If you are a homeowner, chances are that the current owner of your mortgage is an entity known as MERS (Mortgage Electronic Recording System). This is true even though you are making your payments to one of the major banks or a dedicated mortgage servicing company. Nobody borrows from MERS in the first instance but somewhere in the chain of title the likelihood is that MERS became (and continues to be) the owner despite a series of transfers to banks, trusts, and investment vehicles. In legal parlance, MERS will be identified in your mortgage documents as the "mortgagee of record," and will also be identified as the "nominee," or agent for the purpose of making future transfers to other entities. 

What Is MERS and How Does It Work?

Like a lot of what has transpired in the mortgage industry, it's hard to get a handle on how MERS works and what exactly is wrong with it. Fortunately, very-readable testimony offered by Professor Christopher Peterson before the House Judiciary Committee casts much light on the subject and is available for your reading pleasure.    

MERS is essentially a large electronic database of mortgages and mortgage transactions. It was invented in the mid 1990s as a legal device to replace the county land title recording system. It is MERS that made the real estate boom feasible by (supposedly) allowing electronic transfers of mortgage ownership among bank and investors in a variety of forms known as real estate trusts, securitized mortgage bonds, and other miscellaneous financial derivatives -- all backed by packages of mortgages consisting of various risk levels.

The lion's share of the financial entities dealing with mortgages were and are members of MERS, and under the MERS rules are also agents which are authorized to effect transfers to other members. These transfers have seldom been recorded in county land records offices -- since ownership never (supposedly) changed but rather remained with MERS. Thus, not only does MERS facilitate transfers of real estate interests, it saves the real estate and banking industries millions if not billions of dollars in recording fees by eliminating all those recording transactions that would otherwise have to be made, at an average pop of $35 per transaction. Avoiding these fees was a major reason that MERS was created in the first place.

Problems Created by the MERS System

The most profound problem that the courts and commentators have with MERS is that it purports to replace the way in which land transaction records have been created and stored since the beginning of the country -- all without  the benefit of authorizing legislation. Under the traditional (and legally authorized) method of keeping track of who owns what, any person is free to walk into a land records office and search the entire historical record of who bought and sold any particular piece of property. This is what is known as a "title search." Under the MERS system, however, no such search is possible. MERS Members are not required to report transfers to the database and so there is no real way to be sure about who owns what.

One Court Says: MERS Doesn't Deliver Clear Title

In In re Agard, a bankruptcy judge analyzed MERS for the purpose of deciding whether a bank seeking foreclosure could prove that it owned the promissory note accompanying the mortgage -- a prerequisite in bankruptcy court when asking the court for permission to proceed with the foreclosure. Previously, MERS had attempted to assign the mortgage and promissory note to the foreclosing bank and the question was whether it successfully did so. 

Although for procedural reasons the Court allowed the bank to proceed with the foreclosure, the Court went on to analyze the role of MERS in the chain of title for the debtors' home. It concluded that MERS, as currently structured, did not deliver clear title to the foreclosing bank. Although the court's analysis does not, strictly speaking, count as precedent because it wasn't necessary to the court's ultimate decision (that is, it was dicta only), it should still prove persuasive with other courts dealing with cases involving MERS ownership.  

MERS Announces Some Changes

Because of the various problems it faces in the Courts, MERS has recently announced that it is changing one of its membership rules (Rule 8) to require that members no longer foreclose in MERS name. MERS has also told its members that assignments out of MERS's name should be recorded in the county land records even if the state law doesn't require it. In short, MERS is on the defensive. These are welcome changes for the future, but the degree to which MERS past practices have placed clouds on current real estate titles remains to be seen. 

The most common question I get these days is whether filing Chapter 7 or Chapter 13 bankruptcy will stop a foreclosure.

Chapter 7 Bankruptcy and Foreclosure

The simple answer is, Chapter 7 bankruptcy can keep you in your home for an additional two to three months, and that's about it. But, and it's a big "but," because you will be getting free shelter when you aren't paying your mortgage, a three month delay can be worth three times what you would be paying for a monthly rental, or a total of between $4,000 and $6,000 for the typical family.

To learn more about what happens to your home when you file for Chapter 7 bankruptcy, read Nolo's article Your Home in Chapter 7 Bankruptcy.

Chapter 13 Bankruptcy and Foreclosure

If you file a Chapter 13 bankruptcy and can propose a feasible repayment plan, you may be able to stave off the foreclosure for up to five years. Just how long will depend on your income and basic living expenses, and how far behind you are on your payments.

