MERS on the hot seat?

On December 2, 2010, the House Judiciary Committee held a hearing on the mortgage crisis affecting the American homeowner.  Disturbing testimony came from Christopher Peterson, associate dean for academic affairs and law professor at the University of Utah.  He indicated in his written submission how big banks basically destroyed America’s land-recording system, which is a method of tracking property titles changing hands since colonial times and the founding of this Republic.

What big banks did was create a company called MERS (Mortgage Electronic Registration Systems, Inc.).  This company was purposely designed to get around physically recording mortgages upon transfer or sale of the note and mortgage.  As shown below, the way they prepare their documents is legally questionable, and makes tracking mortgage ownership extremely difficult, from a consumer’s perspective, since nothing is publicly recorded upon sale/transfer of the note.  Ownership of the note, however, is something that must be proven in court during a foreclosure action.  This creates confusion.   

MERS states on its website that “MERS is an innovative process that simplifies the way mortgage ownership and servicing rights are originated, sold and tracked.  Created by the real estate finance industry, MERS eliminates the need to prepare and record assignments when trading residential and commercial mortgage loans.”

So let’s examine this statement.  MERS was created by the real estate finance industry, meaning those big banks that produce home mortgages.  They also eliminate the need to prepare and record assignments, which is contrary to the way mortgage ownership has been recorded since the founding of this country.

MERS was created by banks, for banks, to satisfy their interests and also to limit their liability since MERS is on the original mortgage and note as “nominee” only.  What this actually means is really contentious and there is no definitive answer, yet, since courts are now faced with this issue. 

In addition to tracking ownership and servicing rights, MERS has taken on another more aggressive legal role.  When closing on a home, the lender (example Wells Fargo) lists MERS as the mortgagee of record on the actual paper mortgage, rather than the lender who funded the loan.  When recorded, the mortgage is under MERS, even though MERS does not solicit, fund, service or actually own any of the mortgages.  MERS continues to be the mortgagee for the life of the mortgage even after the original lender (Wells Fargo) or a subsequent assignee transfers the loan into a pool of loans that are then sold to investors- a process known as securitization.  MERS is legally involved in the origination of about 60% of all mortgage loans in the U.S. 

MERS justifies its role by explaining that it is acting as “the mortgagee of record in nominee capacity.”  This allows for 2 things: 1) MERS does not have to record any subsequent assignments since it is the mortgagee, thus avoiding county recording fees on millions of mortgages- this amounts to millions in savings for the banking industry. 2)  MERS brings foreclosure proceedings in its own name, rather than the actual owner of the loan, which is often a trust owned by investors.  This eliminates the need for the trust to foreclose in its own name or reassign the loan to a servicing company to bring the foreclosure suit.  This does create a host of legal problems.  For example, does MERS have standing to bring a foreclosure action?  Is MERS considered a debt collector under the federal Fair Debt Collection Practices Act?  

Why is this important?

Million of foreclosure documents produced by MERS may have been signed in MERS’s name by people without the power to do so.  A lack of authority to sign these crucial documents calls into question their validity.  While the full scope of its ramifications continues to remain uncertain, this creates more uncertainly in the already murky swamp of foreclosures.

MERS tracks and holds mortgages in a huge electronic database that is created, financed and maintained by its “members” who are the giants in the residential mortgage business.  This database simplifies securitization and makes it cheaper by foregoing the requirement that every change in ownership of a mortgage be recorded in the county where the mortgaged property is located.

Instead of recording the documents as required by law and has been the rule for countless decades, the mortgage is recorded in the name of MERS one time only, and all other transfers of ownership of the note and mortgage in the future, are tracked by the MERS system.  However, entering data into the MERS database is optional for its members.  MERS Chief Executive R.K. Arnold told Congress that “members tend to register only loans they plan to sell.”

The land registering system in each county is losing tens of thousands of dollars since MERS is helping banks bypass the recording process.  In fact MERS boasts of saving the “industry up to $200 million annually by creating an electronic clearinghouse for mortgage ownership rights and information.”

What’s more interesting is that MERS has no employees.  MERS members upload and manage their own data, and whenever a MERS member wants MERS to do something for it, the member just tells a MERS “certifying officer,” roughly 20,000 of them, to do whatever that member wants.  These certifying officers who have a traditional corporate title like vice president do not report to anyone at MERS and do not get paid by MERS.  The only link to MERS is a corporate resolution signed by MERS Secretary Hultman appointing them as officers of MERS.  How and who is appointed a certifying officer has come under attack.  When Hultman was deposed last April, he pointed to a 1998 corporate resolution giving him the power to approve certifying officers.  However, the resolution appears to say that only member employees can be certifying officers.  MERS CEO Arnold told Congress that “MERS relies on specifically designated employees of its members, called certifying officers.”  Regardless of this, Hultman has made numerous attorneys at law firms initiating foreclosure lawsuits for MERS member banks certifying officers.  Further, the resolution that authorizes Hultman to approve certifying officers was originally adopted by an earlier incarnation of MERS, and it may not have been ratified by the current version of MERS.  So unless the current MERS ratified the authorizing resolution or replaced it with a new one, that authority ended by January 1, 1999, when the current MERS was established.  During his deposition, Hultman said he did not know if the current MERS ratified his appointing power.  However, as corporate secretary he is in the best position to know this information.  Mark Malone, the former New Jersey assistant U.S attorney and former New Jersey deputy attorney general who took Hultman’s deposition in April, indicated that Hultman has not turned over evidence that MERS had ratified his power.  Lastly, Hultman’s power to appoint is rooted in MERS’s bylaws, which gives only the board of directors the power to choose officers.  A board of directors cannot pass resolutions that violate their company’s bylaws.  So even if MERS did ratify his power to appoint, it may be invalid anyway.

What Hultman states in the resolution he signs is false according to Malone.  Hultman is not saying he is signing according to the power delegated to him by the board, but rather the board met and adopted a resolution, and what he is signing is a true copy of that resolution.  Malone says this is also false since there is no original resolution that it is a true copy of. 

MERS had 66 million mortgages in its database at one point, and currently has about 31 million.  So this begs the question… how many foreclosures were achieved throughout the Unites States using documents that these “certifying officers” signed and how many pending foreclosures are based on these fraudulent documents?

Homeowners facing a foreclosure lawsuit in New York and elsewhere must be aware this is going on and must consult an attorney so that they can challenge any MERS signed documents.  This is a growing problem that must be addressed by the borrowing public, state and federal authorities.

By: Eran D. Grossman, Esq.