“When we go knock down a house, (the owners) usually don’t really care and so what we are ending up doing is having to go back four times a year to cut the grass.” WILLIAM DANIEL, chief administrative officer to Mayor-President Kip Holden
A majority of Louisiana’s district court clerks want a federal judge in Baton Rouge to help them end banking practices they allege have cost them more than $450 million in fees on real estate transactions.
The number of Louisiana state district clerks alleging a racketeering conspiracy by large banks and mortgage companies has jumped from 29 when the lawsuit was filed in April to 47 now. And the big-dollar dispute expanded Monday, when lawyers who represent the clerks filed a similar suit in Texas on behalf of 11 counties.
The clerks in both states allege a racketeering conspiracy by lenders who are members of sister firms Mortgage Electronic Registration Systems Inc., or MERS, and MERSCORP Inc.
Richard D. Faulkner, one of the clerks’ attorneys in Richardson, Texas, and Ted B. Lyon, a clerks’ attorney in Mesquite, Texas, said in April that fees lost since 2000 in East Baton Rouge Parish could total as much as $40 million. Faulkner, who formerly practiced in Jefferson and Orleans parishes, and Lyon also said nationwide losses could total billions of dollars.
The big banks are fighting back, though, and they won dismissal of a similar case in Arkansas last month.
Bank representatives aren’t discussing the growing dispute, but some of the clerks are expressing concerns about transactions that do not appear in public records.
Jon A. Gegenheimer, clerk of the 24th Judicial District Court in Jefferson Parish, said Tuesday that lenders who participate in MERS and MERSCORP pose a two-pronged problem: The lenders engage in repeated real estate transactions for which they pay no fees to Louisiana clerks, whose offices are funded entirely by such fees. And repeated transactions on the same properties are hidden from public view.
“If someone is doing a title search (on a residence, for example) … he won’t know who the latest property holder of record is,” Gegenheimer explained. “The public doesn’t really know what goes on there.”
Added Gegenheimer: “It costs the clerks a lot of money. The district clerks depend on that money as part of their revenue stream. In Louisiana, the clerks aren’t funded by taxes.”
In the Baton Rouge case, the clerks estimate that each property funneled into the databases for MERS and MERSCORP is transferred 10 to 12 times without the knowledge of the general public. Paperwork is filed with a district clerk only on the first transaction, according to the clerks’s suit.
That leaves potential property buyers, who borrow from non-MERS lenders, in the dark, Gegenheimer said.
“You don’t know who you’re dealing with,” Gegenheimer added. “That could cause some problems for future buyers.”
Gegenheimer said buyers not borrowing from MERS lenders could end up paying higher closing costs because of extra work needed to obtain an accurate trail of property ownership.
MERS and MERSCORP are “a way for mortgage companies to save money on recordation costs,” Gegenheimer said. “This is not peculiar to Louisiana. It’s a problem in other states across the country.”
Doug Welborn, clerk for the 19th Judicial District in Baton Rouge, and Dale Atkins, civil district clerk in Orleans Parish, did not respond to requests for comment. Greg Brown, a spokesman for Welborn, said the clerk was tending to a family member with a serious illness.
All the non-public property transactions, as outlined by Gegenheimer, violate state law, the clerks allege in their suit.
“Under established Louisiana law, the transfer of the note includes the transfer of the mortgage,” the clerks told U.S. District Judge James J. Brady in August. They added: “The MERS scheme is merely an artifice to defraud, used to avoid payment of recording fees.”
Many of the lenders package groups of mortgages into blocks of securities for sale to investors, the clerks said.
Those investors are told falsely that “the MERS system replaces the parish recording system” and “protects an investor’s interest as soundly,” the clerks alleged.
“MERS represents that at least 60 million mortgages are recorded on its system, which accounts for approximately 60 percent of all mortgages in the country,” the clerks said in their suit. “Participants in the MERS enterprise include national banks that have been identified by the federal government as ‘too big to fail’ because they are so critical to the national economy.”
The clerks said they and “homeowners, the general public and the courts do not have access to the vast majority of information maintained on the MERS system, including records reflecting the sale of mortgage loans from one financial institution to another.
“Thus, as a result of the creation of MERS, one can no longer look to the public recording system as a reliable source for identifying the proper payment of the obligation, tracking the chain of title for a loan or for identifying the current beneficial owner of the mortgage,” the clerks told the judge.
The 14 lenders targeted by clerks in their Baton Rouge suit include The Bank of New York Mellon, Bank of America, Citimortgage Inc., HSBC Finance Corporation, Merrill Lynch Credit Corporation and Nationwide Advantage Mortgage Co.
