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Can the modern mortage system stay afloat amid a flood of confusing loan-ownership deals? And what does that mean for homeowners?
This is poetic justice at its finest … and, perhaps, most calamitous. Banks and mortgage companies, like they’ve done to so many homeowners of late, may have finally screwed themselves through efforts to make more money from shady and honest mortgages alike. And, again, they may just take the rest of us down with them.
Homeowners Win In Court
In the January 2012 issue of Harper’s, Christopher Ketcham details the efforts of individual homeowners and the National Homeowner’s Cooperative to sue banks, arguing, in short, the latter can’t prove they actually own the mortgage notes. While they have lost in several states, homeowners have, to the astonishment of many in the financial system, won in Massachusetts, Kansas, and Utah. Suits are pending in other states.
When victorious, residents of foreclosed homes have stopped the banks from taking their homes. Yet, even more surprising, a few people — who are up to date on their payments — have won cases in which they contend the banks that claim to own the title in question have no clear, legal record to it. As a result, these homeowners have been allowed to simply stop paying their mortgages. Really!?
MERS-Y
At the heart of these cases is a service used by the banks known as the Mortgage Electronic Registration System (MERS). Created in 1995, it’s a privately held entity of major mortgage firms that basically manages and supposedly tracks the sale of mortgage loans between lenders. In the process, it also thwarts — perhaps innocently, certainly arrogantly, and possibly stupidly — the Western world’s system of recording deeds in local recording offices.
The problem is not so much that MERS broke with tradition but that it departed with what had been a sound, if not sometimes slow, means of tracking who owns a mortgage, or more to the point who is actually owed money. With so many companies buying, trading, swapping, flipping, and rolling mortgages in so many maze-like deals and packages during the recent housing bubble, proving who owns what has become all the more difficult anyway. Add an electronic system that apparently has gaps in the chain of swaps and, well, you get the picture.
Good News, Bad News
This is great news for the home-owner who suddenly reaps a windfall or isn’t tossed to the street (again, sometimes due in part to bank missteps). Yet the implications of such rulings to the financial system are akin to the sweater with a wayward piece of thread. It gets tugged bit-by-bit, only to have the whole thing unravel, and before long we’re all standing about buck-naked.
But wait. There’s more. Such a bewildering labyrinth of swaps also presents a problem to those of us who want to pay our mortgage back as promised. The question is, since ownership of so many mortgage notes can’t be proven, are you sending that monthly check to the right company? Could it be that after 30 years of dutiful payment, when you think you finally own your home outright, you’ll get a visit from some bank dick who says you actually owe his employer? Dunno, but I’m calling my mortgage broker to try and figure it out.
