A federal judge has dismissed a proposed class action lawsuit filed by homeowners who cast doubt on the legitimacy of the nation's leading mortgage registration firm to represent lenders in foreclosures.
U.S. District Judge Timothy J. Corrigan in Jacksonville, Fla., ruled that Mortgage Electronic Registration Systems did not misrepresent itself or hide its role as a nominee for mortgage lenders.
The decision is a major victory for the mortgage industry, which relies on MERS to streamline the process of trading mortgage and to keep costs down.
MERS was created by the mortgage banking industry with the mission of electronically recording every mortgage loan in the United States. Lenders are able to track and trade loans using the company's system.
The ruling helps solidify MERS' legal status as an authorized foreclosure agent in the state. Two Florida appellate courts also have allowed the Vienna, Va.-based company to move ahead with foreclosures in rulings earlier this year.
"The federal court found that MERS is fully disclosed to the borrower during closing, and nothing is deceptive, unfair or illegal about the way MERS operates," said company president and chief executive officer R.K. Arnold.
The class action suit brought on behalf of all Florida mortgage borrowers who had MERS as their mortgagee was filed in state court but was removed to federal court by MERS, an electronic mortgage registration company that handles foreclosure filings on behalf of lenders. The class action suit could have complicated thousands of mortgage foreclosures where MERS was listed as the mortgagee.
The plaintiffs claimed MERS "engaged in a pattern and practice of illegal debt collection practices" by sending communications to borrowers identifying MERS as the creditor and owner of their mortgages, failing to register as a consumer collection agency, failing to obtain a license for mortgage lending and failing to pay the registration fee required of consumer collection agencies.
"The court agrees with MERS that, under the plain language of the statute, MERS did not advertise, solicit, provide, offer or distribute anything," Corrigan concluded. "What MERS did is obtain a legal interest in a note from third-party lenders (becoming the holder of the note so that it could lawfully foreclose) and then proceeded to foreclosure."
Attorney Robert Brochin of Morgan Lewis & Bockius in Miami, who represented MERS in the three Florida cases this year, welcomed the latest ruling.
"This order confirms that MERS' role as a mortgagee and its ability to foreclose are both fully disclosed to the borrowers through the language in the mortgage contract," he said.
Plaintiffs attorney Craig Rothburd, a Tampa solo practitioner, said he couldn't discuss what action might be taken next until meetings with clients and other attorneys in the case. Jacksonville Area Legal Aid also represented homeowners.
"We're a bit disappointed" in the judge's dismissal, he said.
The suit was filed in state court in March 2006 and moved to federal court the following month. Corrigan granted the defense dismissal motion July 20 and issued a judgment in favor of the company July 23. He did not address the question of class certification.
In unrelated cases, the 3rd District Court of Appeal in Miami reinstated a MERS foreclosure action in March, and the 2nd District Court of Appeal in Lakeland, Fla., allowed the company to proceed with a Pinellas County foreclosure in February.
In the Miami case, Senior Judge Alan R. Schwartz noted the decision was based in part in the changes in finance and technology over time.
"The problem arises from the difficulty of attempting to shoehorn a modern innovative instrument of commerce into nomenclature and legal categories which stem essentially from the medieval English land law," Schwartz wrote.
MERS' Web site says it was created by the mortgage banking industry to "streamline the mortgage process by using electronic commerce to eliminate paper."
The 3rd District described MERS as a company "which acts essentially as a collection and litigation agent for the current owner of the mortgages."
MERS was launched by members of the Mortgage Bankers Association of America to harness digital technology and streamline the mortgage paperwork process.
Its 3,000 members register loans on the MERS system, giving them the ability to electronically track changes. Members include Fannie Mae, Freddie Mac, JPMorgan, Countrywide Financial and Citigroup Mortgage.
When borrowers sign a mortgage contract naming MERS as the mortgagee, they are assigning their rights, title and interest in the property to MERS.
Promissory notes resulting from mortgages are recorded in real estate records. Most lenders sell the notes on the secondary mortgage market, often to government-sponsored entities like Fannie Mae and Ginnie Mae, which then resell the notes in the mortgage-backed securities market.
Since MERS remains the mortgagee of record, there are no additional recording fees each time the notes change hands. The fees are commonly $10 to $15 per transaction.
Arnold noted the electronic process eliminates the possibility of mistakes being made during paperwork processing.
MERS registers an average of 25,000 loans per day, but business is down, he said. The company had hoped to be at 30,000 registrations per day at this point. MERS has taken a 20 percent hit in volume from the housing recession.
"There's no question that it's caused our registration number to go down," Arnold said. "Of course this has a financial repercussion, but we're still very stable as far as the business is concerned."
The drop in volume is a result of the shrinking subprime lending market, but lenders with tighter standards have increased their volume of registrations over a year ago, Arnold said.
The company isn't seeing a financial gain on the jump in home foreclosures, which jumped 77 percent in Florida to 64,250 in the first half of the year, according to RealtyTrac, which sells foreclosure data.
Foreclosure filing fees paid by MERS are passed on to the borrower. MERS does not charge additional fees to the lender seeking foreclosure. Its charges are part of an annual membership fee based on the size of the financial institution.
MERS hedges its residential loan registration losses by serving the commercial market, Arnold said. "The commercial lending market is very much counter-cyclical to residential."