You've heard the name Mortgage Electronic Registration Systems or "MERS" mentioned in relation to the foreclosure problems in the residential real estate market.
But what is MERS?
It is the company created and owned by all of the big banks to process title to property in the U.S. Approximately 60% of the nation’s residential mortgages are recorded in the name of MERS.
MERS is a shell corporation with no employees, but thousands of officers.
As the treasurer and secretary of MERS admitted in a deposition:
Q Does MERS have any salaried employees?
Q Does MERS have any employees?
A Did they ever have any? I couldn’t hear you.
Q Does MERS have any employees currently?
Q In the last five years has MERS had any
Q To whom do the officers of MERS report?
A The Board of Directors.
A That’s correct.
Q And in what capacity would they report to you?
A As a corporate officer. I’m the secretary.
Q As a corporate officer of what?
Q So you are the secretary of MERS, but are not
an employee of MERS?
A That’s correct.
How many assistant secretaries have you
appointed pursuant to the April 9, 1998 resolution; how
many assistant secretaries of MERS have you appointed?
A I don’t know that number.
A I wouldn’t even begin to be able to tell you
Q Is it in the thousands?
Q Have you been doing this all around the
country in every state in the country?
Q And all these officers I understand are unpaid
officers of MERS?
Q And there’s no live person who is an employee
of MERS that they report to, is that correct, who is an
A There are no employees of MERS.
(page 70, line 1 through page 72, line 8)
In another deposition, a legal assistant at a law firm initiating 4000 to 7000 foreclosures per month in Florida held herself out as "vice president" and "assistant secretary" of MERS. She testified:
Q: The question was you have no job duties as an assistant secretary of MERS, correct?
A: I do not have any job duties other than signing the assignments and mortgage. Does that help?
Q: Yes. Here, I’ll try to rephrase this. Do you attend any board meetings at MERS?
A: No, sir.
Q: Do you attend any meetings at all at MERS?
A: No, sir.
Q: Do you report to the secretary of MERS?
A: No, sir.
Q: Who is the secretary of MERS?
A: I have no idea.
Q: Where are the MERS offices located?
A: I can’t remember.
Q: How many offices do they have?
A: I have no idea.
Q: Do you know where their headquarters are?
Q: Have you ever been there?
Q: How many employees do they have?
A: I have no idea.
(pages 11 & 12)
She further testified that her signatures on “these assignments,” which from all indications were and are at least several thousand in number, were in no way attestations that the statements contained therein were accurate or truthful. She further testified that she was the person with the most knowledge about the subject assignment.
For example, she testified:
Q: It says, ‘but effective as of the 19th day of February, 2008.” Do you see that?
Q: Where did you get that date from?
A: I did not pick that date. That date was put in by the processor that prepared the
Q: And who was that?
A: Off the top-of-my-head, I do not know who actually typed this assignment.
Q: Okay. But you are signing on behalf of MERS, and you are stating here that it is effective as of the 19th day of February, 2008, correct?
Q: At the time you signed this, what reason did you have, as agent for MERS, to make it
effective as of the 19th day of February, 2008?
A: I did not pick that date. And I do not recall this document.
Q: Sitting here today, you have no idea why it is that it says, “effective as of the 19th day of February, 2008.” Is that correct?
A: Looking at this one particular piece of paper, I do not recall or know the answer to that question, no.
Q: Is there some general practice, of which you are aware, that would give us information as to why this particular date was inserted?
A: That information was determined by the people that review the file prior to me.
Q: And what would they base that on, as a general practice?
A: I do not know.
Q: You don’t know? Were, to your knowledge, any physical documents transferred on February 19, 2008?
A: I do not know.
Q: To your knowledge, does the 19th day of February, 2008 have any significance?
A: I do not know.
Q: Ma’am, if you signed this document on behalf of MERS, picking this date, this effective
date - -
A: I did not pick the effective date.
Q: But you ratified it by signing this; didn’t you?
Q: Didn’t you attest to the accuracy of that date by signing this document?
A: I would say, no.
Q: Did you attest to this document, as a whole, by signing it?
A: I do not think that in my capacity of signing these assignments, it was my position to attest. My role was to be given a document that had been reviewed by an attorney, had been reviewed by a title examiner, had instructions from the client, and I was to sign the assignment as secretary on behalf of MERS.
Q: Right. And when you signed it as secretary on behalf of MERS, were you approving and agreeing with the terms contained therein for MERS?
A: I believe I was approving and agreeing to the fact that the mortgage needed to be assigned from MERS to another entity.
(pages 13 and 14)
In other words, assignments of title were never actually created, notarized and recorded, as required by state law. The "vice president" and "assistant secretary" MERS signing sworn statements under penalty perjury was simply making it up and doing what she was told.
