Recently, a California Appellate Court upheld the right of MERS (Mortgage Electronic Registration Systems, Inc.) to foreclose on a residential mortgage loan. This is interesting because MERS never lent the money underlying the loan, nor did MERS buy the loan from someone else. It is important because MERS controls – purportedly has foreclosure power over – somewhere in the neighborhood of 60 million mortgage loans in the United States.

"How", a March 2011 New York Times article asks, "Can MERS claim title to those mortgages, and foreclose on homeowners, when it has not invested a dollar in a single loan?" It's complicated.

Suppose that a group of us – all neighbors at the time – had gone together and each put up $1,000 to buy an ownership share in the local semi-pro baseball team. Something like the public ownership of the Green Bay Packers. Each share included a designated seat at the local stadium. Well, you know how it is. People move, they lose interest, they need to cash out, etc. So, to facilitate our ability to sell shares, and to avoid the hassle and cost of having the club void the old share, issue a new one, grant a new seat assignment, and charge transfer fees, everyone in the group agreed to make me the nominee for the ownership of their shares. When an owner sells his or her share, they tell me and I keep a record. (Obviously, you have to trust me here.) The club – who has my name on all the shares – sends me the tickets each year and I pass them out accordingly.

MERS works something like that. ( MERS, though, is not a loan servicer.) It was founded in the mid-90s by the mortgage banking industry (including Fannie Mae, Freddie Mac, and big banks such as Bank of America and JP Morgan Chase). As the Times article puts it, MERS "cut out the county clerks and became the owner of record, no matter how many times loans were transferred. MERS appears to sell loans to MERS ad infinitum."

It is claimed that MERS accomplishes three things: speed, lower costs, and the provision of a central source of information for transferring real estate loans. How the first and third results are accomplished is pretty clear. The second – lower costs – bears scrutiny. Wikipedia describes it this way: "MERS maintains that its process eliminates the need to file assignments in the county land records which lowers the costs for lenders and consumers by reducing county recording fee expenses resulting from real estate transfers …"

This last proposition may seem of little consequence to homeowners, especially ones with mortgage problems, but it is, or should be, a big deal to local governments around the country. Think about it. MERS controls some 60 million mortgages. Practically all of those are sold and transferred at least once. Most change hands many more times than that. Suppose the typical MERS mortgage has been transferred 3 times, and that, if done under standard processes, the recording fees would have been ten dollars each time. Doing it the MERS way would achieve a tidy cumulative savings just south of $2 billion. Now, that may not be a big number by Federal standards, but it is sure something the locals could have used in the past few years.

It is little wonder that the MERS process has been called into question – most notably through lawsuits – in a myriad of jurisdictions around the country. Many of these challenge the legitimacy of MERS conducting a foreclosure procedure.

There is no official scorecard available that I am aware of, but, anecdotally, MERS seems to be prevailing in most of the suits. That there are mixed results in MERS cases is partly attributable to the fact that each state has its own laws governing these and other real estate matters. The same set of facts might prove acceptable in one state, yet constitute a violation in another.

Certainly, the issues are not settled. Many of the cases that vindicated MERS are on appeal. Moreover, the MERS process has been attacked under a variety of legal theories. Some complaints may have more traction than others.

One thing is for sure. Not all, if any, courts are going to be cowed by the fact that an invalidation of the MERS process could throw the still-fragile real estate market into further turmoil. A February, 2011, Wall Street Journal article quotes New York U.S. Bankruptcy Judge Robert E. Grossman as follows: "This Court does not accept the argument that because MERS may be involved with 50% of all residential mortgages in the country, that is reason enough for this Court to turn a blind eye to the fact that this process does not comply with the law."

Whether Judge Grossman's view about the MERS compliance with the law is upheld remains to be seen, but he's certainly right about one thing. The size and reach of MERS should not matter.

Published: May 10, 2011

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Bob Hunt is a former director of the National Association of Realtors and is author of the recently published book, "Real Estate the Ethical Way." A graduate of Princeton with a master's degree from UCLA in philosophy, Hunt has served as a U.S. Marine, Realtor association president in South Orange County, and director of the California Association of Realtors, and is an award-winning Realtor. Contact Bob at .