Foreclosure Frenzy Dismays Aspiring Homeowners

• RECOMMEND
• TWITTER
• E-MAIL
• SEND TO PHONE
• PRINT
• REPRINTS
• SHARECLOSE

By GERRY SHIH

Published: December 12, 2009

It was early last year when Joby Morris, a 33-year-old floral designer in Pacifica, heard about the housing market’s crash. Soon she and her fiancé began dreaming of finally buying a home in the East Bay. But for 18 months, Ms. Morris watched helplessly as time and again, an investor with an all-cash offer and no intention of moving into the property swooped in and snapped up a house she was bidding on.

Enlarge This Image

Laura Morton for The New York Times

Michael Galloway, left, was among bidders on foreclosed homes during an auction at the Contra Costa County Courthouse.

This article is part of our expanded Bay Area coverage.

The Bay Area Blog features coverage of public affairs, commerce, culture and lifestyles in the region. We invite your comments atbayarea@nytimes.com.

Go to the Bay Area Blog »

Last year, she entered a bidding war for a home at 2208 41st Avenue in Oakland. It was listed at $149,000; she bid until the price topped $180,000, her real estate agent said. The winning bid was $265,000.

Last month, after the same thing happened a sixth time, Ms. Morris gave up.

“The idea of ownership was a falsehood,” said Ms. Morris, who was planning to finance the purchase with a loan guaranteed by the Federal Housing Administration. “It’s not going to happen.”

Ms. Morris and her fiancé, Justin Womack, with a combined income of more than $100,000, are among hundreds of qualified, aspiring homeowners in the Bay Area baffled and frustrated by the difficulties they face, local Realtors say. As Ms. Morris’s Oakland-based real estate agent, Charles Wright, said, “Everyday homeowner occupants are having a serious problem finding anything because there’s such a frenzy out there.”

“It’s happening in Oakland, the East Bay, Alameda County,” Mr. Wright added. At least four of his clients recently bid on homes, only to be outbid by investors.

There are, of course, winners as well as losers in the phenomenon. For existing homeowners, rising prices are not something to mourn. But it is frustrating for someone like Ms. Morris, who is qualified to buy most foreclosed homes at the offering prices.

The phenomenon is familiar to anyone who has watched a market swoon: vulture investing. Private investors have pooled cash and are buying foreclosed homes by the dozens in the Bay Area.

Despite the negative association with carrion-eating birds, some economists argue that opportunistic investing in depressed markets helps the economy by setting a floor price for devalued assets.

“What would it look like if you didn’t have these investors?” asked James A. Angel, a business professor at Georgetown University. “The banks would be stuck holding properties. The losses to the banking system would be so much more if you didn’t have vultures.”

Sometimes, Mr. Angel added, “investors are helping reduce losses in the banking sector, and that means less stress on the taxpayer to support it.”

In the process, Joby Morris and others like her are priced out of a market they otherwise could have afforded.

Barry Zigas, director of housing policy for Consumer Federation of America, said that as a consequence of the investment flurry, “we’ve seen over and over again a common outcome is investors acquire these properties, put minimal repairs in them and rent them out.”

“There’s been a longstanding history of advocacy to try to get there to be a priority to sell to owner occupants,” Mr. Zigas said, “but it’s a really tough policy to get enacted when financial institutions in our society are faced with trying to recover as much money as they can and move on.”

In Washington, lawmakers like Representative Barney Frank, Democrat of Massachusetts, are trying to give potential buyers more buying power by getting the Federal Housing Administration to guarantee larger loans with lower down payments in expensive markets like the Bay Area.

But a buyer with financing of any sort is still at a disadvantage when competing with an all-cash offer.

To the same end, Fannie Mae, the government-created agency that buys pools of home loans, announced three weeks ago that when it put a foreclosed property on the market, it would consider offers only from “owner occupants and buyers using public funds” for the first 15 days. Offers from investors will be considered only afterward.

Jon Freeman, the chief executive of Stonecrest Financial, an investment firm based in San Jose, would not want to wait. He keeps a laser focus on getting foreclosed properties into the company’s asset portfolio.

“There are huge opportunities out there for those who have cash and guts and foresight,” Mr. Freeman said.

