It wasn’t long ago that the name MERS was familiar only to those within the mortgage industry. But lately, the nationwide Mortgage Electronic Registration System has been receiving a lot more public attention – usually as the receiving end of a lawsuit.
In Salem, Southern Essex District Register of Deeds John L. O’Brien has been pushing Attorney General Martha Coakley to investigate MERS’ raison d’etre – saving its often large member banks and lenders money on mortgage assignment fees paid to county registrars.
“It’s an issue of fairness. If regular folks and small banks have to pay this assignment, the big banks and conglomerates ought to be doing the same thing,” said Kevin Harvey, first assistant Register of Deeds in southern Essex County. “They don’t have a special privilege.”
When asked for comment on O’Brien and Harvey’s assertions and the possibility of an investigation, a MERS spokeswoman referred Banker & Tradesman to a public statement by the company.
“It is not the case that recording fees are somehow owed or outstanding,” the statement reads, in part. “[And the] use of MERS is in compliance with the statutory intent of the state recording acts.”
Requests for further comment or elaboration were declined.
But Essex County’s efforts to challenge MERS are far from isolated.
No Questions Asked
Transfers of land title – and associated mortgages – have for centuries been publicly recorded at registries of deeds. But as the mortgage securitization industry grew in the late 1980s and 1990s, it became common for loans to change hands many times.
Virginia-based MERS was created in the mid-1990s by a consortium of large national banks and Fannie Mae and Freddie Mac with the intention of enabling member banks to cut down on fees paid to county recorders.
Instead of recording a new assignment every time a loan changed hands, the note (a record of the debt owed) and the mortgage (the authorization to take possession of the underlying property if the debt were not repaid) would be broken apart. The mortgage would be recorded under MERS’ name, and the note would be able to be freely traded among all MERS members – without recording a new assignment each time. If it ever reached foreclosure, MERS would bring the action.
The practice is not without advocates.
“The idea of centralizing the legal custody of all of these mortgages under a single entity seemed like a pretty good idea and it seemed efficient,” in the aftermath of the early 1990s real estate bust, according to Richard Howe, register of the Middlesex North Registry of Deeds in Lowell. “It is contrary to traditional real estate law…but when times were good nobody questioned it.”
But as foreclosures have mounted in recent years, many lawyers and legal scholars have raised questions about the MERS model and whether it makes sense under state law.
‘Ginned-Up’
MERS does not own the debt on properties registered within the system. And since MERS is not the entity entitled to collect payment, many lawyers have argued it cannot bring suit to foreclose in the event that debt goes unpaid. In several states – including Maine, Arkansas and Kansas – they’ve found judges who agree.
“There’s language in each of those cases that says MERS is not the mortgagee,” said Christopher Peterson, a law professor at the University of Utah who has testified before Congress on the problems with MERS.
As more questions have been raised about whether foreclosures can be brought in MERS’ name, banks have begun re-assigning mortgages out of MERS before bringing foreclosures. But critics have raised questions about the firm’s practices there, too.
Rather than employing its own staff to handle such tasks, MERS allows the purchase – for a small fee – of a stamp naming the holder a corporate officer of MERS, enabling them to write and authorize assignments themselves. Generally these individuals are in actuality employees of the servicer or law firm bringing the foreclosure action.
“Essentially they assign the assignment to themselves and then go ahead and represent the lender in foreclosing,” a possible conflict of interest, said Jamie Ranney, a Nantucket foreclosure defense attorney and author of a white paper criticizing the firm. “The issue is that there are millions of ginned-up assignments out there, some of which purport to assign the note as well, which we know they can’t do because MERS doesn’t own the note.”
Unsecured Debt
As individual cases nationwide are appealed and state appellate and supreme courts begin to rule on them, MERS’ whole business model could be damaged.
“How can you go in and record your mortgage in the name of somebody that, under state law, they’re not a mortgagee?” Peterson asked. “If it turns out that recording under MERS’ name doesn’t accomplish that basic task, then the MERS business model is doomed.”
But more importantly, if some jurisdictions rule that the transfer of mortgages to MERS was invalid under their state’s law, it could mean that MERS-registered loans on properties in those jurisdictions would effectively become unsecured debt. A lender or investor might be able to prove they are the entity to whom the homeowner is indebted, but they would be unable to take ownership of the property and sell it in order to recover what they’re owed.
Even if only one or two jurisdictions were to interpret the law in this manner, a few bad apples might poison the barrel. Because loans from all across the country were often bundled together when the securities were formed, figuring out which ones may contain unsecured debts – and to what degree this will affect their risk of default – may prove near-impossible.
“I think the issue here is going to be primarily with properties that have already been sold, and their title problems,” said Kathleen Engel, a law professor at Suffolk University Law School in Boston. “I wouldn’t buy a house that was for sale at foreclosure, and I wouldn’t buy a house that had been sold in a foreclosure, until these issues get resolved.”
