New York sues banks over foreclosures

New York Attorney General Eric Schneiderman has sued the big banks over their use of a private electronic mortgage registry.

WASHINGTON (CNNMoney) -- The New York attorney general sued some of the nation's biggest banks on Friday, accusing them of unlawful and deceptive practices for relying on a private electronic registry that tracks mortgages.

Attorney General Eric Schneiderman on Friday sued Bank of America (BAC, Fortune 500), Wells Fargo (WFC, Fortune 500), JPMorgan Chase (JPM, Fortune 500), as well as the Mortgage Electronic Registration System Inc. (MERS) in New York state court.

Schneiderman says that the banks created the electronic registry as an "end-run" around the public property recording system to help them more quickly buy and sell parts of mortgages. He said the system helped banks create "deceptive and fraudulent court submissions" and improperly foreclose on homeowners.

"Our action demonstrates that there is one set of rules for all -- no matter how big or powerful the institution may be -- and that those rules will be enforced vigorously," said Attorney General Schneiderman in a statement.

Foreclosure settlement could be coming

MERS runs a database created in the 1995 to digitize and centralize the paperwork surrounding the bundling and selling of the loans. MERS members include most of the large banks in the mortgage industry. More than 70 million loans are registered in the MERS system, including 30 million that are active, according to the New York attorney general's office.

The New York suit alleges that the database was used by the big banks to transfer ownership of mortgage debt without paying government registration fees and properly recording the transactions. The system also concealed the identities of the holders of mortgage debt from borrowers, the suit claims.

"MERS' conduct, as well as the servicers' use of the MERS System, has resulted in the filing of improper New York foreclosure proceedings, undermined the integrity of the judicial process, created confusion and uncertainty concerning property ownership interests, and potentially clouded titles on properties throughout the State of New York," according to a statement by the New York Attorney General.

MERSCORP, parent company for Mortgage Electronic Registration System Inc., said the company refutes the attorney general's claims, adding that federal and state courts nationwide have already upheld the MERS' business model, according to a statement.

One Washington research analyst notes that the New York charges are similar to past cases brought against MERS, and that so far, "the industry has won most of those challenges," said Jaret Seiberg, of Guggenheim's Washington Research Group "The ones they lost tend to be on narrow issues.

In December the Massachusetts attorney general filed a lawsuit against the same banks, as well as Citigroup (C, Fortune 500) and GMAC Mortgage, alleging similar complaints. That case is still pending.

Schneiderman is also leading a working group of federal and state officials that the president put together to investigate mortgage securities fraud.

At the same time, Schneiderman is also considering whether New York should sign on to a mortgage servicing settlement agreement that federal officials and state attorneys general have been negotiating for a year with the nation's largest banks that service mortgages.