New York State sues three top leading US banks on mortgage database abuse

The banks’ use of the database, known as MERS, misled homeowners, undermined foreclosure proceedings and created uncertainty about ownership interests in properties, the state said in the complaint filed on Friday in New York State Supreme Court in Brooklyn.

“The banks created the MERS system as an end-run around the property recording system, to facilitate the rapid securitization and sale of mortgages,” Schneiderman said in a statement. “Once the mortgages went sour, these same banks brought foreclosure proceedings en masse based on deceptive and fraudulent court submissions.”

The lawsuit comes three days before a Feb. 6 deadline for states to join a proposed multi-state agreement over foreclosure practices said to be worth as much as 25 billion dollas. Last week, he was selected by the Obama Administration to help lead a state- federal group probing misconduct in the packaging and sale of residential mortgage-backed securities.

MERS tracks servicing rights and ownership interests in mortgage loans on its electronic registry, allowing banks to buy and sell loans without recording transfers with individual counties. The system was created by the mortgage industry to evade recording fees, avoid the need to publicly record mortgage transfers and facilitate the packaging of mortgage loans into securities, Schneiderman claimed in the complaint.

Merscorp Inc., which operates the mortgage registry, was sued by Delaware Attorney General Beau Biden last year. Biden claimed the registry is deceptive and harms consumers by permitting foreclosures “for which the authority has not been fully determined and may not be legitimate.”

Janis Smith, a spokeswoman for Reston, Virginia-based Merscorp, which was also named as a defendant in the New York complaint, said in an e-mailed statement that the company rejects the attorney general’s allegations and will fight the suit.

The New York state’s complaint states that MERS eliminated the ability of the public and homeowners to track the purchase and sale of properties through the traditional public records system. That information is stored in the MERS private database, which Schneiderman called unreliable and inaccurate. The mortgage industry has saved more than 2 billion dollars in recording fees with the system, according to the complaint.

Banks’ use of the registry, coupled with “faulty and sloppy” document preparation, has resulted in foreclosures being filed against New York homeowners where the foreclosing party lacked the authority to sue, Schneiderman said.

By relying on legally invalid mortgage assignments using MERS, foreclosure judgments have been obtained “through fraudulent and illegal means,” according to the complaint.

MERS’ conduct and the banks’ use of the system “have resulted in the filing of improper New York foreclosure proceedings, undermined the integrity of the judicial process, created confusion and uncertainty concerning property ownership interests and potentially created clouds of title on properties throughout the state of New York,” the State said.