Turn On The Lights, Watch The Roaches Scatter Part 61

Some big Foreclosuregate news today, via Barry Ritholtz.

Merscorp Inc., operator of the electronic-registration system that contains about half of all U.S. home mortgages, has no right to transfer the mortgages under its membership rules, a judge said.

U.S. Bankruptcy Judge Robert E. Grossman in Central Islip, New York, in a decision he said he knew would have a “significant impact,” wrote that the membership rules of the company’s Mortgage Electronic Registration Systems, or MERS, don’t make it an agent of the banks that own the mortgages.

“MERS’s theory that it can act as a ‘common agent’ for undisclosed principals is not supported by the law,” Grossman wrote in a Feb. 10 opinion. “MERS did not have authority, as ‘nominee’ or agent, to assign the mortgage absent a showing that it was given specific written directions by its principal.” 

Let's review.   This is massive.  Judge Robert Grossman's decision, in part:

MERS and its partners made the decision to create and operate under a business model that was designed in large part to avoid the requirements of the traditional mortgage-recording process. The court does not accept the argument that because MERS may be involved with 50 percent of all residential mortgages in the country, that is reason enough for this court to turn a blind eye to the fact that this process does not comply with the law.

So what does this mean?  Well, MERS, the Mortgage Electronic Records System, exists for the sole purpose of electronically recording mortgage transactions and transfers without all the messy paperwork.  Judge Grossman has ruled that MERS does not have the authority to do that, and that by skipping the paperwork and saying "trust us, we're the banks" MERS has broken the law.

Now keep in mind MERS is involved in half the mortgages in the United States.

Now you see what the problem is.  The legal status of half the mortgages in the country, and more importantly a whole crapload of foreclosures in the last three years, are now up in the air.  Judge Grossman's decision explicitly states that MERS does not have the ability to act as an agent of the banks as far as mortgages are concerned.  If that's true, then it means MERS doesn't have the ability to process foreclosures in the name of the banks either.

That means the foreclosures aren't legal.  It means that through MERS, banks took millions of homes from people illegally.  It means the banks are in staggering amounts of trouble.

So one of two things will happen now, either Congress and the President will create legislation giving MERS all the authority it needs to do that after the fact, getting them off the hook and screwing people who lost their homes, or the Supreme Court will overturn Judge Grossman's decision.  The latter is much more preferable to the politicians, as rescuing the banks again isn't going to get them votes in 2012.

But something has to give.  The alternative is that the banks have to unwind trillions in mortgages and are driven out of business.  Judge Grossman's decision means now that the federal government will have to act.  More importantly, it will now have to face MERS and millions of American families in full sunlight.