Can MERS Survive Legal Storm in Utah?

(EstateNewsWire.com, June 05, 2012 ) Salt Lake, UT -- Bankers’ mortgage system survives legal storm in Utah But lawsuit that catches couple shows gaps it leaves behind.

By Tom Harvey, The Salt Lake Tribune

Published: May 28, 2012 10:16AM

Updated: May 27, 2012 11:30PM

It says something about the ubiquity of the alternative mortgage registration system created by the nation’s bankers that it is now suing itself in a Utah lawsuit.

But even without that anomaly, the lawsuit is a bizarre confluence of factors that has caught a Draper couple in a situation where they bought a home based on a clean title report only to now be in court fighting to ensure the transaction was legitimate.

The case demonstrates both how much the Mortgage Electronic Registration Systems Inc. bankers created in the mid-1990s has invaded the state’s traditional property registration system and how it also left cracks along the way.

And while MERS has beaten back a flood of lawsuits in Utah challenging its legality, it faces serious legal actions in other states over its usurping of traditional real estate recording practices.

A clear title? • Draper townhouse owners Garrett and Sarah Sedgwick have been drawn into the case that previously received national media exposure because the former owner managed to gain title free and clear through state court even though he owed $136,000 on a mortgage.

Now, that case has been reopened with MERS and a loan servicer for Deutsche Bank contending the homeowner, Scott Aedan Harvey, and attorney Walter T. Keane, failed to follow standard legal procedures in obtaining the ruling that gave Harvey a title to the property, after which he stopped making mortgage payments.

Loan servicer American Home Mortgage Servicing Inc. and MERS have gotten a judge to overturn the quiet title action and are suing Harvey, the Sedgwicks, their lender FPF Wholesale, servicer Wells Fargo Bank, Equity Title and MERS itself in order to reinstate its lien and foreclose so it can collect on Harvey’s mortgage default.

MERS is suing MERS because it is named on both the Harvey and Sedgwick deeds of trust, the recording of which secures a lender’s interest in a property. Since its inception, MERS has grown to become listed on most deeds of trust in Salt Lake County as the beneficiary or the loan owner and the agent of the new owners as mortgages are sold and repackaged into investment bundles.

Because it held that position on both the Harvey and Sedgwicks’ deeds of trust, it had to name itself as a defendant in the same suit in which it tries to undo the effects of the earlier court decision.

While now listed on most deeds of trust, it wasn’t long ago that MERS did not even exist.

MERS is born • The Mortgage Bankers Association, the Washington, D.C.-based trade group that represents major mortgage lenders, created MERS, which has been operating in Utah for about 11 years.

MERS runs a database where lenders and those to whom they sell mortgage notes are recorded as owners. Previous to MERS, county offices recorded most property transactions in order to maintain accurate, publicly available records.

The new arrangement allowed for rapid (same day) sale of mortgages by the original lender to those who pooled and sold them to investors. Without changing state laws, MERS took on the task of keeping records of the current owners of promissory notes without having to pay the county recording fees, which average around $35.

The use of MERS and the availability of easy money created the real estate bubble during which millions of subprime loans were sold and packaged into investment pools.

MERS’ role in the mortgage business came under a fierce legal assault in Utah after a wave a foreclosures followed the 2007 bursting of the bubble.

Attorneys argued that MERS could not list itself on trust deeds as the owner of the loan because it didn’t really own any loans and at the same time claim to be an agent of the actual loan owner, who wasn’t named in official records.

But recent federal and state appeals courts decisions have upheld MERS’ position, validating its role on deeds of trust recorded in Utah.

“It’s kind of put an end to these lawsuits,” said Phillip Dracht, a Salt Lake City attorney at Fabian & Clendenin who represented MERS in various cases.

He said the decisions cut off the “cash cow” for attorneys who were filing the lawsuits even though judges were rejecting their arguments.

A homeowner acts • In April 2010, Scott Harvey through attorney Walter Keane, filed a quiet title action to try to take advantage of gaps created in county records left by MERS. It named Garbett Mortgage, who was listed on the deed of trust as the lender, Integrated Title Service as trustee and MERS, as well as two other entities.

