Legal

One of the last stumbling blocks to the $25 billion nationwide mortgage settlement formally announced Thursday was the suit New York Attorney General Eric Schneiderman filed last week against Bank of America, JPMorgan Chase, Wells Fargo, and the Mortgage Electronic Registration Systems. As my tireless Reuters colleagues Aruna Viswanatha, Karen Freifeld, and Rick Rothacker reported Wednesday night, the five banks in the nationwide deal -- three of which are defendants in Schneiderman's MERS suit -- pressured Schneiderman to drop his case, arguing that the national settlement resolves some of the allegations the AG's suit raises. Schneiderman refused.

Indeed, when the settlement was announced this morning, claims against MERS were explicitly carved out; state attorneys general can go ahead with suits against the mortgage registry. MERS is as exposed as a kid locked out of the house without a coat in a snowstorm.

That's significant because of a potentially multi-billion-dollar theory posited in MERS suits by the Massachusetts and Delaware AGs, as well as in a class action Bernstein Leibhard filed on behalf of Ohio county governments.

MERS, you'll recall, was established about 15 years ago by mortgage issuers who wanted to speed up the mortgage-transfer process. Whether the end goal was to facilitate mortgage securitization or to help homeowners refinance high-interest mortgages is a matter of debate, but the practical effect of the mortgage database was to make it easier to do both. MERS members could transfer loans amongst themselves without the delays inherent in government mortgage-recording bureaucracies.

But according to the Massachusetts, Delaware, and New York AGs (and the Ohio class-action plaintiffs), that wasn't the only benefit MERS members enjoyed. They also allegedly avoided paying mortgage-transfer and recording fees to local governments. According to Schneiderman's Feb. 3 complaint, MERS touts those savings in promotional materials, boasting that its 3,000 members avoid paying fees of at least $30 for every loan registered in the MERS system. Every year, according to the N.Y. AG, MERS members shortchange local governments by hundreds of millions of dollars; a former MERS president quoted in Schneiderman's complaint said in a 2009 deposition that the total saving for MERS members was at least $2 billion in mortgage recording fees.

That's big money. It's also, at the moment, a mere allegation. MERS Vice-President Janis Smith told me that no court has endorsed the unpaid-transfer-fee theory, which has only surfaced in the last year. (Previous cases against the oft-sued registry have focused on MERS's standing to bring foreclosure actions.) Smith said MERS is confident that members don't have to pay transfer fees when registered mortgages change hands because MERS remains the assignee. "We think there is absolutely no merit to any of these suits and expect to prevail in the litigation," she said.

What's really interesting, though, is who will have to pony up if Smith is wrong and MERS is found to owe recording fees to local governments. According to Smith, MERS is indemnified by its members. So if there's a judgment against the registry, mortgage lenders are on the hook. That includes, of course, the banks that negotiated the $25 billion settlement. By agreeing to a deal that carves out an exception for claims against MERS, they've left themselves potentially liable for those claims.

Also potentially liable are Fannie Mae and Freddie Mac, which have more mortgages registered with MERS than just about any other member. Fannie and Freddie, you'll recall, are now in conservatorship under the Federal Housing Finance Agency. So in a weird way, the federal government put taxpayer dollars at stake in the $25 billion mortgage settlement. (That's an admittedly far-fetched scenario, but fun to contemplate.)

MERS itself, according to Smith, was not involved in the mortgage settlement negotiations and had no role in the decision to carve out claims against the registry. She declined additional comment on the settlement because the actual document isn't yet publicly available.

(Reporting by Alison Frankel)