Systemic foreclosure fraud was rampant in the years leading up to the 2008 financial crisis, throwing into question our nation’s entire property records system and causing millions of people to wrongfully lose their homes.
A 2009 ruling out of the Kansas Supreme Court is an examination of the many dubious practices that led to this disaster. The decision highlights a critical yet obscure cog in our nation’s lending machinery: the Mortgage Electronic Registration System, a privately owned loan tracking service created in 1997 to improve efficiency and profits among lenders. MERS also eliminated the need to record changes in property ownership in local land records – one of the chief reasons behind the foreclosure crisis.
To put this into context, consider that for hundreds of years, changes in property ownership have been recorded and filed to ensure a complete history of ownership of a piece of property. Part of the reason for this was to ensure that the priority of multiple liens placed on a property were accurate. During the lending spree, however, home loans changed ownership constantly as mortgages were sold to other companies – most often without ever informing the homeowner. Since this happened so quickly, frequently, and without ever being kept track of on paper, it became nearly impossible to prove who was the legitimate owner of a piece of property in order to foreclose upon it.
While it saved Wall Street over $1 billion in costs using MERS, millions of people lost their homes in unlawful foreclosures. MERS flooded the courts with foreclosure lawsuits that ended up being extremely confusing. Lawyers representing struggling borrowers quickly realized how little sense it made for an electronic registry with no ownership claims had the right to turn people out of their homes.
While MERS still prevailed in court during the beginning, they soon started losing cases. The Kansas Supreme Court ruling was one of the first instances where MERS’s business model was challenged. Although it applies only to one specific case, it is an encouragement to other judges to question its validity and standing in certain cases. According to Christopher L. Peterson, a law professor at the University of Utah, “If courts are willing to say MERS doesn’t have any ownership interest in mortgage loans, that may eventually call into question the priority of liens recorded in MERS’s name, and there are millions and millions of them.”
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