Thursday, November 11, 2010

Does the Use of MERS Constitute Consumer Fraud?

One major issue facing those hoping for a federal solution (aka yet another bank bailout) to the MERS controversy is the fact that MERS implicates a wide range of state law issues that are simply not conducive to broad brushed federal intervention or defacto guarantees. We are talking basic property rights, contract law and recording regimes which have been left to states for centuries. Any "federal solution" should be viewed with deep suspicion because the only real reason for Congressional meddling with these traditional state law functions would be to once again shield the banks from unpleasant legal and competitive outcomes. Further, because 50 state law regimes are at issue it would be very difficult for Congress (or bank lobbyists) to craft legislation without potentially serious unintended consequences.

Consider, for example, the recent DC Attorney General Determination that the use of MERS as the original mortgagee to evade recording fees constitutes consumer fraud under DC law. According to the DC Attorney General: "A noteholder’s security interest in a DC home should normally be reflected in the public land records maintained by the District’s Recorder of Deeds. Under District law, in contrast to the laws of many states, each deed or other document transferring a mortgage interest must be recorded with the Recorder of Deeds within 30 days of execution. This requirement is not satisfied by private tracking of mortgage interests through the Mortgage Electronic Registration Systems (MERS)." Thus, a foreclosure proceeding against a homeowner is deceptive to the extent the party seeking foreclosure has no recorded right to do so.

Many jurisdictions would follow this basic approach. Thus, for example, in Illinois, a mortgage must identify the grantee. The mortgage "shall" be recorded and is effective as a lien, generally, only when recorded. And, in Illinois, deceptive practices are statutorily defined to include any misrepresentation of a material fact, in any consumer transaction. In my view, Illinois should therefore also find that the use of MERS constitutes consumer fraud. The same likely holds true in many other jurisdictions.

The basic idea is that a consumer is entitled to know the identity of the mortgagee of their property, and should be able to assess the validity of the mortgage based upon readily available information. It is hard to argue that these facts are not material to a consumer, either faced with foreclosure or otherwise. For example, as stated in the DC Attorney General's opinion how can a homeowner accurately assess a lender's right to foreclose if a lender's mortgage is not duly recorded in the recorder's office. Similarly, if a mortgagor is underwater on their property they should be able to contact the mortgagee without relying on the good graces of their servicer who very often has incentives to pursue foreclosure instead of a loan modification. It is a material fact to know the actual holder of the mortgage.

The upshot of all this means that the great destabilization of property rights associated with the use of MERS is not the only legal problem that courts must address. They also need to think hard about whether consumers have a right (protected by the state consumer fraud statutes) to be able to discern the identity of their mortgagee through public records, independently of the determination of the loan servicer's calculation of its profit interest.

Underlying this judicial determination is an important policy consideration: do courts want to empower consumers to plead their case for loan modifications or forbearance directly with the end lender, or do they want to empower servicers to maximize their ability to generate profits from fees associated with foreclosures? If they choose servicers over homeowners, they will essentially encourage more foreclosures along with associated macroeconomic carnage in the form of devastated families (hurting consumption today and human capital formation long term), massive continued price depreciation nationwide from the downward pressure exerted from foreclosures, and continued losses to the MBS investors from real estate depreciation nationwide. The only beneficiaries will be three or four megabanks that dominate the servicer market.

Congress faces a more complicated calculus. It is a lame duck Congress. The job market sucks. Certainly, those who will not return can be forgiven if they have their eyes on the job market--and the megabanks control more wealth than virtually anyone else in our society. Moreover, since they enjoy a government guarantee the megabanks can pay employees above market wages regardless of their performance or the performance of the economy.

Still the ultimate point of this blog entry is that it would highly inappropriate and macroeconomically devastating for the federal government to once again give the megabankers legal indulgences to allow the senseless foreclosure machine to continue unabated. Further, this time such indulgences would involve a massive extension of federal power into traditional areas of state law ranging from property rights definition, recording statutes, foreclosure rights, mortgages, contracts and consumer fraud.

