The Meaning of MERS

The Meaning of MERS

People have learned a lot about MERS, but in general we haven’t really focused on what it all means. In short, it means that the mortgage industry decided that it was above the law.

MERS was set up thoughtlessly, without regard to its basic legality, and designed with only two objectives: lowering the mortgage industry’s costs and maximizing its convenience. As a result, MERS has none of the advantages of the centuries-old system it was intend to replace, and largely has. MERS is not accurate, not transparent, and not accountable to the public. To let MERS continue simply allows it to continue wreaking havoc on property records and the legal morass it’s created to continue tangling foreclosure and bankruptcy cases nationwide.

The Ultimate Answer: Legislate MERS Out of Existence

At this point legislatures from the states to Congress need to confront the deep reality of what MERS truly is. MERS must be legislated out of existence, and the costs for its existence to date—including the costs of accurately updating our land records nationwide–must be borne by all the players that benefited from MERS. Despite the broad claims of the MERS website, the beneficiaries are generally two groups: mortgage securitizers (yes that includes all the big Wall Street players and TBTF banks) and mortgage servicers (who again include the TBTF banks.)

In replacing MERS, legislatures should consider modernizing and standardizing land records.  The mortgage industry’s frustration with the pre-MERS era is legitimate. But what is not legitimate was the industry’s unilateral decision to create a self-serving system that was indifferent to law and the public’s interest.

Think all that sounds over the top and extreme? Let’s recap what we know about MERS.

MERS is a company whose product is a massive electronic database called Mortgage Electronic Registration Systems. MERS Inc. has no employees, but some 20,000 “Certifying officers”. Certifying officers have included employees of mortgage servicers, law firms, and subcontractors. At least, people signing in MERS’s name have included such people. Whether any of them is really an officer of MERS with any authority is very doubtful. Doubtful because there’s solid evidence that Bill Hultman, who designated all these people as signing officers, lacked authority to do so.

Signatures but Apparently No Authority to Sign

In short, the appointments appear to be invalid two and sometimes three reasons. First they’re apparently forbidden by MERS’s bylaws. Second, the resolution Hultman cites as giving him authority was adopted by an earlier incarnation of the company and doesn’t appear to have been ratified by this one. Third, even if good, the resolution only allows MERS members’ employees to be officers. On what grounds did Hultman designate attorneys at foreclosure mills and “signers” at contractors? A few months ago a Texas court found the authority issue serious enough to allow discovery on the point to go forward.

The authority issue is serious enough for MERS to take action. MERS kicked off 2011 by announcing a new authorization procedure was being adopted, that everyone would have to be reauthorized, but that in the meantime, people could keep signing as if nothing had changed. I wonder how that’s been worked out. Did MERS mark documents signed under the new authority in any way, so people can tell? How is someone to know? Seems to me like MERS is just begging for some long, nasty discovery battles. And it’s just one sign of how ad hoc and careless the MERS project has been.

(Note, in the nine months since I wrote the article at the “solid evidence” link I’ve been persuaded by other attorneys that the doctrine of apparent authority may not solve the problem but it’s a discussion too in the weeds for here.)

MERS Is Inaccurate

We know MERS was designed to track mortgage servicing rights and tracking ownership of the loan was incidental, only done if the investor volunteered the information. (see text at fn 16). We know MERS itself does not update the database or do quality control of any kind. All data entry is done by MERS member companies for their own loans. Limited empirical evidence suggests the database is not accurate.

Lisa Epstein of ForeclosureHamlet.org shared some of her results of searching the MERS database with me, and the results are discouraging. While working on one project, she discovered bad MERS numbers listed in SEC filings for a number of loans, and that Wells Fargo originated loans weren’t showing up at all. Another discovery she made was that MERS had 10 loans listed as active after the properties had been foreclosed and sold or sold short. She found them simply by examining the 45 loans in one securitized trust that were located in her county; that is, she hadn’t tried to select for inaccurate MERS data.