Using the industry term for properties that banks acquire through foreclosures, he said, “Bulk R.E.O.’s — that’s the new buzzword right now.”

Last year, Mr. Freeman said, Bank of America sold him a package of 150 foreclosed homes scattered in low-income areas. He ticked off a few neighborhoods: “A lot in Richmond, Antioch, Oakland, some in San Jose.”

In the recorder-clerk’s office in Martinez, the Contra Costa County seat, Stonecrest Financial’s funds are listed as buyers alongside smaller investors, like Mancheno Enterprises of Orinda.

As of November, there were about 7,000 foreclosed properties of record — and an unknown additional amount in undisclosed bank inventories, according to Matthew Anderson, a partner at Foresight Analytics. Stonecrest Financial, with an estimated $25 million in real estate assets at any given time, is one of the country’s midsized players, which incessantly prod banks for new deals valued between $10 million and $20 million — be it a package of 50 homes in the East Bay or 500 scattered throughout the Rust Belt.

In markets like the Bay Area, the supply of foreclosed homes both for investors like Mr. Freeman and for ordinary buyers like Ms. Morris has been artificially suppressed by the banks that own them. In the months following the financial crisis, as federal bailout money relieved the urgent need for banks to liquidate their assets, lenders and government entities like Fannie Mae and the Federal Deposit Insurance Corporation curtailed sales to raise prices and avoid recording losses on the properties.

Kerry Vandell, director of the Center for Real Estate at the University of California, Irvine, Paul Merage School of Business, said these investors often turned the homes into rental units for short-term gains before looking to sell them at a handsome profit within three to five years. These proliferating operations, big and small, and a low supply of available homes — a counterintuitive consequence of the federal bailout of some banks — combine to put pressure on many first-time home buyers.

With homes falling into the portfolios of investors instead of the hands of potential occupants, Professor Vandell said, communities are subtly scarred.

“I get calls from concerned communities about this all the time,” he said. “You’re going to have speculators there who will tend to walk away from the property or milk the property and not put any investment capital into it.”

And, Professor Vandell added, “the communities are afraid they’ll rent to households of considerably lower income.”

Some investors, like Joshua Host, chief executive of Stone Equity Group, which is based in Southern California, argued that their work had “a social component.”

When he makes package deals, paying $2 million to $5 million for 50 to 300 homes, Mr. Host said, “it’s not just a matter of buying these packages of foreclosures without improving them — we’re not just playing a paper game.”

If buyers often unwittingly play the role of the demure ingénue in the market, their competitors thrive in a fast-talking world of high-stakes deal making and snap judgments made at local auctions in places like Martinez. The newer East Bay suburbs in Contra Costa and Solano Counties sustained extensive foreclosures. On Friday, despite rain, investors gathered on the steps of the county courthouse in Martinez at 10 a.m. to bid.

The tight supply has created a secondary industry of middlemen. Brokers interviewed last week said some of these promised access to property packages — whether or not they had such access.

You wouldn’t believe the number of guys running around telling me, ‘My cousin or my cousin’s cousin knows someone at the F.D.I.C.,’ ” said Leonard McKines of J.P.L. Investments, a group based in Fremont that is raising $100 million to buy bulk foreclosures. “This is the wild, wild West.”

Too wild for Ms. Morris and Mr. Womack.

“We’ve been renting for 13 years, and we’re getting married next month,” she said last week. “I’m from Connecticut, Justin’s from Texas. But this is where we want to make our home. The next logical step having been paying for so long would’ve been to own something. It’s not going to happen.“It’s all been a waste of time and a waste of money.”

Some Borrowers Facing Foreclosure Are Getting Their Loans Canceled

FAIR GAME
If Lenders Say ‘The Dog Ate Your Mortgage’

