In the aftermath of the 2008 mortgage meltdown that threatened the worldwide banking system many have asked, “Why haven’t any banksters gone to jail for causing the problem?” Eric Schneiderman, NYS Attorney General, is committed to pursuing criminal as well as civil prosecutions. Schneiderman’s target is a private national mortgage electronic registry system known as MERS. Created by a consortium of the nation’s largest banks including Bank of America, J.P. Morgan Chase, and Wells Fargo, MERS effectively eliminated the ability of homeowners and the public to track property transfers through the traditional public records system, complicating adjudication of foreclosures. Virginia-based MERSCORP, Inc. and its subsidiary, Mortgage Electronic Registration Systems, Inc. and various national banks are named as defendants in the lawsuit.

Over 70 million loans nationally have been registered in MERS System, including about 30 million currently active loans. In NYS, MERS has filed over 13,000 foreclosure actions against homeowners listing itself as the plaintiff. Schneiderman’s lawsuit asserts MERS lacked the legal authority to foreclose in many instances and did not own or hold the promissory note, despite saying otherwise in court submissions.

“The banks created the MERS system as an end-run around the property recording system, to facilitate the rapid securitization and sale of mortgages,” said AG Schneiderman. “Once the mortgages went sour, these same banks brought foreclosure proceedings en masse based on deceptive and fraudulent court submissions, seeking to take homes away from people with little regard for basic legal requirements or the rule of law,” 

Shneiderman’s lawsuit alleges the financial industry created MERS in 1995 to allow financial institutions to evade local county recording fees, avoid the hassle and paperwork of publicly recording mortgage transfers, and facilitate the rapid sale and securitization of mortgages. Through their membership in MERS, these companies avoided publicly recording the purchase and sale of mortgages by designating MERS Inc. – a shell company with no economic interest in any mortgage loan – as the "nominal" mortgagee of the loan in the public records.

According to the lawsuit, MERS' conduct, as well as the servicers’ use of the MERS System, has resulted in the filing of improper New York foreclosure proceedings, undermined the integrity of the judicial process, created confusion and uncertainty concerning property ownership interests, and potentially clouded titles on properties throughout the State of New York. In fact, several New York judges have questioned the standing of the foreclosing party in cases involving MERS loans and the validity of mortgage assignments executed by MERS certifying officers.

Schneiderman’s lawsuit asserts the MERS System is riddled with inaccuracies which make it difficult to verify the chain of title for a loan or the current note-holder, and creates confusion among stakeholders who rely on the information. In addition, as a result of these inaccuracies, MERS has filed mortgage satisfactions against the wrong property.

The lawsuit seeks a declaration that the alleged practices violate the law, as well as injunctive relief, damages for harmed homeowners, and civil penalties. The lawsuit also seeks a court order requiring defendants to take all actions necessary to cure any title defects and clear any improper liens resulting from their fraudulent and deceptive acts and practices.

Schneiderman’s core belief that state Attorneys General must retain the power to investigate and pursue prosecutions of mortgage fraud led him to challenge Pres. Obama’s plan to bring relief to the nation’s homeowners at risk of losing their homes.  A year ago, the Obama administration sought a $20 Billion settlement with the nation’s top banks that would have been applied to loan modifications and mortgage counseling. The agreement would have been limited to robo-signing a practice in which banks were found to have filed false foreclosure papers in state courts. In addition, the agreement would have shielded banks from future civil and criminal liability for questionable banking practices. 

Nationwide, the problem is bigger than robo-signing. When foreclosures were challenged in court, banks filed false affidavits and unsupported documents. Mortgages and liens were not in the files. Banks could not prove they owned foreclosed homes, who really owned the loans or whether the borrower was actually in default. The process has been deemed as a means to defraud the courts, leading more than a few courts to void the foreclosure and award the home to the borrower free and clear. 

For its part, the Obama administration saw the original settlement a method to deliver swift relief to struggling borrowers. “We can’t magically sort of fix a decline in home values that’s so severe in some markets that people are $100,000 to $150,000 underwater,” said President Obama more than a year ago. “What we can do is to try to create sort of essentially bridge programs that help people stabilize, refinance where they can, and in some cases not just get pummeled if they decide that they want to move.”

Shaun Donovan, the secretary of Housing and Urban Development said that a settlement on the narrow issue of robo-signing would not preclude other investigations by individual attorneys general.

The proposed $20 billion settlement would require the banks to write down the principal balance on underwater loans. An estimated 14.6 million homeowners owe $753 billion more on their mortgages than their homes are worth.  Clearly, $20 billion would not solve the problem while indemnifying the banks from future investigations. 

Schneiderman was not convinced. Neither were Delaware’s AG Beau Biden and California’s AG Kamala Harris. “The banks have been demanding releases for other conduct -- for things that haven't been investigated,” said Schneiderman. “And Beau and I and some other A.G.s have said we're not giving releases for things that haven't been fully investigated, we're not giving releases for things that really aren't the subject of the discussions underway.” Harris has an eye on California’s False Claims Act, which would enable state officials and pension funds to seek substantial monetary damages if it could be proved that mortgages were fraudulently bundled into securities that later dropped in value. 

Without the cooperation of all state Attorneys General, the Obama Administration had to re-think its position. 

During this year’s State of the Union Address, President Obama announced the formation of a Mortgage Crisis Unit, part of a new Unit on Mortgage Origination and Securitization Abuses. The President named Schneiderman as Mortgage Crisis chair. These initiatives are part of the administration’s Financial Fraud Enforcement Task Force and will not supercede investigations already being conducted by the Dept. of Justice. 

The new agreement requires banks to comply with existing laws precluding abusive mortgage foreclosures and set aside $25 billion to help homeowners who were wrongly foreclosed and those who are underwater on their mortgages. In addition, the settlement preserves legal claims for housing crisis misconduct that has not yet been investigated and does not impede Schneiderman’s investigation into MERS.

Schneiderman thanked President Obama for creating the coordinated investigation. “In coordination with our federal partners, our office will continue its steadfast commitment to holding those responsible for the economic crisis accountable, providing meaningful relief for homeowners commensurate with the scale of the misconduct, and getting our economy moving again,” said Schneiderman. “The American people deserve a robust and comprehensive investigation into the global financial meltdown to ensure nothing like it ever happens again.”

NYS is set to receive $136 million of the $25 billion settlement with the nation’s five largest mortgage servicers over mortgage abuses, the most per underwater borrower of any state in the nation, and the fourth highest dollar amount as part of the federal-state settlement. 

Legal claims preserved in the settlement include all criminal claims; all claims based on mortgage securitization misconduct under securities fraud statutes, including NY’s Martin Act; all claims directly against the private national mortgage electronic registry system known as MERS, as well as claims against financial institutions for the use of MERS; All claims for violations of fair lending laws that relate to discriminatory practices in loan origination; all tax claims, including any claim that the failure to transfer mortgage loans to the securitization trusts or other conduct violated tax rules; all claims by counties for lost mortgage recording fees; and all claims and defenses held by private and third parties, including those held by individual mortgage loan borrowers. 

Estimated figures for NY homeowners include $13 million in payments to victims of wrongful foreclosure, $140 million in estimated benefits from refinance program, and $495 in estimated homeowners’ benefits from loan modifications. In NYS, more than 46,000 borrowers could receive some benefit from the settlement, including an estimated 21,000 who could see a principal reduction.