In MERS We Trust
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In MERS We Trust

by Thomas Brom

March 2013

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When you get your pocket picked by a real pro, sometimes all you can do is appreciate the artistry. Such, apparently, is the case with MERS, a national electronic database of home mortgages that effectively swiped millions of dollars from local governments just when they could have used the revenue most.

By now homeowners across the country are familiar with Mortgage Electronic Registration Systems Inc. (MERS) and MERSCORP Holdings Inc., its corporate shell based in Reston, Virginia. Launched in 1997 by the Mortgage Bankers Association, Fannie Mae, and Freddie Mac, MERS was created to bypass perceived logjams at county recording offices, speeding the flow of notes to Wall Street for bundling, securitizing, and sale to investors. The casino needed more chips.

According to boilerplate on its security agreements, MERS owns all the mortgages in the registry, "acting solely as a nominee for Lender and Lender's successors and assigns." MERS also claims to be "the beneficiary under this Security Instrument" and "a common agent for the mortgage industry" - admitting to no contradiction in assuming multiple roles. MERS Inc. is listed as mortgagee on an estimated 70 percent of all home mortgages.

Member banks, however, may or may not track assignments, and they do not reveal the chain of title that extends from the loan originator to the securitized trusts controlled by pooling and servicing agreements. The registry operates with a handful of employees, relying on a small army of designated "vice-presidents" at loan servicing offices to process assignments and foreclosures.

On its website MERS states that it is "not a system of public record nor a replacement for the public land records." Nonetheless, designating MERS Inc. as the mortgagee for all subsequent transfers between members has saved mortgage bankers more than $2 billion in recording fees, according to a 2009 deposition by former MERSCORP president and CEO R. K. Arnold.

MERS neither sought nor received permission to sidestep the public system. By using "a hollow placeholder as the grantee of their property interests," writes Christopher L. Peterson of the University of Utah College of Law, "mortgage bankers have attempted to create a completely fungible mortgage in which the true owner of the lien, or the land itself in title-theory states, becomes whomever the ... loan servicers say it is." Peterson laments, "For the first time in the nation's history there is no longer an authoritative, public record of who owns land in each county." (53 WM. & MARY L. REV. 111, 117 (2011).)

You'd think someone would have noticed. At first, the National Association of County Recorders, Election Officials and Clerks protested that there was no need for MERS to create a federal land-titling system, but to no avail. Most counties simply took the revenue loss on the chin - until the housing bust of 2007 produced a flood of foreclosures that exposed gaps in tracking assignments.

Homeowners in many states sued MERS alleging wrongful foreclosure. Those filings continue in many states, but they are now rare in California. In 2011 a state appellate court ruled that MERS has no obligation to disclose documents prior to initiating a nonjudicial foreclosure, and that a homeowner has no private right of action to determine the identity of the beneficiary. (Gomes v. Countrywide Home Loans, Inc., 192 Cal. App. 4th 1149 (2011).)

A spate of contrary rulings in federal bankruptcy court gave some California homeowners relief. But last year a federal district court - citing a state appellate ruling that deeds of trust in California need not be recorded (Calvo v. HSBC Bank USA N.A., 199 Cal. App. 4th 118 (2011)) - reversed a plaintiff's bankruptcy court judgment. The district judge held that MERS had a statutory right to foreclose under the express language of the deed of trust. (In re Salazar, 470 B.R. 557, 562 (S.D. Cal. 2012).)

Attorneys general in dozens of other states have sued MERS for deceptive trade practices, but very few complaints include claims for lost recording fees. The barriers to recovery are formidable: Depending on state law, recording title assignments may be mandatory or permissive; a private right of action must exist; county recorders must have standing to sue, and also be able to collect damages for failing to record.

To date, lost-fee cases filed by county recorders have survived motions to dismiss in only three states - Alabama, Texas, and Pennsylvania. In October a trial court ruled that Pennsylvania's mandatory recording statute allows "any person in any manner interested in a conveyance" to bring a quiet title action. The judge permitted a claim for unjust enrichment but threw out a civil conspiracy claim. (Montgomery County Recorder v. MERSCORP, Inc., 2012 WL 5199361 (E.D. Pa. 2012).)

