Bank of America Corp. is among a group of lenders that may face a wave of new lawsuits claiming cash-strapped counties were cheated out of millions of dollars by a system used for more than a decade to register mortgages.
Dallas County District Attorney Craig Watkins said state attorneys general and county officials across the U.S. have expressed interest in his lawsuit against Mortgage Electronic Registration Systems Inc. and Bank of America, filed in Texas state court on Sept. 21. Dallas County could be owed as much as $100 million in filing fees, he said.
“This is a big new front,” said Christopher L. Peterson, associate dean and professor at the University of Utah S.J. Quinney College of Law. “This case is scary because if Dallas wins then there are a lot of other counties around the country that are going to follow.”
MERS, a unit of Reston, Virginia-based Merscorp Inc., says on its website that its aim is to place every mortgage in the country on an electronic, rather than a paper, system that allows members to buy and sell mortgages.
MERS acts as the lender’s nominee and remains the mortgagee of record as long as the note promising repayment is owned by a MERS member. Dallas County claims this allows banks to buy and sell loans without properly recording transfers with counties and paying the fee.
‘Practices are Legal’
“The MERS business model and practices are legal and comply with the recording statutes and regulations of Texas,” Janis Smith, a spokeswoman for Merscorp, said in an e-mail. The claims in the lawsuit “are without legal or factual merit.”
Shirley Norton, a spokeswoman for Charlotte, North Carolina-based Bank of America, the biggest U.S. lender by assets, declined to comment on the suit.
Liability in the Dallas case could exceed $1 billion, based on the number of mortgages in the county, Peterson said. Local laws impose substantial penalties, as well as back payments of fees and taxes, if false documents were filed in land transactions, said Peterson, who has advised private plaintiffs making similar claims.
Faulty mortgages and foreclosures have already cost the five biggest home lenders $66 billion, according to data compiled by Bloomberg. Bank of America’s credit rating was cut on Sept. 21 by Moody’s Investors Service in part because the bill for mortgage disputes may climb past the $39 billion committed since 2007. County clerks in Kentucky have also sued MERS, while officials in Massachusetts and Michigan say they are exploring the possibility.
Half of Mortgages
MERS, operating since 1997, has registered more than half of all U.S. home mortgages. The company came under scrutiny last year after attorneys general in all 50 states began investigating claims that banks and loan servicers used faulty documentation in foreclosures.
Merscorp said on Feb. 16 that it will propose a rule change to stop members from foreclosing in its name.
Damages in the MERS claims won’t rival the tens of billions of dollars of losses banks have suffered due to faulty mortgages, said Chris Gamaitoni, a bank analyst with Washington-based Compass Point Research & Trading LLC.
The banks are more threatened by lawsuits that question the way mortgages were originated, pooled and securitized, Gamaitoni said in an interview.
“This is going to test the foresight of the people who created MERS,” said Peter Henning, a law professor at Wayne State University in Detroit.
The prospects for the lawsuits are difficult to determine because every state has its own property laws and requirements, Henning said.
“It will depend on what they say constitutes a transfer of a mortgage,” he said. “Counties sure could use these revenues, so if they can find an opening there they will pursue it.”
MERS is owned by financial institutions including Citigroup Inc., JPMorgan Chase & Co., Wells Fargo & Co. and Stewart Title Guaranty Co., and industry trade groups including the Mortgage Bankers Association and the American Land Title Association. It’s also partly owned by Fannie Mae and Freddie Mac, the housing finance agencies now controlled by the U.S. government after being bailed out in the 2008 financial crisis.
Dallas County called that crisis “a direct result of the financial system’s commoditization, packaging, securitization and sale of tens of millions of mortgages throughout the U.S.,” according to the complaint. “Without the fiction of the MERS system, these activities would not have been possible.”
The county said that through MERS, notes and mortgages are being “sold, assigned or transferred” without being recorded in county deed records. The defendants “misrepresented the true beneficial owner of notes and related mortgages filed by them in Dallas County, Texas, for the purpose of avoiding the recordation of subsequent transfer and payment of attendant filing fees.”
Watkins, 43, is seeking reimbursement for fees lost, punitive damages and a judgment of $10,000 a violation.
He asked the court to find that a violation of the Texas code occurred each time MERS was identified as a mortgagee or beneficiary under a deed of trust when it had no interest in the note secured by that deed. According to the complaint, MERS was the “grantee” in 157,319 records in Dallas as of Sept. 11.
