When we’ve discussed the woes afflicting residential mortgage securitizations, in particular, the deep seated problems arising from the frequent if not widespread failure of the original parties to the deal to take the steps stipulated in their own agreements needed to convey the notes (the borrower’s promissory note) to the securitization legal vehicle, a trust. Although we’ve touched on the problems posed by MERS, if you’ve screwed up on conveying the note in a RMBS, you are very badly stuck. MERS related problems are rounding error. But that isn’t to minimize the problems MERS has created separately, particularly with the integrity of local records, and the way MERS has been abused in court proceedings. Specifically, and bizarrely, foreclosures are often made in the name of MERS. In 45 states, the note is the critical document, and the lien, which is what is registered at MERS, has no independent status. It is the noteholder that has to foreclose, not a mere computer registry for the mortgage. Increasingly, state courts are taking a very dim view of MERS foreclosures.
Housing Wire points out that MERS has also been a party foreclosing in some commercial real estate transactions, again presumably in securitized deals. However, HW assures readers this won’t be a big problem, since relatively few commercial deals actually wind up in foreclosure (I assume because most have cash flow, and perhaps due to differences in servicer fee structures, that most commercial RE loans gone sour are restructured).
From Housing Wire:
Possible foreclosure issues with loans processed through the Mortgage Electronic Recording System, or MERS, may be spreading to commercial real estate, but the effect on securitizations could be minimal, according to Barclays Capital analysts…
According to BarCap, these lawsuits are spreading outside the residential space, challenging foreclosures on loans backing commercial mortgage-backed securities.
But analysts believe there are legal remedies available to limit any negative effect for investors.
“As such, there could be a scenario where MERS originated loans could see a possible extension in liquidation timelines by a few months, but this should not affect CMBS valuations on a fundamental level,” according to BarCap.
Foreclosures still remain low on CMBS loans, standing at about 2.2% of outstanding balance through September, according to analysts.