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Three Las Vegas bankruptcy judges ordered an unusual joint hearing for Aug. 19 in 27 separate cases to determine whether a widely used electronic mortgage tracking company has standing to seek home foreclosures as a stand-in for banks. The ultimate trio of decisions could push to the forefront a long-simmering issue regarding the legitimacy of using the mortgage tracking company, Mortgage Electronic Registration System Inc. (MERS), to substitute for banks in bankruptcy court foreclosure actions. It is the banks that own the deeds and hold the promissory notes to thousands of homes in foreclosure. Around the country, a handful of lawyers and bankruptcy trustees have challenged the standing of MERS and other nominees to operate as a “real party in interest” on banks’ behalf in foreclosure actions. Most rulings have sided with MERS, but a few have sided with debtors in California, Massachusetts, New York and Ohio. In scheduling a hearing on the matter for Aug. 19, the three Las Vegas bankruptcy judges have put the issue front and center at a time when Nevada has been hit hard by the mortgage crisis. One in every 54 households in Nevada received a foreclosure filing during the first quarter of 2008, the nation’s highest foreclosure rate, according to RealTrac, which tracks foreclosures. Who owns the mortgage? MERS Corp., parent company of MERS Inc., electronically tracks the owners of deeds of trust and the mortgage servicing firms on behalf of its member banks. The MERS Inc. subsidiary exists as the beneficiary of the deed of trust and has a right to enforce the foreclosure and seek relief in bankruptcy court, according to MERS General Counsel Sharon Horstkamp in Reston, Va. The business grew with the rise of rapid reselling of mortgages into vast ­securitized pools on Wall Street, making it hard for investors to track ownership of individual mortgages in the pool and expensive to re-register each of the millions of resales with local county recorders’ offices. “The ability of MERS to do this stuff is critical,” said Henry Hildebrand, a Chapter 13 trustee in Nashville, Tenn. “It avoids all the transfer [of ownership] problems for the industry” in the repackaging and sale of mortgages as securities. Lenard E. Schwartzer, appointed by the Executive Office for U.S. Trustees as a private Chapter 7 trustee to monitor debtor compliance and payment to creditors in Las Vegas, began filing objections to foreclosure cases after seeing other challenges around the country. The three judges took notice and set up the joint hearing to sit together for the arguments, Schwartzer said. “To my mind, people should not be foreclosed and lose their home unless it is by the people with the legal right to do it,” he said. “The problem is: No one knows who owns the mortgage.” The ­servicing companies, which collect payments for the banks, “have an interest in screwing around because they get bigger fees for foreclosure than for reworking [the terms] of a loan.” He pointed to a group of Ohio cases last year in which a federal judge dismissed foreclosure actions when the company could not demonstrate who was holder and owner of the notes and mortgages. In re Foreclosure Cases, No. 1:07CV2282, 2007 WL 3232430 (N.D. Ohio). He noted another in New York, LaSalle Bank N.A. v. Lamy, 12 Misc. 3d 1191 (Suffolk Co., N.Y., Sup. Ct. 2006), and yet another in Massachusetts, In re Maisel, 378 B.R. 19 (Bankr. D. Mass. 2007). MERS Inc. attorney Raymond Cardozo of Reed Smith’s San Francisco office said that two of the three cases involved specific evidentiary problems. Courts that have examined the standing issue sided with MERS or nominee companies like it. Horstkamp said hearings such as the one in Las Vegas give MERS Inc. “an opportunity to educate the trustees and judges and point out that MERS is the beneficiary and holder of the promissory note.” She said MERS generally gets a “blank endorsement” of the promissory note so that “whoever holds it takes possession.” That allows for standing in foreclosure actions, she said. A New York court sided with MERS Inc. on standing with the blank endorsement of a promissory note, MERS Inc. v. Coakley, 41 A.D.3d 674 (N.Y. App. Div. 2d Dept. 2007), as have courts in Mississippi and Massachusetts. David G. Baker, a consumer bankruptcy attorney in Boston, challenged MERS unsuccessfully in the Massachusetts case. In re Huggins, 357 B.R. 180 (Bank. D. Mass. 2006). The fundamental question in all these cases is an issue of state law,” he said. “MERS never touches paper, it is a huge electronic database that keeps track of who holds paper and who is the loan servicer. The Ohio federal judge raised the question of who was the holder…meaning you have the paper in your possession,” said Baker of the Law Office of David G. Baker. “There are a lot of courts saying MERS holds it. I am not entirely persuaded by that view. The promissory note is construed as a contract, and MERS is never mentioned on the note,” he said.

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