Even if can't propose a feasible plan, you may be able to put off the foreclosure for a much longer time than would be the case under Chapter 7. The rub is that you will probably need an attorney to achieve this result. But because you aren't paying your mortgage you can divert some of your "shelter money" to hiring an attorney, who will typically charge between three and four thousand dollars to handle a Chapter 13 bankruptcy. While this may seem like a lot, it likely will be only two or three months worth of mortgage payment and you'll likely come out ahead in terms of the total amount saved by staying in your home payment free.

To learn more about what happens to your home in Chapter 13 bankruptcy, read Nolo's article Your Home in Chapter 13 Bankruptcy.

Chapter 13 bankruptcy can have other advantages over Chapter 7. Bankruptcy attorneys are starting to successfully use Chapter 13 procedures to challenge the very validity of the mortgage, which means you may have a shot either at never having to pay the mortgage or at least being able to negotiate lower principle and payment amounts. You also can use Chapter 13 to get rid of second mortgage liens when your home's value is not enough to provide security for the amount owed on the second mortgage (called mortgage lien strip-offs).

To learn more about the interplay between bankruptcy and foreclosure, read Nolo's article How Bankruptcy Can Help With Foreclosure.

Two recent lawsuits, in Washington and California, use "promissory estoppel" (a legal theory in contract cases) to get monetary damages from banks that broke their promises to homeowners facing foreclosure. 

The Washington Case: Promissory Estoppel as a Cause of Action

Abuses by mortgage banks and servicers committed while dealing with homeowners seeking foreclosure relief or mortgage modifications have been well documented. They are especially and eloquently detailed in a class action lawsuit filed on January 10, 2011 in the State of Washington. Reading the Introduction to the complaint (if not the whole document) will be well worth your while. 

Among the claims contained in the class action complaint is a type of breach of contract known as promissory estoppel. Promissory estoppel may seem like an impossible-to-understand example of legal jargon but i'ts actually relatively simple. It means that a party making a promise is prevented (estopped) from reneging on the promise. You can sue for promissory estoppel if 1) someone makes you a promise that is clear and unambiguous, 2) your reliance on the promise is reasonable and foreseeable, and 3) you suffered damages as a result of your reliance. 

You can't hold someone to a naked promise just by itself. In other words forget about suing your parents who failed to deliver on their promise to send you to Harvard. But if you go through all the motions of enrolling, signing a lease for your housing, and buying textbooks, and your parents had good reason to believe that you would act on their promise, you may have a winning case to recover, at the very least, your out-of-pocket expenses, and possibly even for other liabilities you incurred. 

In the class action complaint the promissory estoppel claim deals with a common practice in the mortgage industry. There the bank promised the named plaintiff a permanent mortgage modification if she completed a trial period during which the modified payments were to be paid to the bank. The plaintiff did, in fact, complete the trial period but the bank refused to give her the modification as promised. Here, the requirements for promissory estoppel were clearly met. The bank promised a permanent modification in exchange for three (or more) trial payments. The homeowner reasonably and foreseeably relied on the promise and made the payments. The bank reneged on the promise, and the homeowner suffered damages in that the trial payments would not have been made absent the promise.

You might wonder why this isn't a common-variety breach of contract case. For a contract to be enforceable both sides have to receive something of value (called consideration) in exchange for their agreement to perform the terms of the contract. Also, there has to be an offer and an acceptance. In the situation where the bank makes a promise to modify, it's arguable that only the homeowner is receiving consideration and so a valid contract has not been made. But the law, through the doctrine of promissory estoppel, eliminates the need for mutual consideration and will, under the appropriate circumstances, enforce the promise or award damages if it is not carried out.

Promissory Estoppel in a Recent California Foreclosure Case

The doctrine of promissory estoppel was recently applied to a mortgage workout situation in a California appellate court case titled Claudio Aceves v U.S. Bank (Court of Appeal, Second Appellate District, Div One (1/27/11)). Here Ms. Aceves fell behind on her mortgage and filed for Chapter 7 bankruptcy after the bank served a Notice of Default, a required step in the California foreclosure process. She decided to convert the case to chapter 13 bankruptcy and raise the necessary money to reinstate the loan and pay off the arrearage over the course of the chapter 13 plan. The bank told her they would work with her and that she needn't pursue her Chapter 13 remedy. Relying on this representation, Ms Aceves did not file Chapter 13 and also did not object when the bank filed a motion in her Chapter 7 case to lift the automatic stay (which legally enabled the bank to continue with its foreclosure remedy).

In fact the bank failed to enter into good faith negotiations and instead completed the foreclosure. Ms. Aceves sued the bank alleging a cause of action for promissory estoppel, among others. She argued that 1) the bank's promise to work with her in reinstating and modifying the loan was clear and unambiguous, 2) the bank in fact failed to negotiate the modification, 3) she relied on the bank's promise by forgoing bankruptcy protection under chapter 13 and failing to oppose the motion to lift the stay, 4) her reliance was reasonable and foreseeable, and 5) she suffered damages in the form of losing her house. 

