Gretchen Morgenson  in the NYT reports on the growing challenge of the Mortgage Electronic Registration System (MERS). The registry eliminates the need to record changes in property ownership in local land records, without having to make recording at local county court houses.

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.

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.

Denninger picked up on this story earlier than the NYT from a Huffington post and speaks to the real implications of the story.  It’s not about MERS and really not about second mortgage holders, it’s about the mortgage backed security holders in general:

The real bottom line here is that securitized bondholders may in fact be holding worthless pieces of paper.  My hollering about this began in April of 2007, right when The Ticker began publication, and continued all through 2007….How long will it be before an enterprising attorney or firm decides to put together a class action with all of the bondholders who are certain to get hosed down the road?  Good question.  It is in fact one of the mysteries of the present mess that we haven’t seen a significant push in this direction as of yet.

We don’t know how long it will be either, but it could mean some big fees for the lawyers and a very rude awakening for the CMBS owners.  Just when the FED thought it had all the skeletons securely locked in the closet…