We have yet another major bank today that fully expects to be dinged by federal and state regulators for sloppy mortgage practices.

PNC Financial Services Group Inc. expects to sign consent orders with U.S. regulators because of allegedly faulty mortgage servicing and foreclosures.

The orders are likely to come from the Federal Reserve and the Office of the Comptroller of the Currency, Pittsburgh-based PNC said today in its annual filing with securities regulators. The actions may include activities tied to the Mortgage Electronic Registration System, the registry designed to track mortgage-servicing rights and ownership of U.S. residential loans, according to the filing.

The MERS piece is interesting. As we know, MERS is basically at the end of its rope, forced to tell servicers to stop foreclosing in its name because of a string of lost court cases. Now, PNC, along with BofA and Citigroup, are saying publicly in regulatory filings that MERS may be ruled essentially invalid for mortgage transfers. Keep in mind that the major banks created MERS and still fund it.

Bank of America said legal challenges against MERS have asserted that use of the system can “cloud ownership” of a loan, according to its filing. The Charlotte, North Carolina- based lender, which ranks second in U.S. home lending and first among mortgage servicers, said it uses MERS for “a substantial portion” of new home loans, including those sold to investors or transferred into securitized trusts.

The process “is based on a well-established body of law that establishes ownership of mortgage loans by the securitization trusts, and we believe that we have substantially executed this process,” Bank of America said in its filing.

The question of MERS’s “legitimacy” drew scrutiny from the U.S. Justice Department and Congress as well as regulators and state attorneys general, Citigroup said in its filing. The bank “has determined that the integrity of its current foreclosure process is sound,” the New York-based firm said.

What does this mean for outstanding loans? Many states are working on legislation that would disallow foreclosures on homes without a full chain of title. California is the latest. If MERS is forced to the sidelines, or their process ruled invalid, what does this mean for the chain of title?

There’s a way out of this for the banks, to clean up the complete mess they’ve made, but they’d have to actually provide homeowners with relief to compensate for their near-destruction of the residential housing market. To those who find this unworkable – the serious ones, not McMegan – I would simply ask them what they believe is the proper relief. Because aside from the fact that investors and not servicers should be able to determine whether they allow principal mods to borrowers in trouble, and that all economic signs point to that as the best way to stop foreclosures and save the economy, allowing yet another massive case of financial fraud to pass without punishment does more damage to the integrity of the country than anything I can think of.

David Dayen

David Dayen

3 Comments