NEW YORK - It used to be that every time a bank sold a mortgage, the county land recording office received a fee. It wasn't much -- $30 or so -- but then real estate boomed in the 1990s and banks pooled millions of mortgages into securities that investors bought and sold.
One mortgage transaction became a dozen or more, and the tab grew ever larger. So the banks came up with a way around the fees. Now they are fighting to avoid perhaps tens of billions of dollars in penalties.
In 1997, when banks' burgeoning business in mortgage securities was clashing with the unwieldy nature of written forms, the industry created its own alternative, an electronic system to track the ever-changing ownership of home loans.
The banks formed a private company called Mortgage Electronic Registry Systems Inc., or MERS. Its motto: "Process loans, not paperwork." It has registered more than 65 million loans, three out of every five on the market.
MERS' owners are all the big mortgage firms, including Bank of America, Citigroup, Wells Fargo and J.P. Morgan Chase.
Counties complained about the lost revenue after MERS was implemented, but they rarely tried to challenge the new way of doing business. Now, three years after the housing crash and two months after allegations that some banks submitted fraudulent documents to foreclosure courts, every aspect of the nation's mortgage machine is under scrutiny.
Two lawyers in Reno, Nev., have filed suit in 17 states alleging that banks cheated counties out of billions of dollars. MERS is "an admitted fee-avoidance scheme," says Robert Hager, the Nevada lawyer who, along with his partner Treva Hearne, is filing the suits against MERS and its bank owners, including mortgage-finance companies Fannie Mae and Freddie Mac.
The suits allege that by privatizing public records, MERS enabled banks to circumvent property law and bypass the counties' fee and paperwork requirements, costing billions of dollars in lost revenue.