MERS, however, has appeals pending in all three cases. In a 2010 article, former Ginnie Mae CEO Joe Murin asserted, "[A]voiding these fees in no way constitutes any type of tax avoidance or fraud. Fees are paid in exchange for a service. If the service is not needed ... then there is no 'lost' revenue." In November a Massachusetts state court agreed, finding that MERS's failure to register mortgage transfers was not unlawful. (Commonwealth v. Bank of America, 2012 WL 6062747.)

California officials have been noticeably quiet on the lost-fee issue. In February 2011 Phil Ting - then San Francisco's Assessor-Recorder - issued an audit of about 400 recent foreclosures that concluded about 84 percent of the files contained what appeared to be clear violations of law, and two-thirds had at least four violations or irregularities. But the Gomes ruling denied homeowners a private right of action.

That same year, Ting coauthored AB 1321, a bill introduced by Assemblyman Bob Wieckowski (D-Fremont) requiring that any deed of trust assignment be recorded in the county where the property is located. But the measure died in committee, and wasn't reintroduced. "It was seen as too burdensome on the industry, and also on county recorder offices," says Heather Falkenthal in Wieckowski's office. "They said we were addressing a problem that had already passed, and the bill fizzled."

Last November, Ting and former Orange County Clerk-Recorder Tom Daly - both critics of MERS - were elected to the Legislature. But so far, no bills addressing lost recording fees have been introduced.

With little case law to support a complaint, state Attorney General Kamala Harris's office also has done nothing on the recording issue. "We aren't aware of recording fee-type cases in California," says Jason Lobo, MERS communications director.

Nor does Congress appear interested. In 2010 Rep. Marcy Kaptur (D-Ohio) introduced a bill to prohibit Fannie Mae, Freddie Mac, and Ginnie Mae from owning or guaranteeing any mortgage assigned to MERS or for which MERS is the mortgagee of record. It died in committee in 2011 and again last year; in January, Kaptur reintroduced the bill as H.R. 189.

Whether MERS Inc. can sustain a private, members-only registry of home mortgages remains to be seen. "There can be no national solution - each state governs its own recording system," maintains David E. Woolley, principal of Harbinger Analytics Group in Tustin and a licensed land surveyor. In a 2011 report - later published as a law review article - Woolley predicted that a wave of boundary suits would eventually hit title insurers. "[T]ens of thousands of titles have been lost or diluted in a sea of MERS transactions, and may take a hundred years to fix," he and Manhattan Beach lawyer Lisa D. Herzog lament. (8 HASTINGS BUS. L.J. 365, 367 (2012).)

But Roger Bernhardt, professor of real estate law at Golden Gate University in San Francisco, says Woolley's contentions are nonsense. "If the endorsement is done right, the only question is who's got the note," he says. "In California there are no title recording questions - all the rest is smoke." Still, Bernhardt concedes that a "deed of trust disconnected from its supporting promissory note is an odd creature."

Title insurers show no signs of concern. In fact, the American Land Title Association, their trade group, was a founding MERS shareholder. Kurt Pfotenhauer, its chief executive at the time, called MERS "an elegant solution" to the inefficiencies of state recording systems. In 2009 Pfotenhauer became a MERS director and two years later he was elected its chairman.

You have to at least admire the audacity of this scheme. Under our very noses, the banking industry created a private registry of mortgages that offers homeowners little accountability, slashes millions of dollars from county revenue, and skates over hundreds of years of state property laws.

Anybody have a problem with that?

