The Mortgage Paper Chase


Last fall, Dallas County District Attorney Craig Watkins sued the Mortgage Electronic Registration Systems (MERS), a player in the foreclosure crisis and the target of several lawsuits across the country, for defrauding the county of millions of dollars in mortgage-related fees. In March, Harris and Brazoria counties joined the lawsuit in U.S. District Court in Dallas, which seeks up to $10 billion on behalf of all counties in Texas.

MERS, an agent for mortgage lenders created by JP Morgan Chase, Bank of America and other financial institutions, holds nearly 70 million mortgages nationwide—roughly half of those in the country. The Texas counties are going after the electronic mortgage service for depriving them of transaction fees that they would otherwise collect for recording home sales. Homeowners in the state face a different problem: If they purchased their homes through MERS, getting accurate records about their mortgages could be a time-consuming and frustrating paper chase.

John Warren, clerk of courts for Dallas County, recalls when a recently widowed 75-year-old woman came to his office to check the status of the title to her home. Warren says he couldn’t tell her if the title was free and clear because the records were held by MERS—and it doesn’t have to share them with the county. The accuracy of the company’s record keeping has been questioned in a number of studies.

MERS was created in 1995 in the heady, profit-driven atmosphere of the real estate bubble when the financial industry was packaging mortgage debt en masse and selling it on securities markets. The company, based in Virginia, was created as a cost effective and quick means to trade this debt, supercharging a process that played a major role in the mortgage crisis.

Traditionally, mortgages are registered for a fee at county clerks’ offices. MERS eliminated this step, replacing it with a one-time online registration. No matter how many times debt is sold, it never has to be reregistered, according to the company’s website.

The process saves lenders money and helps companies make millions trading mortgage debt like baseball cards. But it has also created major problems for counties and homeowners. As county budgets dwindle, the practice drains counties of much-needed revenue generated from transaction fees. It can also result in inaccurate property records, leaving homeowners susceptible to property fraud and unjust foreclosures. Both issues are part of the lawsuit brought by Dallas, Harris and Brazoria counties.

Other counties in Texas have a huge number of MERS-related mortgages as well. Travis County Clerk Dana DeBeauvoir told the Austin American-Statesman the number in Travis County is around 400,000. She said MERS owes the county $4 million in registration fees. Travis County is considering pursuing MERS for this money and may join Dallas County’s suit.

Representatives from MERS didn’t respond to requests for comment, but in press releases the company has declared the charges false.

The company’s business model has caused other controversies. MERS’ status as a stand-in for lenders made it something of a hired gun, allowing it to foreclose on properties it does not own. This practice has been challenged in states like New York, where courts called it “absurd.”

According to Brian Rider, a University of Texas law professor and real estate lawyer, it’s legal for MERS to foreclose on houses in Texas. Authored by state Rep. Burt Solomons (R-Carrollton), the law was approved in 2004. That same year, Solomons received campaign contributions from MERS creators Bank of America and JP Morgan Chase as well as lobbying groups with ties to the mortgage company.

MERS stopped foreclosures in response to controversy late last year. However, its record-keeping practices are still under fire. A study by Phil Ting, San Francisco County’s assessor-recorder, found that in 58 percent of the foreclosures done by MERS in California the accuracy of the records were questionable.

Rider thinks Dallas County’s suit may still face an uphill legal battle due to Texas law, which he says provides no legal basis for the suit.

In Louisiana, it’s a different story. Doug Welborn, court clerk for Louisiana’s East Baton Rouge parish, announced April 17 that he is suing banks associated with MERS, including BoA and Chase Morgan. The lawsuit includes 29 parishes in the state, which Welborn’s attorneys claim have lost $450 million due to MERS’ filing practices.

The company and co-defendant BoA have fought Dallas County’s suit at every step. In March, citing Texas’ 2004 law, MERS requested the court dismiss the suit.

A win for Dallas County could have enormous ramifications for MERS and be a first step toward clarity for thousands of mortgage-holders in Texas and across the country. If the suit fails, lenders using MERS will continue the privatization of public records, leaving homeowners chasing paper ghosts.

“I hear the anger from many property owners who have tried unsuccessfully to contact MERS,” Warren says. “This has been a very frustrating experience.”

Nick Swartsell is an intern at the Observer.