But only Garbett and Integrated Title were served with notifications of the suit and both said they no longer had an interest in the property because Garbett sold the loan on the same day it was made. Keane then filed a motion to grant quiet title, telling a judge all parties had been served but had withdrawn or failed to respond.

In reopening the case, which now involves the Sedgwicks as the current property owners, 3rd District Judge Ryan Harris said MERS and American Home Mortgage Servicer should have been served with notice of the lawsuit.

Keane denies claims by the Sedgwicks’ attorney that he was negligent in failing to serve notice on MERS and the servicer. He said he relied on county property records to send to the legal owner of record of the mortgage note, Integrated Title Services.

“In Scott Harvey’s case, the legal owner refused to show up,” said Keane, who no longer represents Harvey in the case because he, too, is now a defendant.

In accusing Keane of negligence, the Sedgwicks, their lender and title insurance company pointed in court documents to a recent article in Harper’s magazine that quotes remarks from Keane at a dinner with the writer during which he made outrageous and sexually explicit remarks about his role in the case.

James Bennion, a Salt Lake City attorney who represents the Sedgwicks, their lender, servicer and title company, declined comment on behalf of his clients. James Gilson, the attorney for MERS and American Home Mortgage Servicer, also declined comment.

Questions remain • Still, Harvey and Keane’s attempt to use gaps in public property registration records to gain a clear title, continues to raise questions about MERS’ role in the recording of property transactions.

Attorney Abraham Bates, whose firm filed dozens of lawsuits against MERS, acknowledges recent appeals court decisions have shut down a legal avenue of attack. But he said recent lawsuits in other states have taken a different approach.

He pointed to Louisiana, where a lawsuit alleges fraud by MERS and banks under a Racketeering In Corrupt Organizations (RICO) statute. It alleges they illegally deprived local governments of millions of dollars in recording fees.

“There are presently ongoing discussions in Utah with various local state, county, and city authorities to file a similar lawsuit against MERS and the banks which own and operate it,” Bates said in an email. “Utah also loses millions of dollars a year in recording fees pursuant to this ongoing fraudulent enterprise operated by the banks.”

Salt Lake County Recorder Gary Ott has said that county property records go back to the Mormon pioneers in the mid-19th century and were largely complete before MERS name began appearing on records in Utah more than a decade ago. While MERS has been better lately at filing documents that record transactions, the official record remains incomplete, Ott said.

The Sedgwicks point out in a court filing that the document transferring the mortgage from Garbett to American Home Mortgage Servicer is lost or misplaced. They also say when they bought the townhouse, the title was clean and that any damages were due to Harvey’s alleged misconduct and not theirs.

But a ruling allowing the servicer to proceed with foreclosure could mean their title insurance company would be on the hook to pay off their $156,000 loan.

Duane J. Phillips, CEO of Salt Lake City-based Founders Title Co. and president of Utah Land Title Association, said while MERS has created gaps in the public title records, the title insurance industry has not encountered major problems.

While the industry would like to see everything recorded at county recorders’ offices, title companies have access to the MERS system, which, Phillips said, can with “some degree of confidence” provide them with information on where to send loan payoffs and on loan ownership transfers.

“The reality of our life is there are some pieces of our business that are getting out from the recorder’s office and that’s just part of our world now,” he said.

tharvey@sltrib.com

Twitter: @TomHarveysltrib

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What is MERS?

Bankers created Mortgage Electronic Registration Systems Inc. in the mid-1990s.

MERS runs a database where lenders and those to whom they sell mortgage notes are recorded as owners. Before MERS existed, county offices recorded most property transactions in order to maintain accurate, publicly available records.

The new arrangement allowed for rapid (same day) sale of mortgages by the original lender to those who pooled and sold them to investors. Without changing state laws, MERS took on the task of keeping records of the current owners of promissory notes without having to pay the county recording fees, which average around $35.

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© 2012 The Salt Lake Tribune

Bankers’ mortgage system survives legal storm in Utah

By Tom Harvey

The Salt Lake Tribune

Walter T Keane PC

Walter T Keane

801-990-4422

walter@waltertkeane.com

Source: EmailWire.Com