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Originally published Thursday, March 15, 2012 at 7:43 PM

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State's high court hears suits against mortgage clearinghouse

The state Supreme Court heard arguments Thursday in two cases that could determine whether the nation's largest electronic mortgage-tracking system has legal authority to foreclose on delinquent homeowners in Washington.

Seattle Times staff reporter

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I have an idea "Say What" why not just have banks follow the law and the same... MORE
"It's a fallacy to think the borrowers need to know who the note holder is." ... MORE
"It's a fallacy to think the borrowers need to know who the note holder is." ... MORE

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The state Supreme Court heard arguments Thursday in two cases that could determine whether the nation's largest electronic mortgage-tracking system has legal authority to foreclose on delinquent homeowners in Washington — a decision that has wide implications for homebuyers and sellers.

The cases against the private Virginia-based clearinghouse known as Mortgage Electronic Registration Systems (MERS) pitted lending-industry representatives such as the Washington Bankers Association against the National Consumer Law Center and Attorney General Rob McKenna.

MERS was created during the late 1990s when the buying and selling of mortgages became a big business for Wall Street — much like the electronic buying and selling of stocks and bonds.

Before MERS, every time an investor sold a mortgage loan to another investor, documents had to be filed in the county where the property was located.

The MERS system avoided that paperwork and saved the mortgage-finance industry millions in county-recording fees.

But that has meant all of a property's loan documents may not be held in one place.

McKenna said MERS can't foreclose if it doesn't possess the borrower's promissory note. Attorneys for MERS countered that state law gives lenders the right to contract with an agent like MERS, so there's nothing wrong with MERS initiating foreclosures.

By some estimates, MERS holds title to more than half the home mortgages in the United States. Federal and state courts across the country have issued conflicting rulings on MERS' authority.

Thursday's hearing marked the first time a case against MERS reached the state's highest court, after years of litigation in lower courts over its role in alleged wrongful foreclosures.

The question before the court is whether MERS meets the definition of "beneficiary" under state law, giving it the legal authority to start a foreclosure.

In Washington, lenders and other titleholders can take a borrower's house without court approval. MERS, however, isn't a lender. Rather, it stands in as a "nominee" for the lender or, if the loan has been sold, the next owner of the mortgage.

Critics say that while the MERS system has created efficiency for the mortgage industry and Wall Street, it has come at the cost of transparency and certainty in public records.

"For the first time in the nation's history, there is no longer an authoritative, public record of who owns land in each county," wrote University of Utah law professor Christopher Peterson in a law review article last year.

Under the current system with MERS, the promissory note and the deed of trust — two legal documents created when a loan is made — are often separated.

That has caused "havoc" in the state mortgage marketplace and harms consumers, McKenna said.

For example, a lender may sell a note to an investor but conceal the transfer and tell the borrower to keep paying him, McKenna said. The investor doesn't get paid, and the borrower doesn't get credit for payments.

The plaintiff in one case heard Thursday, Kristin Bain, still hasn't been able to get an answer from MERS on who owns the promissory note on her Tukwila home after more than three years of litigation.

"I think that's very telling," Bain's attorney, Melissa Huelsman, told the justices on Thursday.

McKenna said the MERS system's concealment of the true owner of the note "is damaging to a free, fair and transparent mortgage marketplace."

But the Washington Bankers Association and MERS say borrowers don't need to know who owns their note for MERS to foreclose. If borrowers have issues, they can raise them with their mortgage servicer, who collects the payments.

MERS attorney Robert Pratte told the court that the plaintiffs' cases are designed to stop foreclosures on borrowers who are indisputably in default.

"It's a fallacy to think the borrowers need to know who the note holder is."

The vast MERS database benefits the public, too, Pratte said.

When banks fail, the federal government uses the MERS database to transfer the mortgages of the failed bank to a new bank, Pratte said. The Federal Bureau of Investigation uses the MERS loan data to combat fraud, he said.

In Michigan, an appellate court ruled last April that MERS foreclosures were invalid. Title insurers stopped insuring properties and many lawsuits were filed to overturn foreclosures, according to the Washington Bankers Association.

The Michigan Supreme Court overturned the lower court's decision last November.

According to RealtyTrac, which tracks foreclosures, the number of foreclosures in Michigan dropped after the appellate court's decision but rebounded last month.

In Washington state, foreclosure filings in February were half the level of a year ago, RealtyTrac reported. Daren Blomquist, a RealtyTrac spokesman, said he couldn't explain the magnitude of the drop.

The state Supreme Court is expected to issue a ruling later this year.

Sanjay Bhatt: 206-464-3103 or sbhatt@seattletimes.com

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