[LINK] Outsourcing and Privatization

[stephen at melbpc.org.au]

A story regarding out-sourcing, and privatization ..


On Library Street in Reston, Va., one obscure business, the MERS 
Corporation, claims to hold the title for nearly half of all the home 
mortgages in America — an astonishing $60 million in 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 huge problem for the mortgage industry. 

Judges, lawmakers, lawyers and housing experts are raising piercing 
questions about MERS, which stands for "Mortgage Electronic Registration 
Systems", and whose private mortgage registry has all but replaced the 
nation’s public land ownership records. 

Most questions boil down to this: 

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? 

The answers have implications for all American homeowners ..

A birth certificate, a marriage license, a death certificate: these 
public documents note many life milestones. 

For generations of Americans, public mortgage documents, often logged in 
longhand down at the county records office, provided a clear indication 
of homeownership. 

But by 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. 

MERS, industry executives hoped, would pull record-keeping into the 
Internet age, even as it privatized it. 

Streamlining record-keeping, the banks argued, would make mortgages more 
affordable. 

But for the mortgage industry, MERS was mostly about speed — and profits. 

MERS, founded 16 years ago by Fannie Mae, Freddie Mac and big banks like 
Bank of America and JPMorgan Chase, cut out the county clerks and became 
the owner of record, no matter how many times loans were transferred. 

MERS appears to sell loans to MERS ad infinitum. 

This high-speed system made securitization easier and cheaper. But 
critics say the MERS system made it far more difficult for homeowners to 
contest foreclosures, as ownership was harder to ascertain. 

MERS was flawed at conception, those critics say. 

The bankers who midwifed its birth hired Covington & Burling, a prominent 
Washington law firm, to research their proposal. Covington produced a 
memo that offered assurances that MERS could operate legally nationwide. 

No one, however, conducted a state-by-state study of real estate laws. 

“They didn’t do the deep homework,” said an official involved in those 
discussions who spoke on condition of anonymity because he has clients 
involved with MERS. “So as far as anyone can tell their real theory 
was: ‘If we can get everyone on board, no judge will want to upend 
something that is reasonable and sensible and would screw up 70 percent 
of loans.’ ” 

County officials appealed to Congress, arguing that MERS was of dubious 
legality. But this was the 1990s, an era of deregulation, and the 
mortgage industry won. 

“We lost our revenue stream, and Americans lost the ability to 
immediately know who owned a piece of property,” said Mark Monacelli, the 
St. Louis County recorder in Duluth, Minn. 

And so MERS took off. 

The MERS board gave its senior vice president, William Hultman, the 
rather extraordinary power to deputize an unlimited number of “vice 
presidents” and “assistant secretaries” drawn from the ranks of the 
mortgage industry. 

The “nomination” process was near instantaneous. A bank entered a name 
into MERS’s Web site, and, in a blink, MERS produced a “certifying 
resolution,” signed by Mr. Hultman. The corporate seal was available to 
those deputies for $25. 

As personnel policies go, this was a touch loose. 

Precisely how loose became clear when a lawyer questioned Mr. Hultman in 
April 2010 in a lawsuit related to its foreclosure against an Atlantic 
City cab driver. 

"How many vice presidents and assistant secretaries have you appointed?" 
the lawyer asked. 

“I don’t know that number,” Mr. Hultman replied. 

Approximately? 

“I wouldn’t even be able to tell you, right now.” 

In the thousands? 

“Yes.” 

Each of those deputies could file loan transfers and foreclosures in 
MERS’s name. The goal, as with almost everything about the mortgage 
business at that time, was speed. Speed meant money. 

ALAN GRAYSON has seen MERS’s record-keeping up close. From 2009 until 
this year, he served as the United States representative for Florida’s 
Eighth Congressional District — in the Orlando area, which was ravaged by 
foreclosures. Thousands of constituents poured through his office, hoping 
to fend off foreclosures. Almost all had papers bearing the MERS name. 

“In many foreclosures, the MERS paperwork was squirrelly,” Mr. Grayson 
said. With no real legal authority, he says, Fannie and the banks 
eliminated the old system and replaced it with a privatized one that was 
unreliable. 