Let's hope Congress makes the right call and allows our preexisting legal system to dole out incentives and disincentives without political interference on behalf of the most outlaw elements of our society.


  1. From Scott H. (FIU)

    It seems just as likely to me that the lenders will orchestrate a wave of favorable legislation at the state level, and immunize themselves that way instead of relying on a divided Congress. One element of the mid-term election that has not received much attention was the Republican gains in state legislatures, and many states have one-party control. In Florida, for example, we have elected a Republican governor, and the Republicans now have a veto-proof majority in both chambers of the legislature. This is a state that has always been beholden to real-estate interests, and it would not be a stretch to see legislation protecting lenders from MERS liability, couched in the interest of freeing up credit to jump-start the dormant real-estate and construction industries. The only push-back I can envision to this may come from the counties themselves, who may want to recoup the recording fees they lost to MERS filing.

  2. Mers is owned by several of the largest mortgage companies in America, including Fannie Mae, Freddie Mac, Wells Fargo, Citimortgage, Chase, HSBC and the-now-defunct Countrywide. A safe bet would be that the feds aren't going to reprimand Mers for their unrecorded deeds, any more than they've done to misbehaving megabanks.

    MERS claims that its success has saved the mortgage industry far more than one billion dollars by avoiding those pesky recording fees in the county records, which unfortunately for us didn’t prevent the industry from still asking for and receiving billions in taxpayer bailout money.

    States aren't being so lenient. In California, for example, a court threw out foreclosure suits brought by MERS for failure to follow the rules. A court in Nevada did likewise. Rhode Island Attorney George Babcock has been very successful challenging the chain of title created by MERS and 'supposedly' being electronically tracked.

    In Florida, MERS has already stopped the practice of trying to foreclose on homeowners in its OWN name. Why? Seems thus far there’s been too much opposition to MERS, and let's hope the legal climate in Florida's judicial system stays the same despite any mid-term election changes.

  3. I think the solutions of attacking MERS on foreclosures is reaching and will not solve the real problem which is the people losing their homes to the bullying banks. Yes, the MERS system allowed a clearing house and simplicity to bundle up the mortgages with speed as the original documents got lost in the shuffle. The fraudulent and overstated mortgages then got sold to the secondary buyers etc. What should happen, and this is my policy argument, is that in order for MERS to file for foreclosure on a mortgage, they should be ordered to by law to provide the court the "pedigree" of the mortgage. The original lender and paperwork needs to be provided to the court. Too much paperwork? Theoretically these hundreds of thousand dollar securitized mortgages should be easy to trace back and obtain a paper trail. If the originating bank or 2ndary buyer that obtained a profit in the sale of this security and did not do any due diligence as to the accuracy of the mortgage - ie ability to pay, credit ratio of buyer, inflated appraisal, ... (which we all know none of the 2ndary buyers did, and a profit was made) AND got part of the bail out money for their distressed assets, then the mortgage should be modified to fair market value. This way the lenders take some accountability for their own lack of controls and self policing. Why are the banks the only ones getting the bailout? Yes many buyers inflated income and misrepresented the ability to pay but this misrepresentation was not onesided. The originating lenders that sold these mortgages turned a blind eye to this catastrophe. The courts that are rejecting the arguments of fraud have a point, they originating contracts list MERS as the named mortgagee. As the notes gets sold on the market, MERS as the named mortgagee follows the note. As stated, calling it a sham will not solve the problem.

  4. David H. Snider (FIU)November 16, 2010 at 4:50 PM

    I absolutely agree with Scott H. regarding the power lenders and the real estate industry throughout the country have over both the state and Federal legislatures. It is clear that the Federal government is more than willing not to properly regulate these intertwined industries—what makes us think the state and even local governments will? I do not see the current political climate supporting any change which would require the classic recording requirements vs. the MERS electronic method. Locally, especially here in Miami-Dade County, I feel as though the housing market has reached the point where the consumer is in power. The property appraiser is more accurately assessing property and overall the local government is more concerned about the voters and less influenced by the three or four mega banks which can and have influenced state and Federal legislation. Unfortunately, as Scott H. pointed out, the local government is the last remaining hope.

