Foreclosure Abatement?

Much of the news generated during this deep recession has to do with mortgage foreclosures.  We’ve all seen report after report of the high numbers of foreclosures and the toll that they take on families forced to abandon their homes.  Some economic forecasters feel that we may be in for another big wave of foreclosures within the next six to twelve months.

A report by attorney Ellen Brown says that there may be legal relief coming for millions of people facing foreclosure.  She writes about a recent decision of the Kansas Supreme Court that ruled that foreclosures initiated by Mortgage Electronic Registration Systems (MERS) are not valid.   MERS is a nominee company that registers mortgages electronically and then keeps track of changes of ownership.  Brown’s article explains that if the original mortgage was registered through MERS and then sold, the court held that there is no party with legal standing to foreclose.  Reportedly there are 60 million mortgages registered through MERS.

What this means at this point is hard to determine.  A ruling by the Supreme Court of Kansas applies only in the state of Kansas.  Courts in other states can take note of the decision, but may choose not to apply it if they feel that the laws of their own state differ in material ways (or if they disagree with the legal reasoning used by the Kansas court).  Brown states that the legal reasoning is sound, but I have found no other corroboration of that as yet.

If this decision contains legal principles that are indeed applicable in other states, then we can likely expect a flurry of lawsuits being filed.  If some of those cases result in decisions agreeing with the Kansas case, confusion would soon reign in the mortgage world.  Those who had been buying mortgages, often in bundled and collateralized forms, likely would stop doing so if they could not effect a foreclosure in the event of non-payment.  Lenders who routinely sell their mortgages would find that the market had evaporated.  Lawmakers likely would be tying themselves in knots trying to decide between a frozen credit system (again) and putting even more people out of their homes (again).  Not a pretty picture.

The major caveat at this point is that so far it is one case that affects only one state thus far.  It remains to be seen where, if anywhere, it goes from here.  Stay tuned.