Homeowners struggling to avoid foreclosure got some good news today. U.S. District Judge Kent Dawson upheld a bankruptcy court ruling that makes it harder for lenders to foreclose on home mortgages.
The case, heard by a panel of federal judges in November, concerned whether Mortgage Electronic Registration Systems Inc. could foreclose on residences on behalf of lenders.
The electronic system records the ownership of residential mortgages for the mortgage banking industry.
Dawson said the company could not foreclose on a home, because it did not provide evidence that it held the note on the residence and didn’t show that it was an agent of the lender.
About half of all U.S. mortgages “whose loans have been securitized, sliced and diced are now held" by Mortgage Electronic Registration Systems Inc., or MERS, according to a blog posted by securities analyst Barry Ritholtz.
The case started in bankruptcy court two years ago.
MERS officials asked bankruptcy Judge Linda Riegle for permission to start foreclosure proceedings against a property owned by Lisa Marie Chong. Bankruptcy trustee Lenard Schwartzer objected, saying the electronic system was not a “real party in interest” in the mortgage loan.
Like many mortgages, Chong’s loan had been securitized, meaning it had been pooled or packaged into a security held by investors.
Mortgage Electronic Registration Systems Inc. was unable to show that it had possession of the note. The bankruptcy judge ruled in Schwartzer’s favor. The decision was appealed to federal court.
In his decision Tuesday, Dawson said the registration system does not lose money when borrowers fail to make payments on home mortgages.
Dawson found that the Mortagage Electronic Registration must at least provide evidence that it was a representative of the mortgage loan holder, which it failed to do.
“Since MERS provided no evidence that it was the agent or nominee for the current owner of the beneficial interest in the note, it has failed to meet its burden of establishing that it is a real party in interest with standing,” Dawson said, affirming the bankruptcy court ruling.
Real estate attorney Tisha Black Chernine said the ruling is good news for struggling borrowers and homeowners in general.
“It will have a dramatic effect on lenders being able to foreclose,” she said.
Because the decision makes it more difficult to foreclose, she hopes lenders will be more willing to negotiate with homeowners struggling to meet mortage payments by approving short sales or making other concessions.
In a short sale, a lender agrees to allow a homeowner to sell his home for less than is owed.
This is particularly helpful, because many homeowners owe far more than their homes are worth since home prices have fallen.
Houses sold in short sales typically go for 30 percent more than homes sold after foreclosure, Black Chernine said.
Appraisers looking at the short sale price will use it in determining the market value. Thus, avoiding foreclosure results in higher market values for other houses, she said.
“It should help buoy home prices,” Black Chernine said.
Bill Uffelman, chief executive officer of the Nevada Bankers Association, predicted that most foreclosures will be able to proceed, because the real mortgage owners and notes will be able to be identified in most cases.
However, he said, many homeowners facing foreclosure may be able to stay in their homes longer because of the delay.
“In the end in 99.9 percent of the cases, ownership of the note will be proved,” he said.
While the decision is believed to be the first of its kind in Nevada, the Kansas Supreme Court made a similar finding in a similar case.
An attorney for the electronic system did not return a call for comment on whether it will appeal.
Contact reporter John G. Edwards at firstname.lastname@example.org or 702-383-0420.