A spokeswoman for MERS declined interview requests. In an e-mail, she 
noted that several state courts have ruled in MERS’s favor of late. She 
expressed confidence that MERS’s policies complied with state laws, even 
if MERS’s members occasionally strayed. 

“At times, some MERS members have failed to follow those procedures 
and/or established state foreclosure rules,” the spokeswoman, Karmela 
Lejarde, wrote, “or to properly explain MERS and document MERS 
relationships in legal pleadings.” 

Such cases, she said, “are outliers, reflecting case-specific problems in 
process, and did not repudiate the MERS business model.” 

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. 

As far back as 2001, Ed Romaine, the clerk for Suffolk County, on eastern 
Long Island, refused to register mortgages in MERS’s name, partly because 
of complaints that the company’s records didn’t square with public ones. 
The state Court of Appeals later ruled that he had overstepped his 
powers. 

But Judith S. Kaye, the state’s chief judge at the time, filed a partial 
dissent. She worried that MERS, by speeding up property transfers, was 
pouring oil on the subprime fires. The MERS system, she wrote, ill 
serves “innocent purchasers.” 

“I was trying to say something didn’t smell right, feel right or look 
right,” Ms. Kaye said in a recent interview. 

Little about MERS was transparent. Asked as part of a lawsuit against 
MERS in September 2009 to produce minutes about the formation of the 
corporation, Mr. Arnold, the former C.E.O., testified that “writing was 
not one of the characteristics of our meetings.” 

MERS officials say they conduct audits, but in testimony could not say 
how often or what these measured. In 2006, Mr. Arnold stated that 
original mortgage notes were held in a secure “custodial facility” 
with “stainless steel vaults.” MERS, he testified, could quickly produce 
every one of those files. 

As for homeowners, Mr. Arnold said they could log on to the MERS system 
to identify their loan servicer, who, in turn, could identify the true 
owner of their mortgage note. “The servicer is really the best source for 
all that information,” Mr. Arnold said. 

The reality turns out to be a lot messier. 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. 

Some experts in corporate governance say the legal furor over MERS is 
overstated. Others describe it as a useful corporation nearly drowning in 
a flood tide of mortgage foreclosures. But not even the mortgage giant 
Fannie Mae, an investor in MERS, depends on it these days. 

“We would never rely on it to find ownership,” says Janis Smith, a Fannie 
Mae spokeswoman, noting it has its own records. 

Apparently with good reason. 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.” 

THE Sarmientos are one of thousands of American families who have tried 
to pierce the MERS veil. 

Several years back, they bought a two-family home in the Greenpoint 
section of Brooklyn for $723,000. They financed the purchase with two 
mortgages from Lend America, a subprime lender that is now defunct. 

But when the recession blew in, Jose Sarmiento, a chef, saw his work 
hours get cut in half. He fell behind on his mortgages, and MERS later 
assigned the loans to U.S. Bank as a prelude to filing a foreclosure 
motion. 

Then, with the help of a lawyer from South Brooklyn Legal Services, Mr. 
Sarmiento began turning over some stones. He found that MERS might have 
violated tax laws by waiting too long before transferring his mortgage.

He also found that MERS could not prove that it had transferred both note 
and mortgage, as required by law. 

One might argue that these are just legal nits. But Mr. Sarmiento, 59, 
shakes his head. He is trying to work out a payment plan through the 
federal government, but the roadblocks are many. “I’m tired; I’ve been 
fighting for two years already to save my house,” he says. “I feel like I 
never know who really owns this home.” 

Officials at MERS appear to recognize that they are swimming in dangerous 
waters. Several federal agencies are investigating MERS, and, in 
response, the company recently sent a note laying out a raft of reforms. 
It advised members not to foreclose in MERS’s name. 

It also told them to record mortgage transfers in county records, even if 
state law does not require it ..


See: "MERS? It May Have Swallowed Your Loan"
By MICHAEL POWELL and GRETCHEN MORGENSON  Published: March 5, 2011
<http://www.nytimes.com/2011/03/06/business/06mers.html?ref=business>

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Cheers,
Stephen