Las Vegas Business Press – Las Vegas,NV,USA

BY TIM O’REILEY

A Las Vegas bankruptcy judge has dealt a blow to an obscure but critical?piece of the mortgage enforcement machinery that could slow?foreclosures.

After a rare hearing in front of three judges last year that initially?encompassed 27 cases, U.S. Bankruptcy Court Judge Linda Riegle has ruled?that the Mortgage Electronic Registration System (MERS) could not?represent lenders seeking to foreclose on delinquent homeowners already?in bankruptcy unless it could produce the actual loan note. This goes to?the heart of how home lending has evolved over the past two decades,?with a loan rarely staying on the books of the originator but often?being sold several times to other institutions or investment groups. As?a result, producing a loan document is far more complex than opening a?drawer in a filing cabinet.

MERS, a joint venture of numerous lenders launched in 1993, is a?database tracking an estimated 60 million mortgages and promising to?take responsibility for functions such as foreclosure as long as a?mortgage stays with a MERS member. To reach this point, en route to its?self-professed goal of “register(ing) every mortgage loan in the United?States,” it has fought off court challenges to its status across the?country and challenged the argument that it must possess a loan document?to have legal standing. MERS has represented hundreds of different?lenders in Las Vegas in recent years.

For that reason, MERS quickly appealed Riegle’s decision in April.?Although not commenting directly on the case, a MERS spokeswoman points?to other states such as Florida, where MERS lost at the trial-court?level but ultimately won on appeal.

The case has attracted industrywide attention. Writing last October in?the American Bankruptcy Institute newsletter, Johnathan Bolton, a?bankruptcy attorney with the Houston firm of Fulbright & Jaworski, noted?that the local case “could have a great impact on the ability to enforce?mortgages in the United States.”

“Since Nevada is a nonjudicial foreclosure state, this issue is only now?coming to a head,” said Bill Uffelman, president of the Nevada Bankers?Association. “If in fact you can’t produce the note, it puts the whole?thing (a foreclosure) into abeyance.”

But for people with homes worth far less than the loan balance or?without the income to cover monthly payments, the ruling may buy only a?few months of breathing room.

“Whether this changes the outcomes of foreclosures remains to be seen,”?said Henderson attorney Robert Massi, who represents debtors. “But it?does buy time and gains some negotiating leverage” even before a?bankruptcy.

Lenard Schwartzer, a private attorney and a bankruptcy trustee who won?the case, has come to doubt its practical significance.

“In most cases, it buys an additional three to six months,” he said.?”But not many people seem to care.”

Because people tire of living under the threat of a forced move-out,?especially when a house has negative equity, he now describes his work?on the case as “50 to 100 hours of wasted legal time.”

The ruling comes amid swelling complaints that mortgage servicers have?exacerbated the deluge of foreclosures in the past couple of years.?Assembly Speaker Barbara Buckley has introduced a bill in the current?legislative session to allow financially besieged homeowners to request?arbitration of a default, partly to bypass servicers and force lenders?to the table.

MERS claims credit for an integral role in the widespread expansion of?mortgage lending options for consumers by providing the mechanism not?only to follow loans from owner to owner but avoid tens of millions of?dollars of recording fees every year and the piles of paperwork that?come with it. MERS highlights one section of a Florida court decision?that called it “an innovative instrument of commerce.”

Nevertheless, Riegle’s ruling not only parsed federal and state law but?at least implicitly rapped MERS on the knuckles for its practices. For?example, she noted that MERS acted as the attorney on several loans in?Las Vegas even after they were transferred to non-MERS members.?She also rejected the argument that lenders who belong to MERS and?designated it to be their legal representative should be good enough for?the court. Without the loan papers, she concluded, MERS’ terms and?conditions for its members do not give it any rights to foreclose under?Nevada law.

“To reverse an old adage,” she wrote, “if it doesn’t walk like a duck,?talk like a duck and quack like a duck, then it’s not a duck.”

Foreclosure is just a lawsuit brought by the bank to try to take back your property. You have the legal right to fight that lawsuit. Banks must take specific steps, in the correct order, with the correct timing, in order to have the right to foreclose. ?Whether it is a commercial or residential foreclosure, I can fight your mortgage company. ?Brian Huddleston