Reader Comments

Richard F. Kohn - March 28, 2013
You wrote that MERS relies "on a small army of designated 'vice-presidents' at loan servicing offices to process assignments and foreclosures. The number exceeds 20,000 apparently! That's equivalent to an army division.
project_wolverine - April 3, 2013
You have to at least admire the audacity of this scheme. Under our very noses, the banking industry created a private registry of mortgages that offers homeowners little accountability, slashes millions of dollars from county revenue, and skates over hundreds of years of state property laws. Anybody have a problem with that? I do! Nothing to see here! just status quo! They think we are all zombies if we do not understand it we will ignore it! if it seems to have no effect on our dally lives then why bother! we get so complacent that everything happens under our noses and when we find out the truth it's to late. The audacity of them/us.
Frank - April 3, 2013
All these judges have to go right now they are criminals.Obama is a criminal to. Everybody in Congress are criminals to. All this corruption must stop now. These judges are giving away house to scammer servicers.
Charles Reed - April 3, 2013
Start at any Washington Mutual Bank (WaMu) government insured loan as they are being served by Wells Fargo and it is the key to taking MERS down because they are in need of providing a link of chain of ownership. Because WaMu was declared a "failed bank" on Sep 25, 2008 it exposes that Wells Fargo does not have a claim to the loans and MERS creates a fake chain of ownership, by find an already paid off originator who was in title and acts as if they sold the loan to Wells Fargo when in fact neither Wells Fargo or Ginnie Mae purchase the loan debt and are not the "holder in due course"!
Mike Dillon - April 3, 2013
All one has to do to find flaws with the MERS system, at least with regard to the securitization process, is read the relevant sections of PSAs and Prospectuses and who can do what and when and compare that with the Assignments of Mortgage. I'm seeing MERS, oftentimes as nominee for entities dead as long as 5 years, assigning mortgage **and the notes** into trusts as far out as 6 years after the time frames to do so expire. To the best of my knowledge, neither courts nor the insurance industry nor the S.E.C nor the I.R.S seem to have shown any interest in this. This isn't a question of borrowers not having the standing to challenge AoMs or enforce PSAs as third party beneficiaries. This is about Trusts and associated entities refusing to abide by their own contractual documents - which trump UCC - and Internal Revenue Code.
SoCal7 - April 3, 2013
Gomes was a poorly pled and argued case. The basics are that MERS can foreclose, but not it its own name. In any assignment, substitution of trustee and notices, it must state who it acts for. CA Statutes and the Deed of Trust itself support this. Recent decisions at the state and Fed level do as well. A better case pled and reasoned case will arrive at the appeals level and make Gomes inconsequential.
DON YOCUM - April 15, 2013
IF MERS IS MERELY A RECORDING SERVICE WOULDN'T IT MAKE SENCE THAT PROPER ASSIGNMENT OF THE SALE AND PURCHASE ON THE NOTE CONFIRM A CLEAR RECORD OF CONVEYANCE? WHAT IS RECORDED BY MERS AND WHAT IS ON THE NOTE SHOULD BE THE SAME. WOULD YOU BY A CAR, PAY CASH AND TELL THE DEALERSHIP, DON'T WORRY ABOUT THE TITLE? AM I OVERSIMPLIFYING THINGS?
George - June 26, 2013
So the banks developed MERS and use it as a bridge to bypass the county recorders office which streamlines the process of buying and selling MBS, saving them from paying county recording fees also! Lets say the Big Automobile Companies were to do the same thing for all the auto dealerships. Create a company called "Automobile Electronic Registration System" (AERS) Now the dealer registers the new car with motor vehicle just once at the very 1st sale of the car, and when the car is returned at the end of a lease or traded in back to the dealer, the dealer bypasses motor vehicle and just simply makes all the transactions of buying and selling the car go through "AERS". With that said, would motor vehicle be able to keep track of who the owner of the car is? Cars can be bought and sold many times over. This also would create the same loss of revenue for motor vehicle, no Registration Fees, etc. Would motor vehicle like losing Fees? How accurate would AERS records be? Why not let any type of business that has to register something on a continual basis with our government, develop there own registration system...? Why would the government even, ever, allow MERS to be developed? Oh, that's right, the banks needed a quick way to process transfers, assignments etc. to gain the huge profits they've received. (I'm not saying kickback to the Gov. ? - maybe that's why Banks are bailed out and not consumers?) Win / Win / Win / Win - for the Banks * Banks are receiving money from consumers paying a mortgage, even with good payers or bad payers, cash is coming in. $$$$ * Banks are turning around and selling that mortgage as a product to investors... Receiving Investments, Fees....etc. $$$$ * Banks have taken Bail Out Money from the government, (tax dollars) paid again! For Loses! $$$$ * Banks finally are reluctant to greatly help with modifications or to adjust loans to seriously help the consumer, so they foreclose on your home and get paid again selling the home...! $$$$
George - June 26, 2013
