Mar 05, 2011

MERS: The Elephant in the Foreclosure Room

If you are a homeowner, chances are that the current owner of your mortgage is an entity known as MERS (Mortgage Electronic Recording System). This is true even though you are making your payments to one of the major banks or a dedicated mortgage servicing company. Nobody borrows from MERS in the first instance but somewhere in the chain of title the likelihood is that MERS became (and continues to be) the owner despite a series of transfers to banks, trusts, and investment vehicles. In legal parlance, MERS will be identified in your mortgage documents as the "mortgagee of record," and will also be identified as the "nominee," or agent for the purpose of making future transfers to other entities. 

What Is MERS and How Does It Work?

Like a lot of what has transpired in the mortgage industry, it's hard to get a handle on how MERS works and what exactly is wrong with it. Fortunately, very-readable testimony offered by Professor Christopher Peterson before the House Judiciary Committee casts much light on the subject and is available for your reading pleasure.    

MERS is essentially a large electronic database of mortgages and mortgage transactions. It was invented in the mid 1990s as a legal device to replace the county land title recording system. It is MERS that made the real estate boom feasible by (supposedly) allowing electronic transfers of mortgage ownership among bank and investors in a variety of forms known as real estate trusts, securitized mortgage bonds, and other miscellaneous financial derivatives -- all backed by packages of mortgages consisting of various risk levels.

The lion's share of the financial entities dealing with mortgages were and are members of MERS, and under the MERS rules are also agents which are authorized to effect transfers to other members. These transfers have seldom been recorded in county land records offices -- since ownership never (supposedly) changed but rather remained with MERS. Thus, not only does MERS facilitate transfers of real estate interests, it saves the real estate and banking industries millions if not billions of dollars in recording fees by eliminating all those recording transactions that would otherwise have to be made, at an average pop of $35 per transaction. Avoiding these fees was a major reason that MERS was created in the first place.

Problems Created by the MERS System

The most profound problem that the courts and commentators have with MERS is that it purports to replace the way in which land transaction records have been created and stored since the beginning of the country -- all without  the benefit of authorizing legislation. Under the traditional (and legally authorized) method of keeping track of who owns what, any person is free to walk into a land records office and search the entire historical record of who bought and sold any particular piece of property. This is what is known as a "title search." Under the MERS system, however, no such search is possible. MERS Members are not required to report transfers to the database and so there is no real way to be sure about who owns what.

One Court Says: MERS Doesn't Deliver Clear Title

In In re Agard, a bankruptcy judge analyzed MERS for the purpose of deciding whether a bank seeking foreclosure could prove that it owned the promissory note accompanying the mortgage -- a prerequisite in bankruptcy court when asking the court for permission to proceed with the foreclosure. Previously, MERS had attempted to assign the mortgage and promissory note to the foreclosing bank and the question was whether it successfully did so. 

Although for procedural reasons the Court allowed the bank to proceed with the foreclosure, the Court went on to analyze the role of MERS in the chain of title for the debtors' home. It concluded that MERS, as currently structured, did not deliver clear title to the foreclosing bank. Although the court's analysis does not, strictly speaking, count as precedent because it wasn't necessary to the court's ultimate decision (that is, it was dicta only), it should still prove persuasive with other courts dealing with cases involving MERS ownership.  

MERS Announces Some Changes

Because of the various problems it faces in the Courts, MERS has recently announced that it is changing one of its membership rules (Rule 8) to require that members no longer foreclose in MERS name. MERS has also told its members that assignments out of MERS's name should be recorded in the county land records even if the state law doesn't require it. In short, MERS is on the defensive. These are welcome changes for the future, but the degree to which MERS past practices have placed clouds on current real estate titles remains to be seen.