By GRETCHEN MORGENSON
Published: October 24, 2009
FOR decades, when troubled homeowners and banks battled over delinquent mortgages, it wasn’t a contest. Homes went into foreclosure, and lenders took control of the property.
On top of that, courts rubber-stamped the array of foreclosure charges that lenders heaped onto borrowers and took banks at their word when the lenders said they owned the mortgage notes underlying troubled properties.
In other words, with lenders in the driver’s seat, borrowers were run over, more often than not. Of course, errant borrowers hardly deserve sympathy from bankers or anyone else, and banks are well within their rights to try to protect their financial interests.
But if our current financial crisis has taught us anything, it is that many borrowers entered into mortgage agreements without a clear understanding of the debt they were incurring. And banks often lacked a clear understanding of whether all those borrowers could really repay their loans.
Even so, banks and borrowers still do battle over foreclosures on an unlevel playing field that exists in far too many courtrooms. But some judges are starting to scrutinize the rules-don’t-matter methods used by lenders and their lawyers in the recent foreclosure wave. On occasion, lenders are even getting slapped around a bit.
One surprising smackdown occurred on Oct. 9 in federal bankruptcy court in the Southern District of New York. Ruling that a lender, PHH Mortgage, hadn’t proved its claim to a delinquent borrower’s home in White Plains, Judge Robert D. Drain wiped out a $461,263 mortgage debt on the property. That’s right: the mortgage debt disappeared, via a court order.
So the ruling may put a new dynamic in play in the foreclosure mess: If the lender can’t come forward with proof of ownership, and judges don’t look kindly on that, then borrowers may have a stronger hand to play in court and, apparently, may even be able to stay in their homes mortgage-free.
The reason that notes have gone missing is the huge mass of mortgage securitizations that occurred during the housing boom. Securitizations allowed for large pools of bank loans to be bundled and sold to legions of investors, but some of the nuts and bolts of the mortgage game — notes, for example — were never adequately tracked or recorded during the boom. In some cases, that means nobody truly knows who owns what.
To be sure, many legal hurdles mean that the initial outcome of the White Plains case may not be repeated elsewhere. Nevertheless, the ruling — by a federal judge, no less — is bound to bring a smile to anyone who has been subjected to rough treatment by a lender. Methinks a few of those people still exist.
More important, the case is an alert to lenders that dubious proof-of-ownership tactics may no longer be accepted practice. They may even be viewed as a fraud on the court.
The United States Trustee, a division of the Justice Department charged with monitoring the nation’s bankruptcy courts, has also taken an interest in the White Plains case. Its representative has attended hearings in the matter, and it has registered with the court as an interested party.
THE case involves a borrower, who declined to be named, living in a home with her daughter and son-in-law. According to court documents, the borrower bought the house in 2001 with a mortgage from Wells Fargo; four and a half years later she refinanced with Mortgage World Bankers Inc.
She fell behind in her payments, and David B. Shaev, a consumer bankruptcy lawyer in Manhattan, filed a Chapter 13 bankruptcy plan on her behalf in late February in an effort to save her home from foreclosure.
A proof of claim to the debt was filed in March by PHH, a company based in Mount Laurel, N.J. The $461,263 that PHH said was owed included $33,545 in arrears.
Mr. Shaev said that when he filed the case, he had simply hoped to persuade PHH to modify his client’s loan. But after months of what he described as foot-dragging by PHH and its lawyers, he asked for proof of PHH’s standing in the case.
“If you want to take someone’s house away, you’d better make sure you have the right to do it,” Mr. Shaev said in an interview last week.
In answer, Mr. Shaev received a letter stating that PHH was the servicer of the loan but that the holder of the note was U.S. Bank, as trustee of a securitization pool. But U.S. Bank was not a party to the action.
Mr. Shaev then asked for proof that U.S. Bank was indeed the holder of the note. All that was provided, however, was an affidavit from Tracy Johnson, a vice president at PHH Mortgage, saying that PHH was the servicer and U.S. Bank the holder.
Among the filings supplied to support Ms. Johnson’s assertion was a copy of the assignment of the mortgage. But this, too, was signed by Ms. Johnson, only this time she was identified as an assistant vice president of MERS, the Mortgage Electronic Registration System. This bank-owned registry eliminates the need to record changes in property ownership in local land records.
Another problem was that the document showed the note was assigned on March 26, 2009, well after the bankruptcy had been filed.
Mr. Shaev’s questions about ownership also led to an admission by PHH that, along the way, it had levied an improper $450 foreclosure fee on the borrower and had overcharged interest by an unstated amount.
John DiCaro, a lawyer representing PHH at the hearing, was in the uncomfortable position of having to explain why there was no documentation of an assignment to U.S. Bank. He did not return a phone call seeking comment last week. Ms. Johnson, who couldn’t be reached for comment, did not attend the hearing.
According to a transcript of the Sept. 29 hearing, Mr. DiCaro said: “In the secondary market, there are many cases where assignment of mortgages, assignment of notes, don’t happen at the time they should. It was standard operating procedure for many years.”
Judge Drain rejected that argument, concluding that what had been presented to the court just did not add up. “I think that I have a more than 50 percent doubt that if the debtor paid this claim, it would be paying the wrong person,” he said. “That’s the problem. And that’s because the claimant has not shown an assignment of a mortgage.”
Mr. Shaev said he was shocked when the judge expunged the mortgage debt.
“We are in uncharted territory,” he said. “Right now I am in bankruptcy court with a house that has no discernible debt on it, yet I have a client with a signed mortgage. We cannot in theory just go out and sell this house because the title company won’t give a clear title on it.”
Among the next steps Mr. Shaev said he would take is to file an amended plan or sue to try to get clear title to the property.
Late last week, PHH appealed the judge’s ruling. But Mr. DiCaro and PHH are in something of a bind. Either they will return to court with a clear claim on the property — including all the transfers and sales that are necessary in the securitization process — or they won’t be able to produce that documentation. If they do produce it, they will then have to explain why they didn’t produce it before.
Oh, what a tangled web these mortgage lenders weave.
RecommendN

