As everyone is aware, the foreclosure crisis in the United States is at its highest levels since the Great Depression, and it has kept rising, despite the efforts of the Obama administration to stop the tide of foreclosures by setting up new programs aimed at restructuring mortgage loans, particularly for those homeowners who are underwater in their mortgages. Yet while the banks who made risky loans to homeowners were bailed out by TARP, they have given little or no such relief to homeowners. Many homeowners in foreclosure have simply walked away from their homes. But thanks to the banks own practices and some technicalities in bankruptcy law, homeowners may not even need to walk away from their mortgages; in some cases, they are getting their homes free and clear.
According to a recent article published at WebofDebt.com, a loophole has been discovered which has allowed homeowners currently facing foreclosure to not only ward off the banks and the local sheriff from kicking them out of their homes, but even get their homes free and clear. This loophole is based on an institution created by the big banks themselves, Mortgage Electronic Registration Systems, Inc. (MERS), a clearinghouse that serves as the mortgagee of record for lenders, allowing properties to change hands without the necessity of recording each transfer during the purchase or sale of a property. It was created by the big banks to speed up real estate transactions, and because it didn't necessitate any additional recording documentation with the local jurisdictions, it was supposed to reduce closing costs for homeowners purchasing property (though it did not happen in practice).
In one bankruptcy case last spring, Citibank foreclosed on a homeowner who fell behind on his mortgage, and the desperate homeowner filed bankruptcy to stave off the sheriff's sale of his house. The bankruptcy judge asked the bank (in this case, Citibank) to provide title of the mortgage note on this homeowner's property. Citibank did provide the mortgage note, but because the note was actually registered to MERS and not Citibank, the judge requested that Citibank provide a chain of title with MERS, and that MERS needed to provide the mortgage note to show the original chain of title. But because MERS is only a clearinghouse which acts as a nominee for the banks and not a bank or mortgage company itself, they acknowledged that they could not provide documentation showing they were the mortgage holder on the property. As a result, the bankruptcy judge ruled that MERS did not have clear title to the property in question, and that the claim for foreclosure was invalid. And because the chain of title was not established, the homeowner was able to walk away with free and clear title to his home.
Now this has only happened in a handful of cases, but as of today there are 62 million homes in the USA which lists MERS as the mortgage holder. If even only ten percent of these homeowners were to challenge title to these properties, it could have catastrophic effects on the banking industry, while at the same time become a lifeline for distressed homeowners. This could have ripple effects across the nation, as some huge banks could once again fail or need a bailout, yet it may also save the economy in other ways.