Mortgage Doublespeak
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Mortgage Doublespeak

June 2011


When I use a word," says Humpty Dumpty in Through the Looking Glass, "it means just what I choose it to mean--neither more nor less." Alice replies: "The question is, whether you can make words mean so many different things." To which Humpty responds, "The question is, which is to be master--that's all."

That dialogue could be chiseled onto the cornerstone of Mortgage Electronic Registration Systems
Inc.--if it had a cornerstone. MERS, created in 1995, is a private registry that tracks more than 65 million home mortgages nationwide. It is incorporated in Delaware; operates within a Reston, Virginia, shell corporation (MERSCORP, Inc.); lists its address as a post office box in Flint, Michigan; and has no employees. It relies on its members to process documents and--until recently--to initiate foreclosures in its name.

Fannie Mae, Freddie Mac, and other board members founded the MERS registry to bypass county recorder offices--thereby saving billions of dollars in fees and speeding the securitization of mortgage-backed securities. Within the MERS system, transfers of beneficial ownership may occur many times, but they aren't publicly recorded or even reported by members. On its website the registry boasts, "Chain of title starts and stops with MERS!"

It all worked wonderfully, until it didn't.

County recorders were the first to rebel. In 2001 the county clerk in Suffolk County, New York, simply refused to record and index MERS transactions. The New York Court of Appeals ruled the clerk lacked authority to reject MERS assignments, but Chief Judge Judith S. Kaye wrote in a partial dissent, "If it achieves the success it envisions, the MERS system will render the public record useless by masking beneficial ownership of mortgage and eliminating records of assignments altogether." (MERSCORP, Inc. v. Romaine, 8 N.Y. 3d 90, 104 (2006).)

The core legal issue was MERS's statement of purpose, prominently displayed on its website: The corporation is "acting solely as a nominee for Lender and Lender's successors and assigns," and "MERS is the mortgagee under this Security Instrument."

After the housing crash, however, MERS faced challenges in foreclosure proceedings from debtors demanding to know who owned their notes.

In testimony before the House Judiciary Committee last December, law professor Christopher L. Peterson of the University of Utah pointed out the contradictions in MERS's statement of purpose. "On the one hand, MERS purports to be acting as a nominee--a form of an agent," he testified. "On the other hand, it also is claiming to be an actual mortgagee, which is to say an owner of the real property right to foreclosure upon the security interest. It is axiomatic that a company cannot be both an agent and a principal with respect to the same right."

Nevertheless, the California Court of Appeal for the Fourth Appellate District ruled in February that MERS, as nominee, has no obligation to disclose documents prior to initiating a nonjudicial foreclosure; it held further that California statutes give a homeowner no private right of action to determine the identity of the beneficiary (Gomes v. Countrywide Home Loans, Inc., 192 Cal. App. 4th 1149 (2011)).

"Debtors in a wrongful foreclosure suit are in a real Catch-22," says Ehud Gersten of San Diego, who is petitioning for state Supreme Court review of the Gomes decision. "The defendants simply file a demurrer, the case never reaches discovery, and the debtor has no way of tracking the chain of title assignments."

But recent rulings in U.S. bankruptcy court went differently. "The bankruptcy courts are saying, 'MERS is just an agent of the lender--show me the agreement that you have the authority to act as beneficiary and to assign the note,' " says Christopher Hanson, principal of Hanson Law Firm in Alameda who represents borrowers, real estate agents, and mortgage lenders.

In Los Angeles, Judge Samuel L. Bufford held that "MERS supports this relief from stay motion solely with evidence from a low level clerk whose only function is to compare the financial numbers on his evidentiary declaration with those on a computer screen." Bufford found that the clerk was not competent to testify, that MERS had presented no admissible evidence, and that the law firm filing the motion should be sanctioned (In re Vargas, 396 B.R. 514, 520 (Bankr. C.D. Cal. 2008)).

In a Sacramento case, Judge Ronald H. Sargis concluded, "Since MERS did not own the underlying note, it could not transfer the beneficial interest of the Deed of Trust to another." (In re Walker, No. 10-21656-E-11 (Bankr. E.D. Cal. findings filed May 20, 2010).)

And in a Chula Vista case, Judge Margaret M. Mann observed, "[C]ircumventing the public recordation system is, in fact, the purpose for which the MERS system was created. Creation of a private system, however, is not enforceable to the extent that it departs from California law." (In re Dobie, 2011 WL 1465559 (Bankr. S.D. Cal.) at *7 & n. 15.)

Those bankruptcy court decisions set off alarms among MERS's members. Last year Fannie Mae directed its loan servicers to stop naming MERS as the plaintiff in foreclosure actions. Board member JPMorgan Chase & Co. followed suit, as did Freddie Mac this March. That same month MERS proposed to change its operating rules, revoking members' authority to conduct foreclosures in its name and requiring them to execute the assignment out of MERS at the county recorder's office before initiating foreclosure proceedings.

"I love this!!!!" one online user posted to the Mortgage Servicing Fraud Forum. "If you read the memo, there is desperation in the air ... I truly find this amusing, that now they want to get all their corporate resolutions right."

In April, the long-slumbering Office of the Comptroller of the Currency woke up as well. The bank regulator named MERSCORP in a consent decree that requires its members, according to a press release, to "promptly correct deficiencies in residential mortgage loan servicing and foreclosure practices." (OCC No. AA-EC-11-20 consent order issued Apr. 13, 2011.)

Of course the underlying problems remain. If MERS is merely a custodian, how can it assign a mortgage note? Who really owns the promissory note? Assigned, securitized, tranched, and sold to investors, its beneficial owner could be anywhere.

"I see a logistical nightmare coming, not a crisis," Hanson says. "There's nothing wrong with electronic registry. In foreclosures, MERS is the extra step between the borrower and the true holder of the note. But that shield was created by MERS's members."

MERS responded quickly to the OCC, asserting in a press release, "The actions undertaken by Federal regulators emphasize the legal appropriateness--as well as the importance--of MERS to our nation's housing finance system."

Humpty Dumpty couldn't have said it better.


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