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Suit challenges 600,000 MERS loans

Until recently, attorney Greg Leyh had never handled a foreclosure case. Now he may be taking on hundreds of thousands of them.

Leyh, an attorney in Gladstone, has filed a potential class action lawsuit against Mortgage Electronic Registration Systems, or MERS, a private company involved in millions of mortgage loans throughout the country. If successful, the lawsuit could save its named plaintiffs from foreclosure, but it could also have far-reaching consequences.

“It has the modest objective of invalidating 600,000 mortgages in Missouri,” Leyh said.

MERS, based in Reston, Va., was created by the mortgage banking industry to make it easier for lenders to transfer mortgages. The company is listed in place of the actual bank or company that owns the loan, which allows the loan to be sold over and over without having to record each the new assignment.

The suit argues that the banks from which the plaintiffs originally got their loans never gave written permission for MERS to assign the deeds of trust to the banks that later bought those loans. According to the suit, that violates Missouri’s Statute of Frauds, R.S.Mo. 432.010, which says such agreements “shall be in writing.”

As a result, the suit argues, the assignments MERS made “are null and void and transfer no interest in the Deeds of Trust … executed by plaintiffs, as MERS had no interest in the Notes.”

In an emailed response, MERS spokeswoman Karmela Lejarde said the company wouldn’t comment on pending litigation.

The suit was filed March 18 in federal court in Kansas City and names Joseph and DeAnna Zahnter, a Clay County couple fighting to keep their home from going into foreclosure. Missouri Lawyers Weekly’s sister publication, The Daily Record in Kansas City, in December profiled Leyh’s efforts on their behalf. Leyh’s practice hadn’t included foreclosure matters until last year, when he began representing several families who claim they faced wrongful foreclosures.

In ongoing litigation in Clay County Circuit Court, the Zahnters said their lender instructed them to not make house payments during a loan modification process. They won an injunction that has kept them in their home for now.

The Zahnter’s lender is not a defendant in the federal suit, nor is MERS named in the state court action.

Last week, Leyh added another Clay County resident, Matthew Sullivan, to the federal suit. Leyh said Sullivan’s home was scheduled for foreclosure last week.

MERS is the recorded mortgagee on approximately 600,000 loans in Missouri. The company says it has registered about half the residential mortgage loans in the United States.

MERS has faced criticism and scrutiny during the current foreclosure crisis, and some states have started to investigate the system. Last month in Massachusetts, for instance, a Southern Essex County recorder of deeds charged that MERS’s electronic assignments of deeds had cost the state $200 million in recording fees. MERS has denied that its actions cost the state.

The issue of MERS’s legality has been raised in courts throughout the country, with mixed results. Missouri’s federal courts have so far been favorable to MERS.

Leyh, however, pointed to a recent ruling from the U.S. Bankruptcy Court for the Eastern District of New York, which he said involved arguments not previously made in the Missouri cases. That ruling, In re: Agard, held that just because MERS was listed on the loan documents didn’t give it authority to assign a mortgage without written directions.

“There’s an anti-MERS trend emerging in the caselaw,” Leyh said.

Although its spokeswoman declined to elaborate, MERS apparently disagrees with that assessment. In press releases on its website, MERS points to rulings this year in nine states where it has won court rulings that “confirm the legality of MERS’s role in the mortgage,” the company said.

In one release, MERS specifically disagreed with the Agard ruling, saying it conflicted with previous New York state court rulings.

The case, Zahnter et al. v. Mortgage Electronic Registration Systems Inc., 4:11-cv-285, is pending before U.S. District Judge Gary Fenner.