A small company that plays an important role in millions of American mortgages is getting sued by a big Texas county for $100 million in unpaid mortgage-filing fees. Today Harris County, which includes Houston, may decide to file a similar lawsuit.
“I mean, it’s huge,” John Odam, assistant county attorney in Harris County Texas, says of the revenue that MERS cost his county. “Our rough estimate of $10 million in damages to Harris County is very conservative.”
The suits could spell big trouble for MERS, which stands for Mortgage Electronic Registration Systems. The company, based in Reston, Va., runs an electronic registry of mortgages, tracking which companies own and service the loans.
[Article: Fed: Anti-Foreclosure Programs Can Succeed]
The service allows the financial industry to track home ownership without paying fees to county governments, which typically charge about $35 to record a change in ownership, says Christopher Peterson, associate dean and professor at the University of Utah’s law school. In the modern mortgage economy, where loans are bundled together and sold as investments, most mortgages pass between four to six different owners from the original lender all the way to the investor who eventually buys it.
With millions of loans being written each year, and each one changing hands multiple times, that translates to hundreds of millions of dollars in fee revenue that traditionally would have gone to county governments, but which now does not.
Dallas County District Attorney alleges that it still should. The county filed suit against MERS in September, arguing that the company owes the county between $58 million and $100 million.
“There should have been filing fees paid when these mortgage-backed securities were transferred,” says Craig Watson, district attorney for Dallas County. “And they circumvented that process.”
[Resource: Get your free Credit Report Card]
In the past, MERS has defended its actions as legal. In response to a story by the Tampa Bay Times, Karmela Lejarde, a spokeswoman for MERS, defended the company. “It is important to note that there are numerous cases upholding the legal validity of MERS,” she said.
The cases are important because MERS “pretends to own about 60 percent of all residential mortgages in the U.S.,” Peterson says. The company claims ownership so that mortgage companies don’t have to go to the expense of filing documents and paying about $35 every time a mortgage changes hands, he says. If a homeowner defaults, MERS files an assignment giving the owners of the mortgage the right to foreclose.
The problem, Peterson says, is that this is all just an elaborate shell game. In reality, MERS never takes ownership of the mortgage, which means the company can’t assign the right to foreclose to anyone.
“I think these assignments are just gibberish,” says Peterson. “MERS doesn’t own anything so they don’t have the right to assign anything.”
The Harris County Commissioners Court will decide today whether to proceed with a lawsuit.
[Featured Product: Need credit monitoring options?]
Image: Rishabh Mishra (possible248), via Flickr.com