"Over the past several years, a number of residents who were facing foreclosures didn't know who owned their mortgage or to whom they should be making their mortgage payments," Joyner wrote.
If the ruling stands, it would be a costly setback for MERS, which handles more than half of all home loans in the United States and was created for the purpose of avoiding the time and expense of county records.
Merscorp president Bill Beckmann said in a statement that he disagreed with Joyner's interpretation and that the firm is "currently pursuing all options available to us in the legal process."
Montgomery County Recorder of Deeds Nancy J. Becker brought the suit in 2011. This February, she was granted class-action status to sue on behalf of all 67 recorders in the commonwealth.
The suit claims that Montgomery County alone lost $15.7 million in recording fees from 2004 to 2011. But Becker said Tuesday that was "a very, very conservative estimate."
"We took all the MERS mortgages between 2004 and 2011 and then multiplied them by two, assuming they were sold once," Becker said. "But other recorders in other states ... have found most of these mortgages were sold 10 to 12 times."
If MERS's holdings across the state are comparable to those in Montgomery County, that could translate to more than $1 billion just in lost recording fees. Becker's suit also seeks reparations for unjust enrichment and other damages.
Joyner has yet to schedule a trial to determine the extent of damages.
Created by the banks
MERS was created by the banking industry in the 1990s to simplify the sales and tracking of mortgages. During the foreclosure crisis, MERS was at the heart of many hot-button issues such as subprime mortgages and mortgage-backed securities.
The firm doesn't buy or sell mortgages, but provides a marketplace to facilitate the transactions and in some cases serves as the named owner on loans that are being traded by its member institutions.
Those transactions were kept in a database only accessible to MERS members - banks, loan servicers, mortgage insurers, and Fannie Mae and Freddie Mac.
MERS says borrowers can easily identify the current owner or servicer of their home loan by calling MERS or searching on its website.
Joseph Kohn, the lead attorney for Becker, said that homeowner-search feature is a recent addition and may not be accurate.
Marie T. McDonnell, one of the foreclosure experts who testified on Becker's side, examined some MERS properties and found that many of the transactions recorded with the Securities and Exchange Commission and MERS's own database were incomplete, redundant, or contradictory.
Becker said the breakdowns in records - and the harm they caused to homeowners - led her to file the suit. She cited a recent example of a young couple from Pottstown who came to her office with a foreclosure letter.
"The gentleman had all of his canceled checks. What happened was, the checks went into a lockbox, but the loan had been sold, and the lockbox didn't know where to send them," Becker said. "So the bank wasn't getting the money."
Kohn said Pennsylvania's statute is specifically worded to prevent such confusion. The law says "conveyance of properties shall be recorded, whereas some other states say may be recorded," he said.
Martin Bryce, a partner at the law firm Ballard Spahr who often represents banks, said MERS's modus operandi has been challenged many times, and this is the first case he can recall where a judge has agreed.
"I just think this court misunderstood the way MERS works and is reading more into the Pennsylvania recordation statute than is there," he said.
Bryce said he believes the case will make its way to the U.S. Court of Appeals for the Third Circuit and be overturned. But until then, he said, the ruling "has quite a bit of potential to upend the entire system."
The ruling is likely to spark more litigation, Bryce and others said, adding to the spate of lawsuits MERS is already facing from other states and homeowners. Just last week, several county recorders in South Carolina filed suit for lost fees.
Even though Becker's case hinges on a Pennsylvania statute, it could prove more significant because the judge based his ruling on "the model upon which defendants' entire business is built."
"This one is in some ways a broader and more direct threat to MERS," said William K. Black, a professor of economics and law at the University of Missouri-Kansas City. "The entire purpose of MERS was to avoid recordation of subsequent transactions. It destroys their entire business model. It removes their only reason for existence."
Becker and the other county recorders probably won't see a dime until the trial is complete and all appeals have been exhausted - a process Bryce said would take at least a year.