Friday, December 17, 2010
MERS: Who Really Owns Your Mortgage?
Mortgages and other public documents, as I have written about here before, have in the last few centuries relied on the transparency of being recorded publicly. This means that when you purchase a home and take out a mortgage the mortgage is recorded in a publicly available book somewhere in your country (at least in the US). The book records information about you, the property, the terms of the note, and most importantly the mortgage holder.
The mortgage holder would be the bank loaning you the money. Before the last decade or so this was about all that happened in the county clerks office. Sometimes the bank would use a service firm to collect payments but the bank was always recorded on the mortgage.
Associated with this process were various fees. If you have a mortgage you have seen them. Typically at closing you pay $115 (for example) to the County Clerks office to "record" your mortgage. "Recording" is the process of putting it into the public book.
More than a decade ago your bank "Home Savings and Loan", or whoever they may be, realized that mortgages could be pooled together to form investments others would buy. Typically this meant the mortgage holder on the mortgage would change a few times: once when the loan was sold to a broker and again when that broker sold that loan to a Trust or other investment vehicle for investors to buy. The reason this paper work changed is that each point someone else besides "Home Savings and Loan" effectively took over the mortgage. These transactions were recorded at the County Clerk's office so that if you failed to make payments it would be easy for the mortgagee (who ever it was at the time) to process the foreclosure.
(Foreclosures typically require the actual mortgagee to be present in court and to prove that they are in fact who is entitled to take the property back.)
None of this was a problem until the industry of creating investments from mortgages took off. This business involved creating a single investment from thousands of mortgages across the country. In turn this required the originator of the investment to send minions to all corners of the country to to record changes to mortgages in each and every Country Clerks office to represent the true state of ownership. This was an expensive and tedious process.
In order to bypass all of this overhead the white paper was circulated at a Mortgage Banking Association meeting in the early 1990's. This white paper described a system where a "electronic construct" would take the place doing all this paperwork. Mortgage companies would interact with the "construct" rather than the County Clerk's offices and transferring mortgages around would become very simple. The "electronic construct" would handle the details and stand in place of the actual mortgagee.
By about 1997 MERS (Mortgage Electronic Recording System) was launched to perform this service. Initially a bank would close on a mortgage and then assign, through a traditional Country Clerk's office transaction the mortgage to MERS. MERS created an MID (Mortgage ID) for the mortgage and provided this to the bank. Now all the banks participating in MERS could exchange mortgages by simply moving around MIDs.
Eventually, around 1999 or so, the banks began having the mortgages recorded in the name of MERS int he first place. Now MERS here just acts as a "placeholder" for the real mortgage bank. Though their name was on the mortgage paperwork the intentions was that the relationship was still between you and the originating bank. MERS could not foreclose, collect payments, etc. That was the banks job. MERS job was simply to make trading the mortgage easier and cheaper by eliminating the County Clerk's office and associated fees and tedium of having to update the paperwork as the mortgage traded hands.
Around this time (1999) if a default happened the true owners would show up and effectively "pretentd" to be MERS in any court or legal proceeding associated with the default. Moody's Investor Service put its "stamp of approval" on this "pretending" idea and the mortgage as an investment market exploded.
In the intervening decade MERS came to be the name on approximately 60 million US mortgages. With the financial mortgage crisis of 2008 the "pretending" model of foreclosing suddenly became a serious issue. The issues are (from this paper) "(A) whether MERS owns title to mortgages either as a mortgagee or an assignee; (B) whether MERS has standing to bring foreclosure lawsuits; (C) whether MERS is a "debt collector" for purposes of the federal Fair Debt Collection Practices Act; and, (D) whether MERS has priority against subsequent bona fide purchasers for value (including bankruptcy trustees)."
Now, with millions of loans in foreclosure, a significant problem emerges. Courts do not like "legal pretending" when someone is going to lose their home. So, if MERS is on the mortgage as the mortgagee then the court expects that MERS actually owns the mortgage, which it does not. Sometimes MERS tries to pretend its an "agent" for the real mortgagee but that conflicts with the fact that it is itself listed as the mortgagee. (You can read about this in detail in the link provided above.)
The bottom line is that MERS is basically just a "placeholder" for a real mortgagee and there is no legal concept to go along with that, i.e., the courts and County Clerk's offices around the country don't recognize this. They understand a mortgage, a mortgagee, a mortgagor, but not something that is none of these.
This problem creates a second difficulty. Since MERS isn't the "holder of the mortgage" in any way that a court or legal system recognizes its easy to show that MERS, though it is listed on the mortgage documents, does not have legal standing to foreclose. This is sort of like Julie borrowing money from Bob, Julie not paying Bob, and Sam coming to collect. Though Sam might be able to do this if Bob is a loan shark the legal system does not recognize Sam's legal standing between Julie and Bob.
There are Federal laws related to consumer debit and item (C) above comes into play here. The problem here is that the Fair Debt Collection Practices Act (FDCPA) does not recognize something like MERS. It says that MERS must either be the debt collector or it is not - it cannot be both. The problem here is that if MERS "get's away" with being a "placeholder" for the mortgagee then its likely other debt collection services could use the same tactic to circumvent the FDCPA. This creates a problem for the courts when it treats transactions with MERS. Too many findings one way or another create problems.
Finally, MERS creates a serious problem for foreclosure. Mortgage recording in the County Clerk's office creates a legal "backstop" for tracking the ownership of a property. If a mortgage is not properly recorded then the mortgagee may not have standing in a bankruptcy and could, for example, be considered an unsecured creditor rather than a secured creditor.
Courts take a very dim view of slipshod paperwork and have found mortgages invalid for extremely minor paperwork related details. If single MERS mortgage were found to have such a flaw it could be argued that all the MERS mortgages in the state (because these are state laws) with the same flaw are equally invalid.
All this said MERS did not cause the 2008 financial crisis but it was certainly a contributing factor. What part it will play in resolving the crisis from the perspective of mortgages, robo-signing and the rest is still unclear. Further, MERS is a direct attack on the transparency of printed and direct public records. You and I cannot access MERS to see where the ownership of our mortgages might be (MERS data is only available to those who "own" it). This veil of secrecy flies directly in the face centuries of state and federal law which attempts to keep property transaction public and works very hard to ambiguity out of property ownership.
Again, if these were a few mortgages here and there there would not be a problem and the courts would work this out. Unfortunately, one half of all mortgages are recorded via MERS.
MERS represents the destruction of centuries of legal work to make a fair and clear mortgage system. It was created to facilitate the creation of investment vehicles who's very value MERS now undermines. Until recently I had never heard of MERS and no doubt neither had you.
MERS was created by "big Wall Street Banks" - so is it evil?
Well that's really what's hard to tell.
The investments created in part by MERS are probably paying your retired parents or grandparents bills as part of pensions.
The "poor folks" who government policies at Fannie and Freddie Mac helped to buy homes would probably not have them (provided then are not in default) if it weren't for MERS.
MERS undermines centuries of law and will no doubt leave a lasting and permanent mark on the history of property ownership in this country.
It will no doubt take a full decade or more for this to be resolves (the RIET trust used to resolve the savings and loan crisis from years ago took as long).
The problem here is that everyone is greedy - the home owner, the retiree, the banker, the County Clerk, everyone. All profited and are are being punished.
Now, for me, who did not participate - is it fair I should be punished?
Posted by John Gault at 8:43 AM