    MERS was designed as a shell for the large banks to centralized electronic registrations of mortgages and track mortgage ownership. The MERS system allows MORTGAGE ownership to change hands quickly and ultimately benefits the corporations trading these instruments and not the little guy who has no idea and cannot accurately assess their standing with regards to foreclosure, etc. It is shameful that courts are slowly but surely accepting the MERS system as legitimate.

  5. LaureenG (FIU)

    You're right. The federal government's intervention may negatively impact consumers. Recordation is central to property ownership and should remain under the control of the states. Consumers should not lose the right to have liens on their homes recorded.

    I recently heard that a a certain bank's customer called to check on the progress of their modification loan. What they didn't know was that the house had already been sold. In this instance, homeowners can check online or check their local recorder's office to find out the status of their home.

    It would be a significant risk to consumers to no longer allow recordation of deeds. Consumers should absolutely know who owns their mortgage.

  6. Brian C. (FIU)

    It seems to me that the most important aspect of protecting people from unduly foreclosures from the likes of MERS is as basic as having an attorney who is diligent, aware, and competent. Clearly, it is a complicated matter to have the legislature, federal or otherwise, to come up with an effective means to regulate such powerful players in such a vital industry; but we are not helpless without the legislature.
    Lenders and servicers in many cases have dug their own graves in foreclosure matters. With mortgages exchanging so many hands it becomes very common that paperwork is lost or an assignment turns out to be fraudulent. It is up to the attorney in a foreclosure defense to make sure the details are all in line in order for a lender to foreclose. Without a valid assignment of mortgage or paperwork showing that the plaintiff is the party in interest, there is no case. However, making these arguments can sometimes take a watchful eye. I have seen cases where there was an assignment and it seemed like the plaintiff was indeed in possession of the mortgage, but a closer look revealed that the assignment from MERS to the plaintiff seemed fraudulent.
    The bigger problem is the amount of foreclosures going through the courts which becomes the cause of “fast food litigation” as I like to call it, where the judge does not look to see whether there is a case, but simply grants a motion for summary judgment for the plaintiff without taking a closer look at the facts. This is the fight an attorney with a foreclosure defense faces. The court of appeals is the next stop and hopefully the facts prevail. There is a great need for legislation on the issues surrounding servicers and foreclosure, but that may take a while; until then we can only defend ourselves from foreclosures by keeping our eyes open and our heads up!

  7. Katherine S. (FIU) posted..
    To answer the question posed by the title of the blog, it appears that YES MERS constitutes consumer fraud! I went to the MERS website and found this on the main webpage: “ MERS eliminates the need to prepare and record assignments when trading residential and commercial mortgage loans.” How fitting! It’s a wonder we are in the mess we are in now. What happened to the good ol’ traditional way of recording mortgages/assignments. To top that the MERS’ website goes on to state that it was “a database created by the financial mortgage industry.“ Well, there goes all my faith. Finally, it states that every MERS mortgage loan agreement contains a paragraph that explicitly designates MERS as the mortgagee and gives MERS the right to foreclose. Hmmm, interesting as a number of State Supreme Courts have thought otherwise. Take for instance, in the case of MERS, Inc., v. Saunders et al, the Supreme Judicial Court of Maine ruled in August 2010, that “MERS is not in a fact a “mortgagee” and therefore does not have standing to initiate the foreclosure action.

    It seems to me that MERS was created to avoid the cost and delays of having to record title every time a property changes hands. Its logical that now many of the properties that were fraudulently foreclosed on by robo-signing via the MERS system, are now unable to figure out who has title to them?

  8. If one examines the countries with failed economies, one common denominator will be found: lack of property rights. Anyone who has purchased a property can agree that it is arguably one of the most confusing endeavors they’ve undertaken. Banks will change the documents a thousand times and the numbers are
    picked at random. The convoluted process is no accident; the banks want the consumer to be confused. It does not help either than states like Delaware have laws that strongly favor banks and therefore banks flock to such states. While the federal government should avoid meddling into economic matters, they should ensure that they protect the rights of consumers by mandating
    transparency in the mortgage process.