The lower court dismissed the action but the court of appeals ruled that in fact Ms. Aceves had stated a claim for promissory estoppel and should be allowed to proceed with her lawsuit in the trial court. In making its ruling the court specifically found that "U.S. Bank never intended to work with Aceves to reinstate and modify the loan. The bank so promised only to convince Aceves to forgo further bankruptcy proceedings, thereby permitting the bank to lift the automatic stay and foreclose on the property."

As long as this case remains published (and isn't ordered de-published by the California Supreme Court) it provides great precedent if you decide to sue your mortgage lender or servicer for breaking its promises. If you can't find an affordable lawyer, you might consider doing your own state court lawsuit with the help of Nolo resources such as Represent Yourself in Court, by Paul Bergman and Sara Berman-Barrett, and Everybody's Guide to Small Claims Court, by Ralph Warner.

While you may be invited to join a class action, those types of cases usually are much more  beneficial to the lawyers bringing them than they are to the plaintiffs. If possible, you should consider going your own way. However, sometimes a class action is the only way to find a lawyer without parting with an arm or a leg and if that is your situation, and self-help is not an option, by all means sign up as a class action plaintiff. . 

Recently, homeowners are having more success in preventing mortgage lenders from continuing with a foreclosure (by lifting the "automatic stay") after the homeowner has filed for bankruptcy.

Bankruptcy's Automatic Stay

When you file bankruptcy your creditors must stop all activities related to collecting a debt, with a few exceptions (usually involving child support and taxes). The prohibition against collection activities is part of what's called the automatic stay, meaning that collection activity is stayed while your bankruptcy case is pending, and that this stay occurs automatically upon your filing. In some situations creditors can file a document known as a "motion to lift the automatic stay" which requests the bankruptcy court to give them permission to proceed with the desired activity listed in the motion.

The most common reasons for requesting that the court lift the stay are:

• when a landlord is attempting to evict a tenant
• when a mortgage lender is attempting to proceed with foreclosure activities, and
• when a lender on a car note is seeking to repossess the car because of non-payment.

As a general rule the bankruptcy court will lift the stay as to a particular creditor when the bankruptcy filer (the debtor) has no equity in the property (for instance when premises are being rented) or when the creditor will suffer economic harm regarding the property at issue if the stay is not lifted (as in the case of a foreclosure or car repossession).

Change in How Courts Treat Motions to Lift the Stay in Foreclosures

Until recently, courts routinely granted motions to lift the automatic stay and there wasn't any reason for the bankruptcy debtor to show up at the scheduled hearing. However, in the last year or so, bankruptcy attorneys are having some degree of success in fighting motions brought by mortgage lenders on the ground that the lender can't establish who owns the mortgage and therefore has no legal right to ask the bankruptcy court for relief (this is called "lack of standing."). The main reason why ownership can't be established is that during the housing boom many mortgages were transformed into securities that could be sold on the bond market and then sold and resold so many times that proof of ownership became lost or unavailable.

What Happens if the Motion is Denied?

In a Chapter 7 bankruptcy, success in fighting a motion to lift the stay would typically mean a one or two month extra delay in implementing foreclosure proceedings (which without the stay being lifted couldn't proceed until you received your discharge). In a Chapter 13 bankruptcy, however, successfully fighting a motion to lift the stay might mean that the mortgage may not be enforceable at all--although the more common outcome is for the lender and homeowner to settle the dispute on terms greatly favorable to the homeowner. 

Other Ways to Raise Ownership Issues and Fight the Foreclosure

The ownership issues that can be raised in a hearing on the motion to lift the stay can also be raised in state court after you receive your Chapter 7 discharge. That is, if you are in a state where the foreclosures go through state court, you can use the failure to prove ownership as a defense that may stall your foreclosure indefinitely--or produce a favorable settlement. And if you live in a state where foreclosures occur outside of court (as in California and about half of the other states), you can file an action in the state court challenging the foreclosure on the same grounds, and with the same outcome. (To learn more about challenging foreclosure in state court, see Nolo's article False Affidavits in Foreclosure: What the Robo-Signing Mess Means for Homeowners.)

Because bankruptcy is a federal court, and because federal courts often have different "standing" rules than state courts, you may not have as much success in the state court as would be true in federal court.

Get Help From a Lawyer

Obviously this can all get pretty complex in a hurry and you would be well advised to shop for a lawyer who knows this stuff inside and out. But beware paying a lawyer (or anyone else) very much money up front to fight your foreclosure in state court. At the very least, negotiate a fee agreement with the lawyer that will give you a healthy refund if the case is not successful. And make sure the lawyer you choose knows the likelihood of your case being successful, however success is defined.