The Brutal Human Cost Of Foreclosures--People Living In Homeless Shelters

Foreclosures Force Ex-Homeowners to Turn to Shelters
David Maxwell for The New York Times
Sheri West operated a shelter for homeless people, but last year she lost her home in Cleveland and had to sleep in her car.

By PETER S. GOODMAN
Published: October 18, 2009
CLEVELAND — The first night after she surrendered her house to foreclosure, Sheri West endured the darkness in her Hyundai sedan. She parked in her old driveway, with her flower-print dresses and hats piled in boxes on the back seat, and three cherished houseplants on the floor. She used her backyard as a restroom.
Multimedia
Audio Slide Show
A Dream Foreclosed
Related
Times Topics: Foreclosures
Enlarge This Image
David Maxwell for The New York Times
Sheri West in the West Side Catholic Center. By December, she will exhaust its 90-day limit.
Readers' Comments
Share your thoughts.
Post a Comment »
Read All Comments (106) »
The second night, she stayed with a friend, and so it continued for more than a year: Ms. West — mother of three grown children, grandmother to six and great-grandmother to one — passed months on the couches of friends and relatives, and in the front seat of her car.
But this fall, she exhausted all options. She had once owned and overseen a group home for homeless people. Now, she succumbed to that status herself, checking in to a shelter.
“No one could have told me that in a million years: I’d wake up in a homeless shelter,” she said. “I had a house for homeless people. Now, I’m homeless.”
Growing numbers of Americans who have lost houses to foreclosure are landing in homeless shelters, according to social service groups and a recent report by a coalition of housing advocates.
Only three years ago, foreclosure was rarely a factor in how people became homeless. But among the homeless people that social service agencies have helped over the last year, an average of 10 percent lost homes to foreclosure, according to “Foreclosure to Homelessness 2009,” a survey produced by the National Coalition for the Homeless and six other advocacy groups.
In the Midwest, foreclosure played a role for 15 percent of newly homeless people, according to the survey, reflecting soaring rates of unemployment — Ohio’s reached 10.8 percent in August — and aggressive lending to people with damaged credit.
At a shelter for women and children run by the West Side Catholic Center in Cleveland, where Ms. West now lives, foreclosure accounted for zero arrivals in 2007, the center’s executive director, Gerald Skoch, said. Last year, two cases emerged. This year, the number has already reached four.
Similar increases have been reported at shelters in California, Michigan and Florida, where a combination of joblessness and the real estate bust have generated unusually severe rates of foreclosure.
Most people who become homeless because of foreclosure had been low-income renters whose landlords stopped making their mortgage payments, leaving them scrambling for new housing with little notice and scant savings, according to the survey and interviews with shelters.
But in recent months, there has been a visible increase in the number of former homeowners showing up in shelters. Like Ms. West, most have landed there after months trying to stave off that fate.
“These families never needed help before,” said Larry Haynes, executive director of Mercy House in Santa Ana, Calif. “They haven’t a clue about where to go, and they have all sorts of humiliation issues. They don’t even know what to say, what to ask for.”
Many start off camping out in cars, particularly in warmer places.
“We’ve seen a rise in people sleeping in their cars,” said Rick Cole, city manager in Ventura, Calif., which recently allowed car-camping in designated areas. “Some are foreclosed former homeowners, and some couldn’t afford their rent. People will give up their house before they give up their car.”
Those with means try to rent homes or apartments, though tainted credit often makes that impossible. Growing numbers are landing in motels that rent by the week, cramming whole families into single rooms and using hot plates as kitchens. But as unemployment expands, many are losing the wherewithal to remain.
Many take refuge with families and friends, occupying extra bedrooms, basements and attics. But such hospitality rarely lasts.
So, as lean times endure and paychecks disappear, homeless shelters are absorbing those who have run out of alternatives.
For Ms. West, whose youthful appearance belies her age, in her mid-50s, the nights spent on couches in other people’s homes were uncomfortably familiar. She grew up an only child in a housing project in Neptune, N.J., where her mother slept in the lone bedroom, and she occupied a pullout sofa in the living room.
“I’ve always had this dream of doing better,” she said. “I always wanted to own my own house.”
She realized that dream shortly after arriving in Cleveland with her husband and two children in the early 1990s. At first, they rented. But one fall afternoon, Ms. West found herself on a block lined with leafy trees in Mount Pleasant, a neighborhood east of the Cuyahoga River that was a magnet for middle-class black families like hers. Red brick homes with wooden porches sat on ample lots. Public schools were a few blocks away.
When she saw an ad in the Sunday paper offering a house on that very block, she bought it for $45,000; for the $9,000 down payment she used the savings her mother had left her when she died. She and her husband assumed the mortgage from the previous owner, with affordable payments of less than $400 a month.