MORTGAGE CRISIS Years back the banks began to turn a mortgage into a commodity, with good paying mortgages, then they saw they were running out of this commodity, so the big banks, including Fannie & Freddie started approving loans to almost anyone and everyone, not so much to just give that person a home to have, but they were more concerned about creating more of the commodity. More securities to sell to investors. They even knew some home owners would not last several years or several months, as long as they could say to investors, "Hey, we have more mortgage backed securities to sell”. Now, to sell all these securities, they would have to create a mortgage assignment which is normally recorded with the county land recorders office for a fee. Physically, that would take up too much time and money, so the big banks invented and created MERS,(Mortgage Electronic Registration System). This electronic service was only created to track mortgages sold and bought in the secondary securities market. MERS legally has no invested interest in the mortgage, so they truly are not able to transfer or assign the mortgage acting as a nominee of the loan. But they are! Wrong. The chain of title of the mortgage is broken right here at this very early stage. The mortgage/note has to be assigned from one owning entity to the next owning entity. MERS never owns the loan, but they are creating and are listed on assignments at the local land recorders office. Now that the mortgage was bundled, sold and bought back and forth with investors, no continuing assignments are recorded with the county recorders office. By Law, every time a mortgage/note is sold, it must be recorded at the Land Recorders Office to maintain the integrity of the "chain of title" which reflects all the transactions of the mortgage/note. By not recording these documents, Fannie & Freddie & and all your Big Mortgage Servicing banks are saving millions-billions on recording fees, and possible taxes, etc. What I have found was that the Servicer of the mortgage is listed with the county recorders office as if they own the mortgage, while Fannie & Freddie or other Big Banks are selling the bundled mortgages as securities. Kind of like a Pizza shop cooking pizza legitimately up front, and a mobster selling off investments in the back. (Racketeering). The Servicer up front really is not the owner of the loan, and they tell you this. They also admit that your loan is owned by Freddy or Fannie, or the Investors. So when the Servicer now tries to foreclose on a homeowner, they are not truly the owner of the loan, and you have to own the loan to foreclose!!! Many never even question the Servicer and walk away from their home. Now to foreclose as quick as they can, that’s where the robosigners come in. These people do not review anything in the foreclosure paperwork about the loan, but only sign a name on the affidavit page on thousands of mortgages to get the foreclosure going before any homeowners begin to catch on. You see, its a matter of a quick process the Servicing banks want to achieve in order to get the property in their possession, only to sell it. The crazy thing is, when the originating bank gives the loan, then sells it to the 2nd bank which mostly ends up being the servicer, they again sell it to the 2 major players (Freddie & Fannie) or one of the other Big Banks, and they sell the mortgage back securities to investors. So the servicing bank gets paid for the mortgage and still collects payments toward the mortgage and a percentage goes to the Servicer, Fannie & Freddie and the Investor. So they are all making money. Then the Servicing bank comes to foreclose and if they are allowed to foreclose they get the home without true ownership, even though the loan is actually sold off into bits and pieces to investors. I can go on further, but to conclude, if this were a murder case, I would call this act of the banks premeditated, not an accident. This was all planned out in order to reach the highest profit they could using the mortgage backed securities as a commodity, and have total disregard, deliberately, intentionally ruining the lives of millions of homeowners.
Senaite Shifferaw - March 19, 2014
I am currently on appeal after being evicted from my home of 17 years in Berkeley, CA. I lived at 2639 Mathews Street. At the time of foreclosure my home was worth 530,000 with a loan amount of 290,000. My Servicer GMAC Mortgage filed bankruptcy in the middle of my attempt to get a loan mod. After informing me to be 3 months late, the filed a NOD and finally foreclosed on my property while they were in bankruptcy. MERS assigned the Note and DOT on behalf of the original lender GMAC Bank. Event hough MERS was the claimed assignor, it was actually assigned by employees of GMAC Mortgage. Then the Notice of Trustee Sale claimed it was selling the lien and not the property. On July 13, the bankruptcy court lifted the stay s giving the green light for GMAC Mortgage to sell, evict, negotiate etc its assets. GMAC Mortgage sold my property on July 12. Fannie Mae brought UD case against me as bona fide purchaser for value, where GMAC Mortgage issued a Corporate Grant Deed for 100. Their request to evicted on December 16, two days prior to Fannie Mae's MERCY not to evict during the holidays. I moved across the street from my foreclosed home and watched with amazement as the work to renovate proceeded. They worked like a bee, even before the appeal is heard. Not that I believe I have a chance in California, but then what the hell. I lost over 230,000 in equity. I believe even above the fraud executed against all homeowners...where the location of the property is desirable and there is equity in the property further fraud is committed by those who claim the represent Fannie Mae with an unverified complaint. I am just watching to see who actually purchased the property. The listing says it is not for sale, but people are offering 30 percent more than the appraised price of 550,000. Well I believe in Justice from the Lord. He has stated "VENGEANCE IS MINE". I will simply wait and see what HIS final ruling will be. AMAZED IN CALIFORNIA

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