The lawsuit also seeks a court order preventing the defendants from filing anything in deed records that identified MERS or anyone as a beneficiary who doesn’t have an interest in the secured note. The county said Bank of America “knew or should have known” the MERS system would cause improper filing.
“We expect more banks will be in this before it’s over,” Watkins said in an interview. The litigation could spread, he said. “This is not just going to be a Texas deal.” He wouldn’t specify which states or counties had contacted him or his lawyers about the suit.
Peterson, the Utah professor, who wrote an academic article on MERS that is cited in the Texas complaint, said he has advised plaintiffs in whistleblower cases against MERS in California, Nevada and Tennessee. The California case was dismissed when the court determined the purported whistleblower didn’t meet filing standards. A Nevada court said state law didn’t require recording the assignment of a mortgage.
The clerks of Kentucky’s Christian and Washington counties sued MERS, Chase Home Mortgage Corp., CitiMortgage, Wells Fargo, Bank of America and others in federal court in Louisville in April, seeking to represent all 120 counties in the state.
“According to MERS’s own website, its system saves money for its members and is specifically designed to avoid paying the fees” to county clerks, according to the April 25 filing. “MERS president, R.K. Arnold, testified in 2009 that assuming each mortgage has been resold and recorded just once, it would have saved the industry $2.4 billion in recording expenses.”
The Kentucky suit seeks compensatory and punitive damages and an injunction ordering defendants “to immediately cease the practice of nonrecording of assignments of mortgages.”
Dennis Pantazis Jr., attorney for the counties, declined to comment on the suit.
Thomas Kelly, a spokesman for New York-based JPMorgan Chase, and Vickee Adams, a spokeswoman for San Francisco-based Wells Fargo, the biggest U.S. home lender, declined to comment.
The banks and MERS asked the court to dismiss the case, saying Kentucky law doesn’t require recording transfers of promissory notes or interests in loans. MERS remains the “mortgagee of record” during these transactions, so no duty to record is triggered, the companies said in a July 1 filing.
Oakland County, Michigan is “evaluating a possible suit” against MERS, said Keith Lerminiaux, corporate counsel. The county has sued Freddie Mac and Fannie Mae in federal court in Detroit alleging they failed to pay transfer taxes on foreclosure sales.
Martha Coakley, the Massachusetts attorney general, said this year that she’s investigating MERS. The probe includes complaints by registers of deeds in the state over unpaid filing fees, said Brad Puffer, a spokesman for Coakley.
Delaware is also investigating MERS, according to a person familiar with the matter.
John O’Brien, register of deeds for Southern Essex County, Massachusetts, said he was among the officials pushing Coakley for an investigation. He estimates that since 1998 his district has lost $44 million in fees and the state has lost $250 million to $300 million.
“I’m hopeful that she will be filing the same type of lawsuit against MERS,” he said in an interview. If Coakley doesn’t sue, O’Brien said, there’s a “very strong” chance he would do it himself.
Recording fees vary and may depend on the length of a filing, Watkins, the Dallas district attorney, said. A county may charge $21 for the first page of a document and $9 for each succeeding page, he said. The recording fee for assignment of a mortgage in Christian County is about $13, according to the Kentucky lawsuit.
The Dallas county clerk has estimated that at least $58 million in fees have gone unpaid as a result of MERS-related transactions, dating back to 1997, Watkins said. “Our research shows it could be more than $100 million,” he said.
Claims against Bank of America stem mainly from loans originated by Countrywide Financial Corp., the subprime mortgage company acquired in 2008 when it was on the verge of collapse.
The mounting costs of buybacks, settlements and litigation helped push Bank of America’s stock to levels last seen in early 2009. Chief Executive Officer Brian T. Moynihan, 51, has sold at least $40 billion of assets and preferred shares to bolster the company’s finances.
U.S. states have already dealt with four straight years of budget imbalances and closed gaps totaling about $511 billion, according to the National Conference of State Legislatures in Denver. Dallas county has a budget shortfall of $36 million, Watkins said.
“We’re in the position that we can’t even provide basic services,” he said. Had MERS not existed, “we could have collected those fees,” he said.
The Texas case is Dallas County v. Merscorp Inc., CC-11-06571-E, County Court at Law, Dallas County, Texas. The Kentucky case is Christian County Clerk v. Mortgage Electronic Registration Systems Inc., 5:11-cv-00072, U.S. District Court, Western District of Kentucky (Louisville).