Ms. West then had a job as a maintenance worker at an apartment complex for about $9 an hour. Her husband earned about $10 an hour as a truck driver. As the years passed, they added shrubbery to the front yard and photos of children’s birthday parties to the walls.
“I thought that was going to be my house,” she said.
She tapped her inheritance to buy another house on nearby Union Street, paying $15,000 in cash for a light-blue, vinyl-sided A-frame. She turned the house into a home for five homeless people. She did their laundry, reminded them to take their medications and cooked meals, while collecting payments of up to $750 a person each month from the agencies that placed them.
Over the years, Ms. West and her husband spent more than they earned. They used credit cards to finance restaurant meals. They bought a new S.U.V.
At the group home, Ms. West’s compensation slipped as the state limited benefit payments. Yet every month brought the same thicket of bills — water, electricity, gas, plus food for the people under her charge.
In 2001, Ms. West and her husband took out a $67,000 mortgage on the Union Street house — which had increased considerably in value — to refinance high-interest debts, assuming payments of nearly $700 a month.
Two years later, her husband left her.
“It just took the life out me,” she said. “I was in a very bad state, a very depressed situation. Things just kind of went downhill. I just didn’t care anymore.”
By 2005, she was broke. She sold the brick house to her cousin, disbanded the group home and moved in. She paid what bills she could through temporary jobs as a signature collector for petition drives. But as many months passed without work, the bills piled up past due.
By the next year, terse letters were coming from the mortgage company — notices of delinquency, then threats of foreclosure. Much of the neighborhood was in a similar state. Broken windows sat unrepaired at a two-story apartment block across the street, where tattered curtains flapped in the breeze. The city boarded up abandoned homes to deter vagrants, drug addicts and prostitutes.
Ms. West wrote to her mortgage company, seeking lower payments. But with tainted credit and no full-time job, she was not a candidate for a deal. Fliers beckoned with relief as companies offered to negotiate with her lender for lower payments. But when she called, the companies demanded upfront payments as high as $500.
“I told them, ‘if I had that money, I wouldn’t be going into foreclosure,’ ” she said.
In the spring of 2008, Ms. West accepted an offer from the mortgage company: move out, hand over the keys and collect $2,500. She sold what furniture she could and put the rest on the street — tables, beds, a couch.
Her uncle had said she could stay with him for a while. But when she called him to say she was on the way, he told her that his girlfriend was uncomfortable with the arrangement. Ms. West’s daughter was in a cramped rented house with her boyfriend and her two children. Her son was in a rooming house.
So Ms. West, a stylish woman with a penchant for shiny lipstick and glittering jewelry, wound up camping in her car. She listened to the radio to drown out the voices of prostitutes trawling the street. She meditated. (“Just blank out everything in your mind,” she said. “Just go to a place that’s peaceful, like a beach.”) She prayed.
“It was scary,” she said. “Here I am, alone, and I don’t have nowhere to go.”
The next day, she moved in with a friend, remaining there for about three months. For several more months, she stayed with the cousin who had bought her old brick house and was living there with her husband and seven children. Toys lay scattered across the floor. The walls vibrated with music, television and the sounds of children. She lay awake on the couch, a vagabond in the one place that had once felt so solid.
“I was losing my mind,” she said.
She was grateful to be inside — particularly during the Cleveland winter — yet never comfortable or stable enough to plan beyond the next day.
“You know in the back of your mind that people don’t really want you there,” she said.
Sometimes, she lived out of her car, spending days at the public library, where she washed up in the restroom and used a computer to scan meager job listings.
Finally, a woman she met on the street took her in and helped her formulate a recovery plan. She signed up for food stamps. She enrolled at a community college in a three-month, state-financed training program that would give her a certificate for an entry-level job in biotechnology, putting her in position to earn as much as $16 an hour.
In September, she got a bed at the homeless shelter, reluctantly accepting that she needed her own space to re-establish her life.
“I never wanted to go to the shelter because of the stigma,” she said. “I’m a very independent person. I felt like I got myself into this situation, and I’ve got to get myself out. But I knew I couldn’t just keep going back and forth and staying with these people and not moving forward with my life.”
She sleeps in a twin bed with a flower-print duvet, in a small room painted lavender. Her plants line the windowsill. She keeps to herself, reading motivational books, as she prepares to start classes next month.
She is working again, taking care of senior citizens in their homes part time, and saving money.
By December, she will exhaust the shelter’s 90-day limit, so she is hurrying to line up a house to rent while arranging a subsidy through the West Side Catholic Center.
She is still shaken by the past and anxious about the future, but she is again looking ahead.
“I do want to eventually own a house again,” she said. “That’s the American dream. That’s what everybody wants.”