Despite the fact that no one is managing this database as a cohesive whole and apparently quality control is, ahem, uneven, for roughly half of all mortgages, MERS’s records are the only ones. The public has nothing else to turn to. For the life of a MERS loan the only record of who owns the loan and who services it is the MERS system. That’s the point, as MERS explains on its website.

MERS Hides Self-Dealing; OR, The Papers Are Meaningless

When the time comes to take MERS’s name off a loan, the MERS officer assigning the mortgage out of the database works on behalf the loan’s claimed current owner, whether as an employee of the servicer or as an employee of a contractor of the servicer. That is, the party getting the mortgage via the assignment is the party saying the assignment is happening. Using MERS’s name covers what seems otherwise obvious self-dealing.

For example, the John Kennerty who signed so many assignments of mortgage to Wells Fargo was a Wells Fargo employee. Or consider yesterday’s post about the New Century MERS assignments; only someone working behalf of the companies getting the deeds of trust could be signing them, since New Century doesn’t exist.

Perhaps self-dealing isn’t accurate because at some point I’m sure the receiving party paid good money for the mortgages. But that’s looking at the assignments purely from a document execution perspective, not a legal one. (see link at page 16.) That is, the way MERS assignments are done only makes sense if the documents are meaningless and the only issue is how quickly and cheaply the documents can be generated.

The documents themselves, however, are submitted to courts as if they have meaning. The documents claim Bank A, by signing the document, is transferring the mortgage (and sometimes the note) to Bank B, including the right to foreclose if the loan isn’t paid. The document itself is the transfer. It’s why the signature of the Bank A person is supposed to be notarized: To protect Bank A’s property from be stolen by someone signing an assignment without authority to do it.

So if the document is supposed to mean what it says, it sure looks like self-dealing when it’s Bank B’s employee signing in Bank A’s name.

Of course, MERS members might say, the document is essentially meaningless. Bank B bought the rights awhile back. The document isn’t really transferring anything; it’s just a piece of paper we need to have to give to the judge or record in the land records. This attitude is inherent in the MERS system, because not only did MERS separate the note and the mortgage, but it separated the transfer of the mortgage from the assignment process. At least that was its intent.

In that frame, where the mortgage assignment is meaningless, what’s the harm in having the receiving bank sign for the assigning bank? And what’s the point of notarizing the MERS signing officer’s signature when nothing’s really being transferred? No wonder they started robosigning the documents.  If the document is meaningless, why does it matter how you sign it?

I wonder how judges will feel when they really start to understand what a sham these assignments are.

Nobody Thought MERS Through

I worked as a corporate lawyer at a big firm for three years, several years ago. The job of a corporate lawyer, in part, is to think things through.  A related job is to help clients reduce their costs by ensuring that the clients’ plans comply with the law. By those measures, the lawyers who blessed MERS didn’t do their jobs.

According to the New York Times’s Michael Powell and Gretchen Morgenson, no one checked to make sure MERS’s system was legal in all 50 states. That’s amazing, because real estate law can vary state by state, even as to basic issues like who owns the land, the purchaser or the lender. Thoroughly analyzing a proposed system like MERS in light of the laws of each state is the kind of task law firms are supposed to be good at.

This failure has already cost MERS members, as MERS’s legality is being litigated on a state by state basis and though winning some, MERS is also losing some. (The link is to a law review article by Dean and Professor Christopher L. Peterson of the University of Utah Law School, the preeminent MERS scholar.) As a result, MERS has been forced to change its procedures. For instance, it has told members not to foreclose in the name of MERS. And along the way the institutions that have relied on MERS have spent a lot of money litigating, and lost a lot of money by not being able to foreclose in a timely fashion.

Another indicator that MERS wasn’t thought through are all the assignments being done on behalf of entities that don’t exist, such as the New Century ones I mentioned yesterday. The MERS system apparently presumed all lenders would continue to be around so that servicer executed assignments in the lenders’ names would make sense. That was as blindly optimistic as the belief home prices would always rise.

