Tuesday, October 19, 2010
Greetings Earthlings - Welcome to MERS!
Caution: do not read this post while driving a vehicle or operating heavy machinery as it may cause drowsiness.
MERS ‘Mortgage Electronic Recording System’ has been a big issue in news as of late. There are a lot of complex legal issues involved with the MERS process that could lead to significant problems for the U.S. Mortgage Market.
In this post, I will try to simplify the issue as best I can and also provide an outline of some of the issues involved and why there may be problems moving forward for the banks. I have cited some authorities, but given that this is a blog post and not a law review article, I refrained on others.
In the go-go years, Banks would create mortgage backed securities (‘MBS’) or Collateralized Debt Obligations (CDOs). They were simply a bundle of loans (or portions of loans) that were sold to investors (ie. pension funds, municipalities, etc.)
In every state in our union, a title and deed of trust (or mortgage) that is transferred is typically ‘recorded’ with the county recorder of register of deeds. This recording has provided a transparent vehicle for determining property ownership in our Country for generations. Typically, a fee is associated with recording of said documents. In King County, the fee is about $65.
In the mid-1990s, mortgage banks decided they did not want to pay the recording fees or create proper ‘assignments’ (ie. Transfer documents) when selling the mortgage to investors as that would obviously be incredibly cumbersome and expensive.
To avoid paying county recording fees, mortgage bankers decided to create a SHELL COMPANY that would pretend to own many of the mortgages in the county – that way, no assignment documents (or recording fees) would be necessary upon the transfer of a loan document.
Currently, about 60% of the nation’s residential mortgages are recorded in the name of MERS.
What exactly is MERS?:
In boilerplate security agreements included in mortgages or deeds of trust around the country, this clause is included:
“MERS”…..is a separate corporation that is acting solely as nominee for Lender and Lender’s successors and assigns. MERS is the mortgagee under this security agreement.
Essentially, MERS is claiming to be an ‘agent’ of the lender and a ‘mortgagee’ (owner with the right to foreclose). This raises two important issues:
1) If MERS is an Agent, it is uncertain whether MERS has the ability to list itself as the Morgagee.
2) If MERS is a mortgagee, both MERS and the companies that invested in these mortgages breach the longstanding precedent that a promissory note and mortgage are inseparable documents.
Court Cases: As of August, 2010, every state supreme court that has ruled on the issue has found that MERS is not a mortgagee or deed of trust beneficiary. (Arkansas Court; MERS v. Southwest homes of Arkansas)(Kansas – Landmark Nat. Bank v. Kesler); (Maine – MERS v. Saunders) which leads to the problem of conveyance of the mortgage.
MERS and the Problem with conveyance:
If MERS is neither a mortgagee, or a deed of trust beneficiary, the courts must soon confront the enforceability of the MERS security agreements as there is a compelling argument that loans originated through the MERS system fail to create enforceable liens.
The (Archaic) Legal Problem:
1) The Banks did not specify who the actual Mortgagee is (MERS is a shell company). This presumably breaks the chain of title, and breaks long standing precedent that a mortgagee must exist to enforce (foreclose) the document.
2) In many cases, the mortgage and the note may have been separated. This of course would violate the legal requirement that mortgage and note are inseperable.
Allowing either of these to continue would upset hundreds of years of legal precedent.
If the courts take a hard stand by invalidating liens because they do not specify a mortgagee, the markets very well may collapse.
Conversely, if they allow MERS to act as a ubiquitous national proxy system, they will alter the real property that has stood for generations.
My guess: Just as we don't depend on horses to transport us anymore or cook our meat over an open fire, we must adopt to a new era of technology and adopt the MERS system (warts and all). I think its fairly obvious that the courts/ politicians will take the easy way out and alter the law rather than create a tidal wave of title issues that could cripple the national real estate market.
Of course, they must first "investigate the problem" as they are now doing in all 50 states. This is purely my opinion, but I believe the investigation is mainly a political ploy to appease the constituents.
That said, there may be other issues looming similar in nature to this problem that will hopefully arise during these state "investigations" including: 1) fraudulent transfers/ misrepresentations by the bank in transferring these mortgages to the taxpayer (ie. Fannie/ Freddie) and other investors; and 2) the continuing accounting fraud in the banking industry that allows for record Wall Street bonuses while the rest of the country continues to struggle from a problem creating largely by Wall Street.
Weitz Law Firm, PLLC
5400 Carillon Point, Bldg 5000
Kirkland, WA 98033
at 7:51 AM