Here’s a good angle on the mortgage mess.

The New York Times reports on an entity I haven’t read much about: A firm called MERS that holds 60 million mortgages in the U.S. and is causing all sorts of problems in the foreclosure crisis. It’s a sort of electronic clearinghouse for mortgages held by banks and investors, one that enables them to get around tons of paperwork and enables the atomization of mortgages by the securitization industry.

In effect, MERS is a front created by the mortgage industry to get around filing fees at the local level. This front also obscures who actually owns the mortgages.

If MERS began as a convenience, it has, in effect, become a corporate cloak: no matter how many times a mortgage is bundled, sliced up or resold, the public record often begins and ends with MERS. In the last few years, banks have initiated tens of thousands of foreclosures in the name of MERS — about 13,000 in the New York region alone since 2005 — confounding homeowners seeking relief directly from lenders and judges trying to help borrowers untangle loan ownership. What is more, the way MERS obscures loan ownership makes it difficult for communities to identify predatory lenders whose practices led to the high foreclosure rates that have blighted some neighborhoods.

I’m guessing this makes it extremely difficult for reporters to identify who those predatory lenders are, too. This is an anti-transparency entity.

The Times comes down pretty hard on MERS, which seem more than appropriate here.

In Brooklyn, an elderly homeowner pursuing fraud claims had to go to court to learn the identity of the bank holding his mortgage note, which was concealed in the MERS system. In distressed neighborhoods of Atlanta, where MERS appeared as the most frequent filer of foreclosures, advocates wanting to engage lenders “face a challenge even finding someone with whom to begin the conversation,” according to a reportby NeighborWorks America, a community development group…

“I’m convinced that part of the scheme here is to exhaust the resources of consumers and their advocates,” said Marie McDonnell, a mortgage analyst in Orleans, Mass., who is a consultant for lawyers suing lenders. “This system removes transparency over what’s happening to these mortgage obligations and sows confusion, which can only benefit the banks.”

See if this passes your smell test:

The potential for confusion is multiplied when the high-tech MERS system collides with the paper-driven foreclosure process. Banks using MERS to consummate mortgage trades with “electronic handshakes” must later prove their legal standing to foreclose. But without the chain of title that MERS removed from the public record, banks sometimes recreate paper assignments long after the fact or try to replace mortgage notes lost in the securitization process.

Banks also “deputize” their employees to act for MERS when they’re foreclosing on someone:

Last February, a State Supreme Court justice in Brooklyn, Arthur M. Schack, rejected a foreclosure based on a document in which a Bank of New York executive identified herself as a vice president of MERS. Calling her “a milliner’s delight by virtue of the number of hats she wears,” Judge Schack wondered if the banker was “engaged in a subterfuge.”

Isn’t this kind of stuff simply fraud?

Imagine a homeowner who lost his title ginning up a “replacement” for the court, or the homeowner’s friend identifying himself as the homeowner in court.

The Audit has long called for more investigation into the underbelly of the mortgage industry.This Times story is exactly the kind of reporting we need. And check out the excellent accompanying graphic, which shows how this arcane setup “works.”

I only wish the paper had given it front-page play.


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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.