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Minnesota's Supreme Court on Thursday handed a small victory to the battered mortgage industry.
In a 6-1 decision, the court ruled that state law does allow the name of a widely used electronic registry of home mortgages, Mortgage Electronic Registration Systems Inc. (MERS), to be listed as the mortgagee of record in thousands of foreclosures. MERS is a tracking system and doesn't own the loans. The registry attracted national attention as foreclosures began sweeping the country and it began representing lenders.
MERS tracks some 60 million home loans across the country as they change hands, and during the boom, they were rapidly bundled and sold to bond investors on the secondary mortgage market. It's run by Merscorp Inc., a company based in Reston, Va., owned by an industry group including Countrywide Home Loans, Wells Fargo Bank and Fannie Mae.
The Legal Aid Society of Minneapolis sued MERS in 2008 on behalf of five homeowners in Hennepin County, arguing that the MERS name on foreclosure-related documents effectively hides the identities of the mortgage lenders who ultimately control home loans and foreclose on borrowers, confounding efforts to negotiate with lenders or track problems.
MERS was listed as the lender in up to 40 percent of all home foreclosures in the Twin Cities, it said. The MERS system violates state law by foreclosing on borrowers without identifying all assignees of the mortgage in county records, and listing them in published foreclosure notices, the lawsuit said.
The Supreme Court disagreed. It decided that Minnesota law does not require the actual name of the note's owner -- the lender -- to be listed in records every time a loan changes hands, and that a "nominee's" name is enough. The justices said that given the level of frustration with the financial crisis, it's hard to not "have some nostalgia for earlier times."
The justices said: "Looking at the mortgage banking industry today, it is apparent that in many mortgage transactions, a George Bailey no longer sits in the corner office of the Building and Loan Association in Bedford Falls." That refers to the 1946 cinema classic "It's a Wonderful Life," starring Jimmy Stewart as banker George Bailey, who saves the town's downtrodden residents.
R.K. Arnold, president and CEO of MERS, said in a statement that he was pleased with the court's decision.
"Now that this ruling has been issued, we are moving forward and continuing to focus on meeting the needs of home buyers by lowering the cost of purchasing a home," Arnold said.
Amber Hawkins, an attorney for the Legal Aid Society, said the state's recording requirements have been in place for more than 150 years.
"We are disappointed that the court did not agree that the MERS system runs afoul of Minnesota's long-standing recording and notice requirements," Hawkins said in a statement.
Alan Page's dissent
Justice Alan Page issued a dissenting opinion saying state law clearly requires that "all assignments" of the mortgage must be recorded.
"It is apparent with the benefit of hindsight that the ability of lenders to freely and anonymously transfer notes among themselves facilitated, if not created, the financial and banking crisis in which our country currently finds itself," Page wrote. "As a result of our court's holding, namely, that the mortgage transfers between MERS members need not be recorded before a mortgage can be foreclosed by advertisement, neither borrowers nor lenders will ever be able to hold anyone in the chain of transfers accountable. That is not sound public policy."
The Minnesota lawsuit is one of several somewhat similar lawsuits across the country filed against MERS involving foreclosures, although it appears to be one of only two to reach a state supreme court. Most of the other cases involve questions about whether MERS has the right to appear in court for a foreclosure as a representative of the actual lender. Results have been mixed, with some rulings saying MERS can represent mortgage lenders and others saying it can't, Hawkins said.
Jennifer Bjorhus • 612-673-4683