Monday, October 18, 2010

MERS Madness!

What is MERS?

According to Professor Christopher Peterson, over 60 percent of all American mortgages are recorded in the name of MERS, even though they do not own the mortgages or underlying notes. This was apparently done to avoid paying recording fees when mortgages were transferred. Here is what MERS does, from the MERS website:

MERS was created by the mortgage banking industry to streamline the mortgage process by using electronic commerce to eliminate paper. Our mission is to register every mortgage loan in the United States on the MERS® System.

Beneficiaries of MERS include mortgage originators, servicers, warehouse lenders, wholesale lenders, retail lenders, document custodians, settlement agents, title companies, insurers, investors, county recorders and consumers.

MERS acts as nominee in the county land records for the lender and servicer. Any loan registered on the MERS® System is inoculated against future assignments because MERS remains the nominal mortgagee no matter how many times servicing is traded. MERS as original mortgagee (MOM) is approved by Fannie Mae, Freddie Mac, Ginnie Mae, FHA and VA, California and Utah Housing Finance Agencies, as well as all of the major Wall Street rating agencies.

Mortgages are held by MERS as "nominee" no matter who actually holds the beneficial interest? As Professor Peterson shows in his outstanding work on this issue, there are serious problems with this means of managing mortgages. First, the mortgage (as well as any assignment) must be recorded with public recorders of deeds to maintain priority over subsequent transferees of any interest in the underlying real estate. (pp. 3, 13). Second, under the statute of frauds the name of the owner of the mortgage must be listed on the face of the mortgage. (pp. 16-19). Third, mortgages cannot be split, transferred or assigned away from the underlying note and MERS does not retain any beneficial interest in the notes. (pp. 5-7). Fourth, only the owner of the mortgage may enforce the mortgage. (p. 5). Finally, it is "extremely unclear" that a mortgage can be held in the name of an agent or nominee. (p. 5). All of this means that there may be very serious flaws in millions of mortgages across the nation, that likely renders many such (perhaps millions) mortgages unenforceable. MERS has thus met skepticism in the courts to say the least. (pp. 8-11). Recent cases fully support the upshot of this analysis.

Professor Peterson suggests that these flaws render the mortgage debt unsecured debt. This would naturally greatly erode the value of all mortgage backed securities infected with the MERS flaws. Peterson also suggests that perhaps courts could impose equitable mortgages in place of legal mortgages; but in equity the mortgages would be unlikely to retain some of their more predatory features. Moreover, equitable mortgages can be discharged in bankruptcy and the ability of lenders to pursue deficiency judgments may well be reduced. In short, this is a costly and uncertain road, and lenders would be well advised to negotiate and reduce their principal than to litigate endlessly in hope of equitable relief. (pp. 20-22).

Obviously, this MERS madness could have serious adverse effects on the continued solvency of our financial sector. But, it is worth noting that these time-honored rules are not technicalities. They exist to assure that a borrower does not have to pay, again and again. By requiring that the mortgage and note stay together in the same person, the borrower can only be sued once on the same debt. In fact, there is already much evidence that some debt has led to exactly this problem with MERS. So requiring the plaintiff in a foreclosure action to show up with the original signed note and mortgage (or to account for same), is a basic protection of homeowner rights.

Professor Peterson highlights other policy ramifications from this fiasco. "For the first time in the nation's history, there is no longer an authoritative, public record of who owns land in each county." (p. 4). Because MERS did not in fact have any claim to the mortgages, its mortgage recordings were false documents. "Using false documents to avoid paying fees to the government sounds a lot like tax fraud." (p. 25). But perhaps most importantly, "the lives and fortunes of generation after generation [of] America's middle class turn more on their ownership of land than any other asset." (p. 18). The massive destabilization of middle class property rights (the rich can hire teams of lawyers) implicit in this MERS madness will impose costs and uncertainty at the heart of the American economy for years to come. Once a mortgage goes into the MERS black hole, there is no tracing the actual owner of the mortgage for purposes of negotiations, payment certainty, or history of the loan. If MERS holds the mortgage there is literally no way to know for sure whom should be paid. Ten years from now these problems will be even worse.

