizes MERS to be recorded as the nominee for the lender or servicer, Choi said that Minnesota is a “shall record” state, meaning that even if MERS is the nominee, recording fees should be paid when there is a transfer or assignment involving the loan. He said the MERS authorization law does not exempt MERS from having to record changes in ownership and pay a recording fee.

“We think the statute is pretty clear on its face that you shall record mortgages and other assignments,” he said.

While MERS has successfully defended its system in court many times, Choi said the courts have yet to tackle the charges made by Hennepin and Ramsey counties.

“The legal issue that’s presented in this particular case has not been litigated yet,” he said.

The lawsuit, he said, is part of an effort to reclaim the state’s public recording system. It is also an effort to recover lost recording income on behalf of taxpayers, he said.

Despite the lawsuit, Choi, who was previously city attorney for St. Paul, the state capital, offered some praise for MERS’ efforts to improve the tracking of loans and servicing rights involving vacant or foreclosed homes, helping the city determine who’s responsible for maintaining the property.

MERS officials declined to speak to me for the record, but they did refer me to voluminous written material on their website, which suggests that they beg to differ on the question of whether this particular issue hasn’t already been litigated.

Janis Smith, a vice president at MERS, issued a statement about the latest litigation salvo, saying there is not merit to the claims made by the two Twin Cities counties.

“All MERS mortgages are recorded in the county land records and all required fees are paid.”

While MERS has won many more court cases than it has lost, it is hardly undefeated in the court system. Last July, for instance, The Oregonian newspaper in Portland, an appeals court—the state’s second highest—ruled that MERS could not be used to skirt county recording fees “in out of court foreclosures.”

MERS has brought tremendous efficiencies to the process of tracking changes in the ownership of home loans and servicing rights, saving lenders billions of dollars. But until the legal challenges to MERS are finally resolved for once and for all, there will always be a bit of fog around the electronic registry’s authority.

Attorney Dustin Zacks of King, Nieves & Zacks in West Palm Beach, Fla., wrote in the Banking and Financial Services Policy Report that just when the legal controversy regarding MERS from foreclosure-related lawsuits seemed to be receding, county clerks have decided to drag MERS back into courtrooms. These county lawsuits, he said in the article, are the “most imminent legal threat to MERS.”

He wrote that so far MERS has won victories against county recorders in states as diverse as Iowa, Texas, Florida and Arkansas. However, even one big loss to a county’s claims down the road could require MERS to pay millions of dollars of recording fees and raise questions about the viability of MERS.

Ted Cornwell has covered the mortgage markets since 1990. He is a former editor of both Mortgage Servicing News and Mortgage Technology.

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