(Reuters) – The growing furor in the United States over improper foreclosure documents is focusing intense attention on MERS, a mortgage-record service company that tracks more than 60 million mortgages. Mortgage Electronic Registration Systems has filed thousands of foreclosure actions around the country on behalf of lenders. Its right to do that is under challenge.

Several courts around the country recently have ruled that MERS lacks the right to file such cases. Federal regulators say they are investigating its role. On Tuesday JPMorgan disclosed that it had stopped using MERS. WHAT IS MERS? MERS, based in Reston, Virginia, is a private company owned by leading banks and mortgage processors. They founded it in 1995 to speed up legal record-keeping of mortgages and sales of mortgage loans through securitizations. Its main purpose was to be an electronic registry that would keep track of repeated sales of mortgage loans as the number of new mortgages and refinancings boomed.

WHY IS MERS FACING LEGAL CHALLENGES AND GOVERNMENT INQUIRIES?

MERS, on behalf of the banks and myriad trusts that own the mortgage loans, has initiated thousands of foreclosure actions around the country, as the “mortgagee of record” listed on homeowners’ mortgages. Homeowners’ lawyers and advocacy groups contend that MERS has no right to initiate the actions because it doesn’t own the mortgage loans. Lending laws specify that only the actual owner of the loan can file a foreclosure action.

Lawyers also have alleged that MERS bypassed laws requiring mortgages and refinancings to be recorded in county recorders offices. Issues have been raised in several court cases about whether MERS misled courts about ownership of the loans. MERS Chief Executive R.K. Arnold has strongly denied any misrepresentations or legal violations, and contends that its services have benefited homeowners as well as lenders. COURT CHALLENGES TO MERS Class action lawsuits against MERS currently are pending in at least three states: California, Nevada and Arizona.

State supreme courts in Maine, Arkansas and Kansas have ruled against MERS’ right to file foreclosure actions. In an individual borrower’s case in Oregon, a federal judge in September issued an injunction, at least temporarily halting a MERS-filed foreclosure, because of evidence that MERS doesn’t own the mortgage loan in question.

MERS earlier, however, won court rulings in several states, upholding its right to foreclose. In most of those cases the issue raised wasn’t whether MERS owned the mortgage loans, but whether it could proceed even though it wasn’t able to locate and produce documents such as loan assignments. POTENTIAL CONSEQUENCES If court rulings against MERS’ authority to foreclose proliferate, many foreclosure cases may be halted indefinitely, and some homeowners in default may end with up with clear title to their homes. Halts to MERS foreclosures would have a big impact on lenders and loan processors who rely on MERS to file foreclosure actions.

(Reporting by Scot Paltrow; Editing by Leslie Adler)

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Lenders foreclose on 288K homes in third quarter, but many could be challenged in court

Alex Veiga, AP Real Estate Writer, On Thursday October 14, 2010, 12:05 am LOS ANGELES (AP) —

Lenders seized more U.S. homes this summer than in any three-month stretch since the housing market began to bust in 2006. But many of the foreclosures may be challenged in court later because of allegations that banks evicted people without reading the documents. A total of 288,345 properties were lost to foreclosure in the July-September quarter, according to data released Thursday by RealtyTrac Inc., a foreclosure listing service. That’s up from nearly 270,000 in the second quarter, the previous high point in the firm’s records dating back to 2005.

Banks have seized more than 816,000 homes through the first nine months of the year and had been on pace to seize 1.2 million by the end of 2010. But fewer are expected now that several major lenders have suspended foreclosures and sales of repossessed homes until they can sort out the foreclosure-documents mess. On Wednesday, officials in 50 states and the District of Columbia launched a joint investigation into the matter.

Rick Sharga, a senior vice president at RealtyTrac, noted that legal challenges are likely. But he doubts many will be successful in overturning foreclosures. He said he expects foreclosures to resume and predicts about 1 million homes will be taken back this year. “The bottom line is not that those properties won’t be repossessed,” Sharga said. “They simply won’t be repossessed as quickly. We’re simply delaying the inevitable.” Experts say if lenders resume foreclosures in a couple of months or so, the delay will amount to a temporary lull followed by a spike in home repossessions early next year. But if the crisis drags on for months and more lenders stop seizing homes, the foreclosure delays could last well into next year.

That could have a severe effect on home sales and prices. A freeze in foreclosure sales between now and December by a majority of lenders could amount to removing 30 percent of all home sales for that period, Sharga suggests. “You would virtually guarantee that tens of thousands of properties would miss going to market in time for the spring, which is the peak buying season for real estate,” Sharga said. Nearly 600,000 bank-owned homes are not yet on the market, according to RealtyTrac. The states most affected by the foreclosure freeze accounted for 40 percent of all foreclosure activity in the third quarter and 36 percent of homes taken back by lenders, the firm estimates.

Sales of homes by lenders made up 18 percent of all U.S. home sales in September, the firm said. Other experts say delays from the foreclosure documents problem won’t end up having a huge impact on home sales or housing values. Foreclosed homes that would have been sold by lenders now will be sold seven or eight months from now, and prices will start going declining about 3 percent to 4 percent nationally, on average, when those sales take place, said Andres Carbacho-Burgos, an economist at Moody’s Economy.com. That’s good news if you’re a homeowner looking to sell in the near term, because there won’t be as much competition from deeply discounted foreclosed properties, Carbacho-Burgos said. “But if you were looking to sell further down the line, that’s not so good news,” he said. Economic woes, such as unemployment or reduced income, continue to be the main catalysts for foreclosures this year.

While bank repossessions rose in the third quarter, new defaults continued to decline. Some 269,647 properties received default notices, the first step in the foreclosure process, down 1 percent from the second quarter and down 21 percent from the same period last year, according to RealtyTrac, which tracks notices for defaults, scheduled home auctions and home repossessions. In all, 930,437 homeowners received a foreclosure-related warning between July and September, up nearly 4 percent from the second quarter but down 1 percent from the same period last year, RealtyTrac said. The latest tally translates to one in 139 U.S. homes. AP Real Estate Writer Alan Zibel contributed from Washington to this report.