Weekend Economists Go Out with a Boom August 24-26, 2012

[Demeter]

11. Real Remedies for the Foreclosure Crisis Exist: The Game-Changing Implications of Bain v. MERS

http://truth-out.org/news/item/11045-real-remedies-for-the-foreclosure-crisis-exist-the-game-changing-implications-of-bain-v-mers

Two landmark developments on August 16 give momentum to the growing interest of cities and counties in addressing the mortgage mess using eminent domain:

1. The Washington State Supreme Court held in Bain v. MERS, et al., that an electronic database called Mortgage Electronic Registration Systems (MERS) is not a "beneficiary" entitled to foreclose under a deed of trust; and
   
   
2. San Bernardino County, California, passed a resolution to consider plans to use eminent domain to address the glut of underwater borrowers by purchasing and refinancing their loans.

MERS is the electronic smokescreen that allowed banks to build their securitization Ponzi scheme without worrying about details like ownership and chain of title. According to property law attorney Neil Garfield, properties were sold to multiple investors or conveyed to empty trusts, subprime securities were endorsed as triple A and banks earned up to 40 times what they could earn on a paying loan, using credit default swaps in which they bet the loan would go into default. As the dust settles from the collapse of the scheme, homeowners are left with underwater mortgages with no legitimate owners to negotiate with. The solution now being considered is for municipalities to simply take ownership of the mortgages through eminent domain. This would allow them to clear title and start fresh, along with some other lucrative dividends.

A major snag in these proposals has been that to make them economically feasible, the mortgages would have to be purchased at less than fair market value, in violation of eminent domain laws. But for troubled properties with MERS in the title - which now seems to be the majority of them - this may no longer be a problem. If MERS is not a beneficiary entitled to foreclose, as held in Bain, it is not entitled to assign that right or to assign title. Title remains with the original note holder; and in the typical case, the note holder can no longer be located or established, since the property has been used as collateral for multiple investors. In these cases, counties or cities may be able to obtain the mortgages free and clear. The county or city would then be in a position to "do the fair thing," settling with stakeholders in proportion to their legitimate claims and refinancing or reselling the properties, with proceeds accruing to the city or county.

Bain v. MERS: No Rights Without the Original Note

The underlying question, said the Bain panel, was "whether MERS and its associated business partners and institutions can both replace the existing recording system established by Washington statutes and still take advantage of legal procedures established in those same statutes." The court held that they could not have it both ways:

Simply put, if MERS does not hold the note, it is not a lawful beneficiary....

MERS suggests that, if we find a violation of the act, "MERS should be required to assign its interest in any deed of trust to the holder of the promissory note and have that assignment recorded in the land title records, before any non-judicial foreclosure could take place." But if MERS is not the beneficiary as contemplated by Washington law, it is unclear what rights, if any, it has to convey. Other courts have rejected similar suggestions. [Citations omitted.]

Bain is binding precedent only in Washington State, but it is well reasoned and is expected to be followed elsewhere.

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