Another part of MERS’s operation I can only hope—mortgage backed securities investors can only hope—was thought through. That is, generally a securitization’s pooling and servicing agreement says that for every MERS loan in the deal, no assignment of mortgage needs to be prepared and delivered to the trust. The contracts presumed MERS worked, and that the mortgages were being successfully transferred along with the notes into the trusts without a contemporaneous assignment. So my question is: under all 50 states’ laws, does that work? If not, what does that mean for the securities?

The Ibanez case in Massachusetts demonstrated that one assignment practice that was standard in securitizations—assignments in blank—did not work under hundred-year old Massachusetts precedent. That fact and the failure to think MERS through make me nervous about the contract provision.

The Banks Believed They Are Above the Law

In a nutshell, here’s all you need to know about MERS, taken from the Powell and Morgenson piece:

“The bankers who midwifed its birth hired Covington & Burling, a prominent Washington law firm, to research their proposal. Covington produced a memo that offered assurances that MERS could operate legally nationwide. No one, however, conducted a state-by-state study of real estate laws.

“They didn’t do the deep homework,” said an official involved in those discussions who spoke on condition of anonymity because he has clients involved with MERS. “So as far as anyone can tell their real theory was: ‘If we can get everyone on board, no judge will want to upend something that is reasonable and sensible and would screw up 70 percent of loans.’ ”

Unfortunately for the banking industry, the judiciary is not temperamentally inclined to rewrite laws for businesses’ convenience. Consider what U.S. Bankruptcy Judge Robert E. Grossman, a former partner of a major corporate lawfirm himself, wrote when finding assignments of mortgage by MERS violated NY law:

“The Court recognizes that an adverse ruling regarding MERS’s authority to assign mortgages or act on behalf of its member/lenders could have a significant impact on MERS and upon the lenders which do business with MERS throughout the United States.  However, the Court must resolve the instant matter by applying the laws as they exist today.  It is up to the legislative branch, if it chooses, to amend the current statutes to confer upon MERS the requisite authority to assign mortgages under its current business practices.  MERS and its partners made the decision to create and operate under a business model that was designed in large part to avoid the requirements of the traditional mortgage recording process.  This Court does not accept the argument that because MERS may be involved with 50% of all residential mortgages in the country, that is reason enough for this Court to turn a blind eye to the fact that this process does not comply with the law.”

It’s high time to legislate MERS out of existence.

Update 7-22-11

Lynn Szymoniak sent me this MERS presentation which suggests another fundamental problem with many MERS Assignments. See page 3, brown box 2 at right and pages 23 and 24. Every MERS officer is supposed to be an employee and officer of the lender they’re signing on behalf of, and is only supposed to sign for loans registered to that lender. That is, a MERS officer signing for, say, Citi is supposed to be an employee and officer of Citi, and only sign for Citi loans.

People generally understand an “officer” of a corporation to be someone who has a corner office, or at least, real status in the company. The word shows up in all the big titles, after:  Chief Executive Officer, Chief Financial Officer, Chief Operating Officer, etc.  But we’ve learned the people signing documents are low level $10/hr employees, sometimes of the company and sometimes their contractors. These people sign as MERS officers for many institutions and believe they’ve been given signing authority by those institutions (presumably by being made officers).

These things can only be simultaneously true if we have another one of these meaningless paper situations.

They’re not “officers” in the commonly understood way. The only way these signers on behalf of multiple institutions can also be “officers” of each is if “officer” means nothing. These people also aren’t employees of the lenders in by any definition I know of. But surely the requirement by MERS that a certifying officer be an officer and employee of the company isn’t an accident. I mean, MERS could have said “agent”; could have said “employee or contractor” etc. Presumably it matters because the assignments claim to transfer assets of the company.

Again, once judges really understand how meaningless MERS documents are—how they are designed to look meaningful while in fact are meaningless—I don’t think it will be pretty. I only hope law enforcement is paying attention too.

 

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