By Ronnie Ellis / CNHI News Service
Kentucky’s attorney general is going after an organization established by major lending institutions to allow them to buy and trade mortgages outside the public view and to avoid state filing fees for such trades.
Jack Conway on Wednesday filed suit in Franklin Circuit Court against MERSCORP Holdings and its subsidiary Mortgage Electronic Registration Systems (MERS) for “violating Kentucky statutes by not recording transfers of mortgages.”
Kentucky law, and the laws of most states, requires mortgages and “assignments” or transfers of mortgages to be recorded in Kentucky in the offices of county clerks.
MERS, created in 1995 by the mortgage industry and such stockholders as Bank of America, Wells Fargo, Fannie Mae, Freddie Mac and Mortgage Bankers Association, enabled those lenders to avoid the $12 Kentucky recording fee for thousands of such transactions and to make it easier for the institutions to pursue foreclosure, Conway said.
In all MERS has more than 6,500 member institutions, Conway said, and has registered more than 70 million mortgages nationally allowing the member institutions to avoid nationwide recording fees of $2 billion dollars, Conway and his suit allege.
He estimated that as many as 300,000 Kentucky mortgages and re-assignments had gone unrecorded through the MERS system and that on average such mortgages are sold or “re-assigned” three times over their terms.
“MERS directly violated (the) law by creating this system that provides absolutely no public record of sales or transactions and deliberately circumvents paying recording fees to the states,” Conway said. “The process makes it very difficult for consumers to access data, to find out who owns their loans, and the commonwealth is ripped off to the recording fees.”
Conway says those actions also violate Kentucky’s consumer protection laws “by engaging in unfair, false, misleading or unfair conduct” which could make the organization liable for up to $2,000 for every violation.
He declined to put a number on the amount the suit might produce but said it would be significant.
“I think there has been real damage here,” Conway said, explaining the system allowed lending institutions to engage in questionable investment and trading practices with no public scrutiny and which he said contributed to the country’s financial meltdown four years ago.
“Before the bottom fell out of the housing market, banks were bundling and selling loans on the securities market as fast as the ink could dry on the paperwork,” Conway said.
“When homeowners had trouble paying mortgages during the economic downturn, they struggled to find out who owned their loans,” Conway said. “It made it difficult to find out who to call to request a loan modification or to defend the foreclosure. There is and was no public record of the transaction.”
Conway said three other states — New York, Massachusetts and Delaware — are pursuing similar suits against MERS which is incorporated in Delaware.
Conway and attorneys general in 48 other states earlier negotiated a $25 billion settlement with the nation’s five largest banks over fraudulent foreclosure practices. That netted Kentucky about $59 million, $33 million of which went to about 1,000 Kentucky home owners to help them avoid foreclosure.
On average, Conway said, those 1,000 homeowner received about $35,000 each.
Conway used $5 million of the National Mortgage Foreclosure Settlement to pursue the MERS investigation.
RONNIE ELLIS writes for CNHI News Service and is based in Frankfort. Reach him at email@example.com. Follow CNHI News Service stories on Twitter at www.twitter.com/cnhifrankfort