Will "MERS" Create Another Blow to Residential Real Estate?

As homeowners, realtors and others continue to struggle with the the consequences of the residential real estate market meltdown (my firm's real estate related revenues are down over $100,000 and many realtors are facing bankruptcy) another possible issue of earth quake like proportions lurks over the horizon which could deal another huge blow to the industry and the economy. What is it? It's called MERS, which stands for Mortgage Electronic Registration Systems, and typifies the chaos in the mortgage industry where far too much documentation is missing and the actual owners of loans - i.e., those with the real legal right to foreclose on defaulted loans - may be unascertainable. It's a mess and is particularly ominous for those trying to effect loan restructures since servicers of loans are not the real noteholders who are the only ones who can agree to loan modifications. The result is that struggling homeowners cannot get answers or approval of restructures and find themselves with two options: bankruptcy and/or foreclosure - even though many of the foreclosures may in fact be invalid. Here are highlights from a New York Times article that looks at the looming debacle:
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[T]he MERS Corporation, claims to hold title to roughly half of all the home mortgages in the nation — an astonishing 60 million loans. Never heard of MERS? That’s fine with the mortgage banking industry—as MERS is starting to overheat and sputter. If its many detractors are correct, this private corporation, with a full-time staff of fewer than 50 employees, could turn out to be a very public problem for the mortgage industry.
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Judges, lawmakers, lawyers and housing experts are raising piercing questions about MERS, which stands for Mortgage Electronic Registration Systems, whose private mortgage registry has all but replaced the nation’s public land ownership records. Most questions boil down to this:
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How can MERS claim title to those mortgages, and foreclose on homeowners, when it has not invested a dollar in a single loan? And, more fundamentally: Given the evidence that many banks have cut corners and made colossal foreclosure mistakes, does anyone know who owns what or owes what to whom anymore?
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[T]he legal challenges to MERS, its practices and its records are mounting. The Arkansas Supreme Court ruled last year that MERS could no longer file foreclosure proceedings there, because it does not actually make or service any loans. Last month in Utah, a local judge made the no-less-striking decision to let a homeowner rip up his mortgage and walk away debt-free. MERS had claimed ownership of the mortgage, but the judge did not recognize its legal standing.
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“The state court is attracted like a moth to the flame to the legal owner, and that isn’t MERS,” says Walter T. Keane, the Salt Lake City lawyer who represented the homeowner in that case.
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And, on Long Island, a federal bankruptcy judge ruled in February that MERS could no longer act as an “agent” for the owners of mortgage notes. He acknowledged that his decision could erode the foundation of the mortgage business.
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[B]y the 1990s, the centuries-old system of land records was showing its age. Many county clerk’s offices looked like something out of Dickens, with mortgage papers stacked high. Some clerks had fallen two years behind in recording mortgages. For a mortgage banking industry in a hurry, this represented money lost. Most banks no longer hold onto mortgages until loans are paid off. Instead, they sell the loans to Wall Street, which bundles them into investments through a process known as securitization.
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MERS’s legal troubles, however, aren’t going away. In August, the Ohio secretary of state referred to federal prosecutors in Cleveland accusations that notaries deputized by MERS were signing hundreds of documents without any personal knowledge of them. The attorney general of Massachusetts is examining a complaint by a county registrar that MERS owes the state tens of millions of dollars in unpaid fees.
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Federal bankruptcy courts and state courts have found that MERS and its member banks often confused and misrepresented who owned mortgage notes. In thousands of cases, they apparently lost or mistakenly destroyed loan documents. The problems, at MERS and elsewhere, became so severe last fall that many banks temporarily suspended foreclosures.
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Alan M. White, a law professor at the Valparaiso University School of Law in Indiana, last year matched MERS’s ownership records against those in the public domain. The results were not encouraging. “Fewer than 30 percent of the mortgages had an accurate record in MERS,” Mr. White says. “I kind of assumed that MERS at least kept an accurate list of current ownership. They don’t. MERS is going to make solving the foreclosure problem vastly more expensive.”
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MERS is a legal fiction. If MERS owned nothing, how could it bounce mortgages around for more than a decade? And how could it file millions of foreclosure motions?
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The situation is a disaster. We are routinely asked to provide copies of documents from closings that occurred 4 0r 5 years ago - I suspect because entire loan files have been lost. In Virginia and many other states, to foreclose, one technically needs to be the holder of the ORIGINAL signed note - a standard that cannot be met when the loan file no longer exists or has been irretrievably lost.