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The nation's traditional property ownership registration system has been undermined by banks in their rush to process mortgages during the great real estate bubble, with consequences that now include a legal quagmire and huge financial liabilities for some of the nation's biggest financial institutions.
The fallout could rumble through the U.S. homeownership system for years, Christopher Peterson, a University of Utah law professor and recognized legal expert on the nation's mortgage crisis, said at a forum Monday on the legal issues surrounding the surge in foreclosures.
The 6.6 million foreclosures initiated since 2007, with an average of 2.5 people per household, have caused disruption comparable to a war, he said at the S.J. Quinney School of Law in Salt Lake City.
"This is the sort of economic dislocation you'd expect to find with a small civil war," Peterson said. "Imagine transplanting more than the entire metropolitan area of New York City in one go-around."
And, with Goldman Sachs projecting 12 million foreclosures initiated over the next five years, "really, the truth is we're not even halfway there in terms of the numbers of foreclosures the best analysts project are coming through our pipeline."
Peterson said traditionally in the United States, ownership of property involved physical documents that included the promissory note with a lender and a deed of trust that gives the lender the right to foreclose on the property if the borrower doesn't meet their obligations. Going back to the British colonies of the 17th century, these types of documents were recorded with local governments.
But the mortgage industry found this system wasn't fast enough or cheap enough when it wanted to sell mortgages to banks that, in turn, bundled them together and resold them to investors in what's known as asset-backed securities.
So the Mortgage Bankers Association created a company called the Mortgage Electronic Registration Systems (MERS), which in name now owns about 60 percent of all of the mortgages in the country. That allowed the industry to shovel mortgages through various hands and into packages without having to record the change of ownership each time with a county recorder.
In many cases, the actual papers were destroyed or were missing, Peterson said, raising questions of how those mortgage agreements can be enforced under the law.
"Of course it was unprecedented in American history," Peterson said, because it subverted the role of elected county recorders and laws passed by elected legislatures.
Attorneys general from all 50 states are investigating allegations of poor record keeping by banks and the companies that collect mortgage payments. The Federal Reserve and other banking regulators are looking into whether mortgage companies cut corners while pursuing foreclosures, including filing thousands of documents from "robo-signers," industry representatives who signed tens of thousands of foreclosure papers without having done the legally required review.
Steven Ramirez, a professor of law at Loyola University who also spoke at the forum, called the MERS issue a "huge problem" for home-owners who could face paperwork problems years from now. It also is a threat to "middle-class prosperity," he said.
Banks face major expenses trying to defend the issue in courts and great potential harm to their finances, with Bank of America facing at least $70 billion in claims, Ramirez said.
"If it turns out that these mortgages are not valid, they sold trillions in mortgage-backed securities that have no mortgages," he said. "That's a huge problem for the banks."
In Utah, dozens of lawsuits have been filed recently over foreclosures, many of them related to the legal questions Peterson and Ramirez outlined.
Attorney Abraham Bates said his firm has filed around 70 lawsuits during the past few months based on legal challenges to the MERS foreclosures and expects to have filed 100 by the end of the year.
Under state law, the entity seeking to foreclose must have physical possession of the original mortgage document and have the property transfer recorded by the county recorder, he said.
Lawsuits in Utah have had a mixed success so far, Bates said. Federal Judge Clark Waddoups in June overturned a district court judge's order that had halted foreclosures in Utah by Bank of America, while state District Judge Kate Toomey recently issued an injunction halting a foreclosure.
A proposed class action lawsuit against MERS, Bank of America and other entities was filed Friday in federal court in Salt Lake City by attorneys E. Craig Smay of Salt Lake City and John Christian Barlow of St. George.