A New Legal Challenge To Mortgage Foreclosures

FAIR GAME
The Mortgage Machine Backfires
RECOMMEND
TWITTER
E-MAIL
SEND TO PHONE
PRINT
REPRINTS
SHARE
By GRETCHEN MORGENSON
Published: September 26, 2009
WITH the mortgage bust approaching Year Three, it is increasingly up to the nation’s courts to examine the dubious practices that guided the mania. A ruling that the Kansas Supreme Court issued last month has done precisely that, and it has significant implications for both the mortgage industry and troubled borrowers.

Related
Times Topics: Gretchen Morgenson

The opinion spotlights a crucial but obscure cog in the nation’s lending machinery: a privately owned loan tracking service known as the Mortgage Electronic Registration System. This registry, created in 1997 to improve profits and efficiency among lenders, eliminates the need to record changes in property ownership in local land records.

Dotting i’s and crossing t’s can be a costly bore, of course. And eliminating the need to record mortgage assignments helped keep the lending machine humming during the boom.

Now, however, this clever setup is coming under fire. Legal experts say the fact that the most recent assault comes out of Kansas, a state not known for radical jurists, makes the ruling even more meaningful.

Here’s some background: For centuries, when a property changed hands, the transaction was submitted to county clerks who recorded it and filed it away. These records ensured that the history of a property’s ownership was complete and that the priority of multiple liens placed on the property — a mortgage and a home equity loan, for example — was accurate.

During the mortgage lending spree, however, home loans changed hands constantly. Those that ended up packaged inside of mortgage pools, for instance, were often involved in a dizzying series of transactions.

To avoid the costs and complexity of tracking all these exchanges, Fannie Mae, Freddie Mac and the mortgage industry set up MERS to record loan assignments electronically. This company didn’t own the mortgages it registered, but it was listed in public records either as a nominee for the actual owner of the note or as the original mortgage holder.