The other defendants in the civil suit include Suntrust Mortgage Inc., United Guaranty Corporation, Wells Fargo Bank N.A., Deutsche Bank A.G., U.S. Bank, J.P. Morgan Chase Bank N.A., HSBC Bank USA N.A. and La Salle Bank N.A.
GMAC Residential Funding Corp. was dropped from the suit after it declared bankruptcy.
By mutual agreement of the opposing sides in the dispute, Chase Home Mortgage Corporation of the Southeast and Washington Mutual Bank were dismissed from the litigation.
Most of the lenders did not respond to requests for comment on the litigation.
Liz Urquhart, spokeswoman for United Guaranty Corporation, responded, but said: “We are declining to comment on this litigation.”
Through a Houston representative, J.P. Morgan Chase Bank also declined to comment.
All of the lenders are asking Brady to dismiss the clerks’ suit without a trial.
“Under Louisiana statutes and case law, court clerks have ‘ministerial’ duties only,” lender attorneys Kent A. Lambert, of New Orleans, and Anthony Rollo, of Baton Rouge, wrote Brady in September. “They lack power to bring litigation except as explicitly authorized, and no such authorization was granted to clerks to sue about allegedly non-recorded assignments.”
Lambert is the first-listed attorney for both CitiMortgage and Wells Fargo Bank. and Rollo is the first-listed attorney for Bank of New York Mellon, Bank of America, Merrill Lynch Credit Corporation and La Salle Bank.
Attorneys for the other lenders also signed the motion for dismissal of the clerks’ suit.
“Because state law did not require (the lenders) to record mortgage assignments, (the clerks) were not deprived of any opportunity to record them or receive the associated recording fees,” the banks and mortgage companies told Brady.
The lenders’ attorneys also argued that MERS was created by participating lenders in 1993 “to track transfers of interests in loan ownership and servicing rights, solely for its members, thereby lowering their transaction costs when loans are bought and sold.”
In addition, Rollo and Lambert told Brady, “Louisiana recording law is permissive, and does not mandate recording of mortgage assignments, and thus no fraudulent conduct is alleged.”
Added the lenders’ attorneys: “Dismissal is therefore required.”
As of Friday, no court hearing had been scheduled on the banks’ motion to dismiss the clerks’ complaint. In some cases, judges decide such motions without holding a hearing.
Mayme Brown, circuit clerk for Hot Spring County, Ark., filed suit against 16 mortgage lenders in August 2011. Brown alleged those lenders — including some of those now sued by the Louisiana clerks — used MERS and MERSCORP to avoid payment of recording fees to her office.
Brown noted that “MERS claims to have ‘saved’ at least $2.4 billion dollars in recording costs by not filing or recording documents that reflect the transfer of an interest in real estate on loans that have a MERS deed of trust or security instrument.”
She argued that her office and those of other clerks in Arkansas were owed some of those unpaid fees.
In addition to the loss of those fees, Brown alleged people who are not paid for work done on properties hidden in the MERS system may find themselves without a means to collect what they are owed.
Such people “without access to MERS cannot assert claims such as labor liens,” Brown argued.
Fannie Mae and Freddie Mac, huge guarantors of home mortgage loans, “have expressed concern to MERS regarding the protection of their security interests,” Brown added.
Fannie Mae was particularly concerned that homeowner associations, lacking knowledge of current ownership of properties within their districts, might foreclose “for unpaid membership dues … and acquire property … resulting in a significant windfall to these associations,” Brown alleged.
Attorneys for the mortgage lenders attacked Brown’s contentions, arguing that her case should be dismissed because Arkansas law does not authorize her to sue them. They also argued that Arkansas law does not require them “to record assignments of mortgages.”
“Arkansas law is clear that the owner of a note need not be the party listed on the mortgage, and that a note holder can list a nominee such as MERS to serve in that capacity,” the lender attorneys argued.
U.S. District Judge Susan O. Hickey, of Hot Springs , agreed with the banks’ attorneys and dismissed Brown’s suit last month.
Brown cited “no case or authority showing that Arkansas requires recording, and the court knows of none,” Hickey wrote on Sept. 17. “In fact, existing law is to the contrary. If a mortgagee wishes to gain the protection of the recording statute, he must pay the recording fee. If he wishes, on the other hand, to go unrecorded, he may do so; it may be unwise, but it is not against the law.”
On Monday, Brown filed a request for reversal of Hickey’s decision with the 8th U.S. Circuit Court of Appeals.