Recent Michigan Court Ruling Slamming MERS Means More Headaches For Banksters Defending Securitization Process

The Wall Street Journal reports on the recent slamming of MERS by an Ann Arbor, Michigan trial judge in ruling on a recent paperwork screw-up that will be the source of great headaches to banksters defending the flawed securitization process by which they transferred mortgage loans to investors:

• Last week, we wrote about how borrowers and courts have uncovered potential defects that could make it harder for banks to foreclose on certain homeowners whose loans were bundled together and sold as securities.
• On Monday, a Michigan judge overturned a foreclosure after concluding that the foreclosing entity couldn’t have owned the mortgage after it failed to comply with certain mortgage securitization rules.

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• The decision is a possible setback for the securitization industry, which has argued that its transfers of mortgage loans are valid under the Uniform Commercial Code, which governs commerce across the nation. The Michigan court ruled that the specific securitization agreements didn’t comply with New York trust law, which superseded the UCC because it governs most so-called pooling and servicing agreements. (For more, see this write-up by Naked Capitalism.)

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• Potentially more troubling is the fact that investors in the mortgage bond deal didn’t actually own the loan that it believed it did. Securitizations are governed by very specific rules to ensure that they wouldn’t run afoul of special IRS rules designed to make mortgage-backed securities investments tax exempt. The case follows a similar decision by an Alabama trial court judge in March.

For more, see In Michigan Case, Securities Trip Up Foreclosure.

In a related story, see Naked Capitalism: Michigan Court Relies on New York Trust Theory, Rules Loan Never Made it to Trust.

For the Michigan court ruling, see Hendricks v. U.S. Bank Nat'l Association, Case N. 10-849 CH (Washtenaw Cty. Trial Ct., June 6, 2011).