Cost savings to members who joined the registry were meaningful. In 2007, the organization calculated that it had saved the industry $1 billion during the previous decade. Some 60 million loans are registered in the name of MERS.

As long as real estate prices rose, this system ran smoothly. When that trajectory stopped, however, foreclosures brought against delinquent borrowers began flooding the nation’s courts. MERS filed many of them.

“MERS is basically an electronic phone book for mortgages,” said Kevin Byers, an expert on mortgage securities and a principal at Parkside Associates, a consulting firm in Atlanta. “To call this electronic registry a creditor in foreclosure and bankruptcy actions is legal pretzel logic, nothing more than an artifice constructed to save time, money and paperwork.”

The system also led to confusion. When MERS was involved, borrowers who hoped to work out their loans couldn’t identify who they should turn to.

As cases filed by MERS grew, lawyers representing troubled borrowers began questioning how an electronic registry with no ownership claims had the right to evict people. April Charney, a consumer lawyer at Jacksonville Area Legal Aid in Florida, was among the first to argue that MERS, which didn’t own the note or the mortgage, could not move against a borrower.

Initially, judges rejected those arguments and allowed MERS foreclosures to proceed. Recently, however, MERS has begun losing some cases, and the Kansas ruling is a pivotal loss, experts say.

While the matter before the Kansas Supreme Court didn’t involve an action that MERS took against a borrower, the registry’s legal standing is still central to the ruling.

The case involved a borrower named Boyd A. Kesler, who had taken out two mortgages from two different lenders on a property in Ford County, Kan. The first mortgage, for $50,000, was underwritten in 2004 by Landmark National Bank; the second, for $93,100, was issued by the Millennia Mortgage Corporation in 2005, but registered in MERS’s name. It seems to have been transferred to Sovereign Bank, but Ford County records show no such assignment.

In April 2006, Mr. Kesler filed for bankruptcy. That July, Landmark National Bank foreclosed. It did not notify either MERS or Sovereign of the proceedings, and in October, the court overseeing the matter ordered the property sold. It fetched $87,000 and Landmark received what it was owed. Mr. Kesler kept the rest; Sovereign received nothing.

Days later, Sovereign asked the court to rescind the sale, arguing that it had an interest in the property and should have received some of the proceeds. It told the court that it hadn’t been alerted to the deal because its nominee, MERS, wasn’t named in the proceedings.

The court was unsympathetic. In January 2007, it found that Sovereign’s failure to register its interest with the county clerk barred it from asserting rights to the mortgage after the judgment had been entered. The court also said that even though MERS was named as mortgagee on the second loan, it didn’t have an interest in the underlying property.

By letting the sale stand and by rejecting Sovereign’s argument, the lower court, in essence, rejected MERS’s business model.

Although the Kansas court’s ruling applies only to cases in its jurisdiction, foreclosure experts said it could encourage judges elsewhere to question MERS’s standing in their cases.

“It’s as if there is this massive edifice of pretense with respect to how mortgage loans have been recorded all across the country and that edifice is creaking and groaning,” said Christopher L. Peterson, a law professor at the University of Utah. “If courts are willing to say MERS doesn’t have any ownership interest in mortgage loans, that may eventually call into question the priority of liens recorded in MERS’s name, and there are millions and millions of them.”

In other words, banks holding second mortgages could find themselves in the same pair of unlucky shoes that Sovereign found itself wearing in Kansas.

Asked about the ruling, Karmela Lejarde, a spokeswoman for MERS, contested the court’s reasoning.

“We believe the Kansas Supreme Court used an erroneous standard of review; this is not the end of the judicial process,” she said. “The mortgages on which MERS is the mortgagee will remain binding contracts.”

BUT Patrick A. Randolph, a law professor at the University of Missouri, Kansas City, who described himself as a friend of MERS, described the recent decision as unsettling. “This opinion is hostile to the notion of MERS as nominee and could lead to problems for it in foreclosing,” he said. “The entire structure of MERS as a recorded nominee could collapse in Kansas, and that could lead to a patch-up job where they would have to run around and re-record the mortgages.”

If so, MERS would be hoisted on its own petard. And it would be a rare case of poetic justice in this long-running mortgage mess.