Frankly, this is outrageous. Doing this right is simple: the original lender is named on both the mortgage and the mortgage note; these documents are recorded at the recorder of deeds office; when these interests are pooled (into a trust or some other entity) for purposes of securitization, then the mortgages and notes are assigned to the securitization vehicle; and, the assignment is recorded to preserve priority. This is simple and time tested. It conforms to law. Yes, it could cost a bit more, but these guys sucked the economy dry with their blasted bonuses, and recording costs about 40 bucks. Our system of property rights is looking like some Banana Republic for a few pieces of silver.

One more time: the apex of our economy is dominated by the most inept, if not corrupt, financial elites in the history of financial elites. Its as if the entire Wall Street culture decided the world was going to end in just a few weeks. It is (way past) time to fragment these banks into 10,000 pieces and terminate all of the senior managers of these unbelievably reckless entities.

The MERS madness shows that these people really think they above the law.

So far, the markets have had an apparently mixed reaction to the foreclosure crisis, but the cost of credit default insurance against major banks is climbing higher. Perhaps the hope is that these legal problems can somehow be resolved over time. If these problems persist I doubt the market will not suffer.

ADDENDUM: Here is the best case for MERS, as stated by their spokesperson.


  1. This is a perfect example of how technology can actually hinder, instead of help. Over the past few days, I spent the first three hours of my morning in the Dade County Courthouse listening to foreclosure cases. Although there was never any talk about these MERS, I can only imagine the amount of confusion they will cause. One instance where the MERS situation has already cause problems involves a good friend on mine. Because his mortgage was submitted into this MERS program through Suntrust, while the foreclosure procedures have been progressing with his home, the bank is having trouble finding the original mortgage. Although there is evidence that the mortgage existed as some point or another, the only existence which can be found as of today is the electronic version stating the interest rate, amount down, and the property address. The signature of the mortgagee is not included in this electronic version. It will be interesting to see how the MERS will affect the already large mess we have with foreclosures in south Florida.

  2. Doreen R. FIU-
    Although I am a homeowner, hold a mortgage, sat through half a semester of property class and previously worked for a broker and attorney doing real estate and title I confess that this article leaves me scratching my head saying, "what"?. The financial elites that created the subprime mess and participated in this revolutionary document recording system that may violate the statute of frauds are the same individuals moving to foreclose on your friends and neighbors. The one thing that is clear is that it is near impossible for the average Joe to know what his property rights are. What if the mortgage can't be found? What then? If MERS leads to the mortgages being unsecured debt the next wave of financial crisis will be in Chapter 13 bankruptcies.

  3. Is this "another example of how privatization of essential government functions doesn’t work" or, rather, an example of our government letting companies like MERS continue doing seemingly reckless acts without any government regulation.

    My understanding is that if MERS “A” is the original mortgagee of record, and thereafter, the mortgage assignment and the mortgage has not
    been re-assigned by MERS, then no assignments need to be recorded or in the file at all.
    How can the government permit this practice without there being a violation of the legal requirements?

    I don't think we should wait for cases to trickle into the judicial vein for the MERS problem to be addressed. Government just needs to hold MERS accountable to start paying the tiny fees to record all mortgage assignments in the chain from the original mortgagee transaction.

  4. Well, it’s amazing. The miracle has been done. Hat’s off. Well done, as we know that “hard work always pays off”, after a long struggle with sincere effort it’s done.
    Mortgage Calculator How Much Can I Borrow

  5. It is certainly not surprising that the private sector Banks are the ones who came up with the MERS system. I don't understand why this was allowed in the first place since it violates the Statute of frauds. Banks try to save a buck her or there by saving on recording costs, and it ends up hurting them in the long run. Why do we allow private companies to establish systems like this without harsher regulations?

  6. Victoria L. (FIU)

    The world is obviously changing due to the advances in technology but is it changing too fast. Change is usually done progressively and with extreme caution. Here the MERS program makes mortgages done entirely electronically which enables there to be less paper wok and more efficient. However this efficiency may have costly kick backs that were unsuspected. How can this program be completely secure from hackers and viruses. How can we assure the people that their mortgage is secure. As previously mentioned, does this violate the statute of frauds learned in basic contracts. Will the people who live in these homes ever know of the potential risks or negative implications of having MERS take over their mortgages. For most people in the middle class society, their homes are their most important asset. How can something so important to the people be completely unmonitored and thrown into an electronic cyber space world?

  7. I admire what you have done here. I like the part where you say you are doing this to give back but I would assume by all the comments that this is working for you as well.
    Debt Negotiation Help