MERS: Symptom or Cause

MERS, which stands for Mortgage Electronic Registration System, is under fire. Courts in a few states have held that MERS does not have standing to pursue a foreclosure in its own name, and there is a pending multi-district litigation claim against MERS. The most recent MERS news is the press release by the Attorney General for the District of Columbia. The District of Columbia has a non-judicial foreclosure process that begins with a Notice of Foreclosure form. The AG has announced that people facing foreclosure can assume that the completion of such a Notice, with its identification of the "Holder of the Note" and the "Security Instrument recorded" in the DC land records means that every intermediate transfer of the security interest is documented in the public records. Under the AG's interpretation, MERS does not meet this requirement. MERS, when it works properly, is privately tracking the transfer of mortgages without notation in the public records.

I tend to think MERS is a symptom of a larger phenomenon about how the mortgage industry operated. Just as with robo-signing or with efforts to treat the ownership of a note as a "technicality," the industry designed and built systems for lending and servicing loans that failed to take into account traditional legal doctrines. Why did they redesign these traditional systems? To make securitized lending cheaper and faster. MERS undoubtedly achieved these goals, but at what cost. By moving the recordation of transfers of land from a public function to the private realm, industry got to write, and then ignore at its will, the state laws requiring the recordation of land transfers. Now, when the legality of MERS is called into question, one defense seems to be to argue that MERS is too big to fail. So many loans used it, how can it possibly not be legal? If Fannie/Freddie used  it, doesn't that make it all right? Interesting logic.

As a final note, for those wanting more information on MERS, I recommend Chris Peterson's article: Two Face: Demystifying MERS's Land Title Theory, available here.

 

Comments

[Mike Dillon]

Even if there was not a single additional opinion rendered with regard to a MERS involved case, I don't think that the argument of "But everybody is doing it" would be able to fly at any point in the future.

Landmark v. Kesler

MERS v. Southwest Homes

Bellistri v. Ocwen

MERS v. Johnston

MERS v. Saunders

Ohlendorf v. American Home Mortgage

and the litany of "In Res" that are already out there seem to make a compelling network of lack of standing opinions.... Of course, that's just me and my non-legal opinion....

By creating MERS, the industry attempted to cut costs $30-50 at a time b/c as we all know from watching the accountings of servicers, it's relatively easy to steal $10 from a borrower. No one really notices. And when you do it to 100,000 at a time, every month, it starts to add up to real money. If I remember correctly, MERS claims to have saved the industry $2.5 Billion in recordation fees. Imagine what our county Registries of Deeds and court houses could do with the $2.5 Billion that MERS saved the industry.

And then, of course, is all of the unaccounted for transfer tax revenue....

[Frank]

Very interesting post. I think that in this as in many other areas, we are seeking out an "automated justice" that undermines the rule of law.

I think the "everybody is doing it" rationale would excuse a riot. When the banks changed the practices on checks, they got Congress to pass a law to that effect in 2006. What stopped them from doing the same for mortgages?

Yves Smith claims that MERS did not always have possession of the full documentation, which undermines their claims to being a truly authoritative alternative.

She also asks: why did "the IRS would let certain violations of REMIC rules that would seem flagrant to a layperson get a free pass?"
at
http://www.nakedcapitalism.com/2010/11/the-mortgage-loan-foreclosure-mess-the-banks-gluttony-problems-with-mers-and-sloppy-securitizations.html

[Mike Dillon]

Ms. Webber also apparently banned me from posting on NakedCap approximately 6 months ago for going down similar roads, Frank. At the time, she was not fond of my suggestions that, among other things, firewalls between trading desks and servicing operations were not nearly as "thick" as supposed or that servicers may have been tanking tranches for specific targeted gains. Last I tripped over them, the posts hadn't been erased yet. Even went as far as privately accusing me of having some kind of "business agenda".

Granted, purely my own admittedly somewhat biased opinion, but she seems to have done a graceful 180 in the last few months as well with regard to the depth and breadth of Mortgage Servicing Fraud issues. She's also had an apparently successful book launch recently.

[William A. Roper, Jr.]

In litigating a foreclosure or motion for relief of stay involving MERS, one particularly KEY document which a defendant needs to obtain and plead into evidence is the MERS Appellant's Brief in the case MERS v. Nebraska Department of Banking, a case decided by the Nebraska Supreme Court in 2005.

The full style of this case is:

Mortgage Elec. Registration Sys. v. Saunders, Cum-09-640, SUPREME JUDICIAL COURT OF MAINE, 2010 ME 79; 2 A.3d 289; 2010 Me. LEXIS 83, June 15, 2010, Argued, August 12, 2010, Decided.

But the KEY is not the decision itself, but the MERS Brief, a copy of which is posted at:

http://www.scribd.com/full/40664635?access_key=key-p098ahy8qx133ekhjq9

Carefully READ this Brief. Then carefully READ the assignment of mortgage executed on MERS' behalf in support of a particular foreclosure. Usually, the assignment will contain FALSE language which purports to represent that MERS is conveying not only the mortgage, deed of trust or other security instrument, but ALSO the promissory note, bond and indebtedness.

