Suits Challenge Missouri Foreclosure Law

By | January 30, 2012

(Source: Jim Gallagher St. Louis Post-Dispatch) – John Kevin Kennedy was an engineer at Anheuser Busch for 30 years. Then came the sale to InBev, and the big downsizing at the brewery left Kennedy out on the street along with much of his department.

With no job, he asked his mortgage lender for a lower payment on his home in Barnhart.

What happened next set in motion a lawsuit challenging the way foreclosures are done in Missouri. By raising questions about which lender actually owns the mortgages, the suit claims certain foreclosures weren’t properly done and it asks the courts to give “hundreds, even thousands” of Missourians their foreclosed homes back.

Kennedy’s is part of a broader legal movement nationwide challenging the foreclosure process, which debtors say is slanted against them.

“We’ll put an end to this,” vowed lawyer Stanley Wallach of the Wallach Law Firm in Creve Coeur. “The capes-and-crusaders mode . . . is to put this back on a level playing field.

Kennedy says Bank of America agreed to reduce his mortgage payment to $624 from $823, and that he made the lower payments through 2009 and 2010. Such modifications are often done on a trial basis pending a permanent decision.

So, he was shocked when the sheriff arrived with a notice that the bank was starting the foreclosure process.

Kennedy called the bank. “I kept getting the runaround. I probably logged 100 to 150 hours on this cellphone,” he said.

In Missouri, lenders can foreclose without a judge’s order. Unless the homeowner files suit to stop it, the house can be sold at a foreclosure sale on the mortgage holder’s word alone. People who can’t pay their mortgages usually can’t afford lawyers, so foreclosures almost always go unchallenged. In Illinois, court approval is required before a foreclosure.

But Kennedy, 62, had something that most troubled homeowners don’t – money in a 401(k) retirement plan. He used it to hire lawyer Greg White, who specializes in fighting foreclosures.

White teamed up with three other law firms to file a lawsuit challenging the state’s foreclosure system. They hope to convert the case into a class-action suit.

A Bank of America spokeswoman said the bank hasn’t yet seen the suit and wouldn’t comment. An attorney at Kozeny and McCubbin, a creditors’ law firm also named a defendant, also declined to comment.

At the heart of the challenge is MERS, the Mortgage Electronic Registration System. It is the mortgage industry’s system for tracking ownership of perhaps 60 million mortgages.

These days, lenders that make mortgages sell them off to Fannie Mae, Freddie Mac or other large operators. There, many mortgages from many states are packaged into securities. Shares in those securities are sold to multiple investors. In the process, the ownership of a particular mortgage can change several times.

For example, Kennedy’s $86,500 mortgage was made by Quick Loans. But he ended up making payments to Bank of America.

Across the country, however, homeowners lawyers claim MERS muddies the legal ownership of loans.

As a result, the lawyers say, lenders trying to foreclose on homeowners often can’t prove that they own the mortgage in question.

“They were pretty sloppy on the way they did it,” said White, Kennedy’s lawyer. MERS is “an end run around the records requirements,” he says.

WHO OWNS THE MORTGAGE?

With millions of mortgages being mixed into thousands of securities, the industry faced a problem in keeping track of who owned what loan, who had the job of collecting payments, and who had the right to foreclose.

The industry’s solution was MERS, formed in 1995. Not only did it ease record keeping, but it was supposed to simplify legal requirements that changes in mortgage ownership be recorded at local courthouses.

The idea was that MERS would represent all its member lenders. The “deeds of trust,” mortgage ownership documents that let the holder foreclose, would all be recorded just once in MERS name, no matter how often the loans changed hands. As a result, MERS shows up in public records as the holder of claims on property, although it doesn’t really own the loans.

The system held up well, until the Great Recession brought on a landslide of foreclosures.

Wilson Freyermuth, law professor at the University of Missouri and an authority on real estate law, says the MERS system in theory seems compatible with the law.

“There’s not necessarily a legal problem with the structure of MERS,” says the professor, who is not involved in the case. “All MERS was originally intended to do was to serve as an agent for the actual owner of the loan.”

Lenders could trade mortgages among themselves without filing papers at the courthouse, as long as they were members of MERS. Or that was the idea.

But MERS produced a field day for homeowners’ lawyers around the country.

Challenges are underway in several states, and judges have gone both ways on the issue. For instance, the California Supreme Court upheld the MERS system, and the U.S. Supreme Court declined to review it. But last August, a judge in Massachusetts let a woman keep her home, after Deutsche Bank tried to foreclose. MERS, not Deutsche Bank, actually held the mortgage, he ruled.

The law on real estate ownership is quite technical, opening the door to technical challenges. In some Missouri suits, homeowners lawyers claim that legal paperwork needed to transfer loans was never actually done within the MERS system, so lenders claim to own loans they actually don’t.

The MERS system is also entangled in the so-called “robo-signing” scandal, in which employees of mortgage servicing operations and law firms swore to the accuracy of loan ownership records that they hadn’t checked.

Kennedy’s challenge claims that Bank of America can’t foreclose because MERS is recorded as the owner of the mortgage. The Kozeny and McCubbin law firm is a defendant because it handled the foreclosure.

Though the bank foreclosed on his home, Kennedy still lives at the house while the two sides face off in court.

“Hundreds, even thousands,” of Missouri families may have lost homes under similar circumstances, the suit says. The suit asks the court to give them the houses back. The law suit, filed in November, is in its beginning stages.

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©2012 the St. Louis Post-Dispatch

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Distributed by MCT Information Services

Source: Jim Gallagher St. Louis Post-Dispatch

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