Hager and Hearne, a Reno-based law firm, is taking nearly a dozen of the nation's largest banks and mortgage lenders to district court in California and Nevada, citing violations of the states' false-claims acts.
The legal offensive is part of the growing national furor over improper foreclosure documentation involving MERS, or Mortgage Electronic Registration Systems, a mortgage-record service company formed in 1997 that tracks more than 65 million mortgages.
MERS has filed thousands of foreclosure actions around the country on behalf of lenders, but its legal authority to do so is under challenge. Several courts around the country have ruled the company had no legal right to file the actions, since loan-servicing companies working with it regularly cannot produce the original note proving ownership of the properties in question.
Instead, some servicers have offered mass-produced affidavits fraudulently asserting that they owned the note or that their employees are actually officers of various large banking chains. The mass production of these bogus affidavits — sometimes by computer automation — is frequently referred to as "robo-signing."
But attorneys are recognizing that court findings of such fraud offer new and potentially quite powerful leverage to homeowners facing possible foreclosure. Lenders may judge it more prudent to come to new arrangements with homeowners rather than risk long foreclosure fights, at the end of which they may find they have no legal standing to foreclose.
"Cases like this have a better likelihood of success than typical foreclosure cases," said Robert Hager, a principal of the Hager & Hearne firm. "There are 50 to 100 institutions involved with MERS but rather than name every one we're starting out with the key groups."
Hager and the plaintiffs — like the states of California and Nevada — argue that MERS disobeyed state laws by not paying county recording fees and thus lacks legal authority to sign off on foreclosures.
"It's obvious they [the employees of MERS-affiliated firms] don't look at any documents if they're signing 5,000 or so a day," Hager said. "The weak link is people signing documents one after another."
Hager and Hearne began filing false-claims, or qui tam, actions on behalf of relaters in July 2009, but state attorneys general have just recently shown interest in the robo-signing controversy.
According to the Nevada attorney general's office, private parties can bring action if they believe the state has been defrauded. While the suit by Hager and Hearne's clients involves the legality of the companies' foreclosure authority and the signing process, their suit is independent of the State of Nevada.
"The issue is that if the robo-signers looked at the files, they would learn that they have no authority to sign the documents [and] that the companies on whose behalf they are signing documents to foreclose have no authority to foreclose," Hager said.
Some of the institutions listed as defendants with MERS include Bank of America, Wells Fargo, JP Morgan Chase and GMAC. However, two of the biggest institutions involved with MERS are government-sponsored entities Freddie Mac and Fannie Mae, who helped create MERS. According to Hager, due to the large number of institutions involved, Fannie and Freddie were not listed in the suit.
"In California specifically, Fannie Mae is a common denominator is this issue," Hager said. "They are the largest single violation in false recording."
In Nevada specifically, the Nevada False Claims Act (Nevada Rev. Statute 357.040) states that a person convicted of making false claims may face a $5,000-$10,000 fine for each false statement and may be ordered to pay up to three times the unpaid amount of damages. According to Hager, if convicted, MERS could face penalties upwards of $2.4 billion.
Major national institutions are not the only ones affected by MERS. According to MERS's website, three Nevada institutions — Nevada Federal Credit Union, Nevada Mortgage Inc. and Nevada State bank — are MERS members.
According to Molly Middaugh of Nevada Federal Credit Union, the local institutions are not part of the suit.
"At this point, it depends on the legal process," said Middaugh. "We'll wait until the proceedings play out to see how it [the challenge to MERS] affects the market."
Hager acknowledged the challenges of taking such large institutions to court, considering the expensive legal teams the companies will presumably hire. According to the National Mortgage Professional Magazine, since 2008 MERS has spent over $1 million on lobbying efforts.
Despite the defendants' clout, Hager is confident in his clients' suit.
"Absolutely we can hold our own," Hager said. "Our attack angle is different from other foreclosure cases and that may give us a better chance."
According to Hager, 17 states have laws sufficiently similar to those of Nevada and California to make challenges to MERS viable in those states also. Currently, Hager and his team are in the process of motioning to amend their complaint in the California case. Their Nevada hearing is scheduled for Jan. 28 at the U.S. District Court in Reno.
For more information on the Nevada and nationwide housing crises, please see NPRI's previous report, titled "Money Pit."