MERS NEVER OWNS OR HAS AN ECONOMIC INTEREST IN THE NOTE!

[Spence]

...but doesn't traditional trust law at least support one of the major themes of securitization/MERS: that a financial asset can be held in trust and the trustee can demand payment or enforce the liability without disclosing the identity of beneficiaries, or including them as parties to any enforcement action?

Similarly, I am pretty sure that in the context of a traditional trust,I do not need to record an assignment if the beneficiary of trust changes, simply because the trust owns a real property interest. What's the fundamental difference between that example and what MERS is doing?

[Transor Z]

@Spence:

When the IRS goes after the beneficiary of "trust assets," the overriding question is always the amount of control the beneficiary had over the asset(s) in question.

So answer your own question: how much control do MERS participants have in disposing of assets supposedly "held in trust" within MERS?

[Knute Rife]

I've never seen MERS commence a foreclosure as a trustee, always as a holder. When it gets called on its status, it says it's acting as nominee or some other generic agency capacity. It never makes a trust argument, probably because it isn't a "traditional trust" in any sense of the word but rather was created as a clearinghouse to avoid transfer fees and expenses and was pressed by expedience into roles it was not designed for.

[Transor Z]

@Knute Rife:

Precisely, with "nominee" never defined and supposedly indicating an agency relationship of some sort. A trustee isn't the agent of a beneficiary!

[Alina]

I believe that the true legitimization of MERS came after two Florida appeals cases - more specifically, MERS v. Revoredo. The appellate judges stated that "To the extent that courts have encountered difficulties with the question, and have even ruled to the contrary of our conclusion, the problem arises from the difficulty of attempting to shoehorn a modern innovative instrument of commerce into nomenclature and legal categories which stem essentially from the medieval English land law."

This reasoning was recently upheld by Florida's 5th DCA in Taylor v. Deutsche Bank wherein the judges stated that "As the third district has pointed out, it is the rub between the expanding use of electronic technology to track real estate transactions and our familiar and venerable real property laws that has generated the heat that led to this appeal and to countless others nationally."

The 5th DCA went further to state "In the present case MERS is identified in the mortgage as a corporation that "is acting solely as a nominee for Lender," and as "the mortgagee under this Security Agreement."" The 5th DCA quoted further language from the mortgage "MERS (as nominee for Lender and Lender's successors and assigns) has the right to exercise any or all of those
interests, including, but not limited to, the right to foreclose and sell the Property..."

With that the 5th DCA concluded that "the mortgage document, reciting the explicit agreement of Mr. Taylor, grants to MERS the status of a nonholder in possession as that position is defined by section 673.3011."

The 5th DCA took great pains in their completely flawed decision to give MERS the status of "nonholder in possession." IMHO, where the 5th DCA missed the boat is that the real property laws are venerable and should be upheld until there is legislation that changes the laws. There is nothing wrong with tracking property owenrship electronically, but that is a far cry from allowing a straw man the rights of "nonholder in possession."

[The Equitable One]

This is likely either obvious, or redundant, but a follow up on the last comment by William A. Roper, Jr., may be in order, particularly for any newcomers in "foreclosure land."

"MERS NEVER OWNS OR HAS AN ECONOMIC INTEREST IN THE NOTE!"

Yes! Yes! Yes!

And further it is not possible for a party to CONVEY something, or an interest in something, it does not itself have.

No interest in the note = no interest to be conveyed.

I also want to re-stress the importance of the Appellant's Brief in the MERS v Neb. Dept of Banking. It is unfathomable that MERS is able to prevail IN ANY CASE with the statements against interest contained in that brief!!

[MinnItMan]

MERS was a response to a real problem: it is extraordinarily difficult to coordinate documentation of loan transfers in national loan pools when you have to deal with 3000-some different county recorders.

It's worth having some context from the pre-MERS era. Assignments were typically recorded only in anticipation of foreclosure, or after a loan payoff. As such, it wasn't as if the real party in interest could be determined any better in the old days. In fact, it was more of a black box then, especially if you were a non-defaulting borrower.

The notion that recording assignments is or should be a revenue generator for government is false in all of the jurisdictions with which I am familiar. I will qualify this by saying 1) recording fees are not taxes, they are "fees" and subject to constitutional limits more-or-less equal to the administrative cost of services provided; and 2) if there is an additional tranfer tax, and if payment of that tax affects the validity of the transfer, then that is an entirely different matter. (NOTE: Many state have mortgage taxes, the payment of which is necessary for claiming the lien, but as I said I am unaware of states taxing assignments).

All this said, I happen to live in a state where MERS is specifically authorized to be an agent by statute. For lenders to have used MERS in states without specific authorization - inviting courts to determine the legal effect of what was happening - was a pretty bad fumble.

[jpe]

@ Frank: Smith doesn't know anything about tax. Her understanding here re: remics is fatally flawed in that she assumes ownership for tax purposes tracks the definition of ownership for real property purposes.