Mortgage mess

If you have lost your home to foreclosure, this is a story you will want to read. It is possible there could be a payoff in your near future.

Keep in mind, though, that the key word here is possible.

But within that possibility is a stunning fact: Tens of thousands of Michigan residents who were the victims of illegal foreclosures could receive compensation.

Two Michigan court cases involving the Mortgage Electronic Registration Systems, or MERS, are key to how this issue will play out.

According to court documents, MERS was created in the early 1990s as a "mechanism to provide for the faster and lower-cost buying and selling of mortgage debt. Apparently, over the last two decades, the buying and selling of loans backed by mortgages after their initial issuance had accelerated to the point that those operating in that market concluded that the statutory requirement that mortgage transfers be recorded was interfering with their ability to conduct sales as rapidly as the market demanded. By operating through MERS, these financial entities could buy and sell loans without have to record a mortgage transfer for each transaction because the named mortgagee would never change; it would always be MERS even though the loans were changing hands.”

In other words, MERS was acting as a sort of clearinghouse for mortgages without having an actual interest in the property. Part of the beauty of the whole thing — at least from the perspective of lenders and the investors who bought mortgage-backed securities — was that they didn't pay the standard fee to any county register of deeds when the mortgages repeatedly changed hands.

Then the housing bubble burst, and the value of mortgage-backed securities crumbled, helping to bring about the 2008 economic collapse and the ensuing foreclosure crisis.

Jump ahead to 2011, when the Michigan Court of Appeals ruled that MERS, under state law, lacked the standing to actually foreclose on a property through the standard procedure in Michigan — which is though advertisement, as opposed to judicial foreclosures that require an appearance in front of a judge at the start of the process — because MERS wasn't actually owed any money by the homeowners.

If you think that sounds confusing, you are right. Part of the reason for that confusion is this: Most people don't realize that there is a difference between a mortgage and a promissory note. When you borrow money to buy a home, typically there are two crucial documents. One is the mortgage, which specifies the terms of the agreement; the other is the promissory note, which is a written promise to repay a specific amount of money.

So the mortgages got traded back and forth while the promissory notes would typically remain in the hands of the original lender. And, as the Court of Appeals ruled in a 2-1 decision handed down in April, although MERS was technically the mortgagee — meaning that it held the title to the property that secured the note — it wasn't actually the entity that was owed the money when borrowers defaulted on their loans.

> Email Curt Guyette