A landmark ruling in a recent Kansas Supreme Court case may have given millions of distressed homeowners the legal wedge they need to avoid foreclosure. In Landmark National Bank v. Kesler, 2009 Kan. LEXIS 834, the Kansas Supreme Court held that a nominee company called MERS has no right or standing to bring an action for foreclosure. MERS is an acronym for Mortgage Electronic Registration Systems, a private company that registers mortgages electronically and tracks changes in ownership. The significance of the holding is that if MERS has no standing to foreclose, then nobody has standing to foreclose – on 60 million mortgages. That is the number of American mortgages currently reported to be held by MERS. Over half of all new U.S. residential mortgage loans are registered with MERS and recorded in its name. Holdings of the Kansas Supreme Court are not binding on the rest of the country, but they are dicta of which other courts take note; and the reasoning behind the decision is sound.
This is a potentially gigantic story. It seems that a court has ruled that about half of the mortgage market has been run as a criminal enterprise for years, which would invalidate any potential forelosure proceedings for about, oh, 60 million mortgages. The court ruled that the electronic transfer system used by the private company MERS — a clearing system for mortgages, similar to a depository, that is used for about half the mortgage market — is fundamentally unreliable, and any mortgage sold and/or transferred through MERS can’t be foreclosed upon, at least not in Kansas.
Coincidentally I’d been working on something related to this all day yesterday. All over the country, lawyers are contesting foreclosures because of similar chain-of-custody issues. I have some material about this coming out in my next Rolling Stone story, so I can’t get into this too much, but suffice to say the lenders and the banks were extremely sloppy about their paperwork (at best — there is a fraud angle as well) and jammed up the system with missing and/or mismarked mortgage notes. Since a sale isn’t legal unless there’s full transfer of the physical note, a lot of the sales of mortgage-backed securities were not entirely legal, since the actual notes were often not transferred.
Nothing like waking up in the morning and finding out a whole sector of the economy is completely screwed. Are these good times or what?
Although this particular case pertains to MERS, non-MERS mortgages were often even worse. Anyway I have more on this coming next week. Thanks again to Eric at MonkeyBusiness for the heads-up.