Freddie Mac issued new policy guidelines to its servicers this week that prohibit foreclosures in the name of Mortgage Electronic Registration Systems Inc. (MERS).

MERS was developed by the industry to keep track of the servicing rights on home loans. It was designed as a paperless property registry to facilitate the quick transfer of mortgages between lenders, as well as investors in mortgage-backed securities.

In certain jurisdictions, servicers use the MERS name to initiate foreclosures on properties listed in its registry on

behalf of the creditor. But this approach has been challenged repeatedly by homeowners who say the electronic system has no standing to act as the mortgagee nominee in foreclosure actions.

MERS argues that borrowers are required to sign documents stating that MERS can assume rights and responsibilities on behalf of creditors, and this reasoning has led a number of state courts to uphold MERS’ right to foreclose.

Still, the electronic registry has come under heavy fire lately. It became a focus of last fall’s robo-signing scandal when the MERS name appeared within defective affidavits and regulators extended their servicing investigations to include the system and its role in the foreclosure process.

Fannie Mae told its servicers last spring that they were no longer allowed to foreclose in the name of MERS, and now Freddie Mac is following suit.

Freddie has updated its servicer guide to eliminate the option for the foreclosure counsel or trustee to conduct a foreclosure in the name of MERS. The new rule is effective for mortgages registered with MERS that are referred to foreclosure on or after April 1, 2011.