Well, lets start with the concept of MERS in the first place.

MERS was created for the purpose of avoiding the filing of assignments. (Yes I over simplified) That being said, there is nothing to draw the conlusion that MERS did not properly assign the mortgage from Lender 2 to Lender 3. Unless of course you have the MERS database and their chain is broken there.

Now, is the mortgage a Federally Insured mortgage? If so, check with your underwriter, you should be writing the policy subject to this, that and the other as you well know.

FYI if it's a BOA note, check with Fidelity because they just released 8 pages of underwriting guidlines that essentially gives blanket coverage for BOA notes.

So, essentially what is your proof lender 3 didn't have rights to foreclose? Check with MERS for the broken chain.