Bankers struggling to deal with faulty foreclosure paperwork just got hit with another major headache.
New York State Attorney General Eric Schneiderman, recently tapped by President Obama to head a new task force to investigate mortgage fraud, sued three major U.S. banks Friday, accusing them of using a popular electronic mortgage database to bolster false documents in foreclosure proceedings.
The suit named Bank of America Corp, Wells Fargo and JPMorgan Chase and MERSCORP, which operates the Mortgage Electronic Registration System, or MERS. The system was created in the mid-1990s to track mortgage ownership and is now used by mortgage servicers and insurers, along with Fannie Mae and Freddie Mac, the government-owned mortgage companies that own or guarantee more than half of all residential mortgages in the U.S.
“MERS has filed over 13,000 foreclosure actions against New York homeowners listing itself as the plaintiff,” Schneiderman said in a statement accompanying the lawsuit. “But in many instances, MERS lacked the legal authority to foreclose and did not own or hold the promissory note, despite saying otherwise in court submissions.”
If successful, Schneiderman's lawsuit could throw a monkey wrench into foreclosure proceedings across the country. More than 70 million mortgage loans have been registered in the MERS system, rather than in local county clerks' offices, according to the lawsuit.
"The mortgage industry created MERS to allow financial institutions to evade county recording fees, avoid the need to publicly record mortgage transfers and facilitate the rapid sale and securitization of mortgages en masse," Schneiderman said.
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MERS has been the target of lawsuits in a number of state courts, including Delaware. In Texas, Michigan and Kentucky, officials are suing the company to collect millions of dollars in unpaid fees from lenders who bypassed state systems of recording land transfers.
"By creating this bizarre and complex end-around of the traditional public recording system," Schneiderman's lawsuit claims that banks saved $2 billion in recording fees. The suit also claims that the system has “effectively eliminated homeowner and the public’s ability to track the purchase and sale of properties."
The three banks named in the suit are among five lenders currently reviewing a proposed settlement with state attorneys general that would call for them to provide $25 billion in mortgage relief to struggling homeowners in return for a release from state legal actions targeting fraudulent and deceptive foreclosure practices. The other two banks in those settlement talks, Citibank and Ally Financial (formerly GMAC), were not named in Schneiderman's lawsuit.
Lenders foreclosing on millions of homeowners rely on MERS to establish the legal chain of ownership for mortgages that were bought and sold many times during the lending boom of the 2000s. Attorneys representing homeowners facing foreclosure have challenged the MERS system, saying foreclosures based on flawed information have resulted in improper or illegal home seizures.
Schneiderman’s lawsuit claims the MERS database is inaccurate and seeks to stop the banks from filing foreclosures in New York state that rely on the system.
An estimated 7 million homeowners have lost their homes to foreclosure since the housing bubble burst in 2006. By the end of the third quarter of last year, some 12.6 percent of homeowners with mortgages -- more than 6 million homeowners -- were either delinquent on their payments or in foreclosure, according to the Mortgage Bankers Association.
MERS denied the claims in the lawsuit and, in a statement, said that "federal and state courts around the country have repeatedly upheld the MERS business model, and the validity of MERS as legal mortgagee and nominee for lenders."
In his lawsuit, filed in New York state court, Schneiderman asked that the banks named in the lawsuit turn over all profits obtained through the fraudulent and deceptive practices and other damages, including $5,000 for each violation of general business law.
The banks named in the suit had no comment.