In that light, Yves Smith's report that "no one in the industry transferred the paper" makes perfect sense.
But why was MERS created in the first place?
MERS, the banks and the mainstream financial press all say that it was simply to save fees by digitizing mortgage electronic.
But as Ellen Brown notes, there is in reality a very different reason that the big banks created MERS:
The rating agencies required that the conduit be "bankruptcy remote," which meant it could hold title to nothing ....
Indeed, the secretary and treasurer of MERS admitted this in a deposition, stating:
As a requirement for mortgages that were securing loans or promissory notes that were sold to securitize trust, the rating agencies would only allow mortgages MERS -- well let me step back. They required that a bankruptcy remote single purpose entity be created in order for transactions holding loans secured by MERS, by mortgages MERS served as mortgagee to be in those pools and receive a rating, an investment grade rating without any changes to the credit enhancement. They required that to be a bankruptcy remote single purpose subsidiary of MERS, of Merscorp.
(page 32, lines 9-20)
And as a a forthcoming article in the Real Property, Trust and Estate Law Journal notes, saving fees was another
motivation for the giant banks in running mortgages through MERS, but
in a way which is shadier than routine cost-cutting efforts.
Karl Denninger summarizes the article (indicated with indented quotes), with commentary:
A few good cites will set the table for those willing to dig into what's really not that hard to understand...
In the mid-1990s mortgage bankers decided they did not want to pay recording fees for assigning mortgages anymore. This decision was driven by securitization—a process of pooling many mortgages into a trust and selling income from the trust to investors on Wall Street. Securitization, also sometimes called structured finance, usually required several successive mortgage assignments to different companies. To avoid paying county recording fees, mortgage bankers formed a plan to create one shell company that would pretend to own all the mortgages in the country—that way, the mortgage bankers would never have to record assignments since the same company would always “own” all the mortgages.
What do you call an artifice designed to evade the payment of taxes - which these fees are?
They incorporated the shell company in Delaware and called it Mortgage Electronic Registration Systems, Inc.
Even though not a single state legislature or appellate court had authorized this change in the real property recording, investors interested in subprime and exotic mortgage backed securities were still willing to buy mortgages recorded through this new proxy system.14
What do you call selling something to someone that claims an ownership right as an inherent part of the bargain - indeed, it's the only consideration that is offered in exchange for money, yet the state legislatures have not ratified this as proper, and in fact the county and state legislatures say it is not?
Because the new system cut out payment of county recording fees it was significantly cheaper for intermediary mortgage companies and the investment banks that packaged mortgage securities. Acting on the impulse to maximize profits by avoiding payment of fees to county governments much of the national residential mortgage market shifted to the new proxy recording system in only a few years. Now about 60% of the nation’s residential mortgages are recorded in the name of MERS, Inc. rather than the bank, trust, or company that actually has a meaningful economic interest in the repayment of the debt.
Astonishingly, MERS “vice presidents” are simply paralegals, customer service representatives, and foreclosure attorneys employed by other companies. MERS even sells its corporate seal to non-employees on its internet web page for $25.00 each. Ironically, MERS, Inc.—a company that pretends to own 60% of the nation’s residential mortgages—does not have any of its own employees but still purports to have “thousands” of assistant secretaries and vice presidents.
AP notes that banks hired hair stylists, Walmart floor workers and people who had worked on assembly lines as foreclosure "experts". Some of these folks testified in deposition that they hardly knew what a mortgage or an "affidavit" is, and admitted that they knew they were lying when they signed the foreclosure affidavits and that they agreed with the defense lawyers' accusations about document fraud. While I have not yet seen any evidence that the folks signing on behalf of MERS were of this caliber, nothing would surprise me at this point.
But It Can All Be Fixed, Right?
Diana Olick notes:
A source of mine pointed me to a recent conference call Citigroup had with investors/clients. It featured Adam Levitin, a Georgetown University Law professor who specializes in, among many other financial regulatory issues, mortgage finance. Levitin says the documentation problems involved in the mortgage mess have the potential "to cloud title on not just foreclosed mortgages but on performing mortgages."
With the chain of documentation now in question, and trustee ownership in question, here is one legal scenario, according to Prof. Levitin:The mortgage is still owed, but there's going to be a problem figuring out who actually holds the mortgage, and they would be the ones bringing the foreclosure. You have a trust that has been getting payments from borrowers for years that it has no right to receive. So you might see borrowers suing the trusts saying give me my money back, you're stealing my money. You're going to then have trusts that don't have any assets that have been issuing securities that say they're backed by a whole bunch of assets, and you're going to have investors suing the trustees for failing to inspect the collateral files, which the trustees say they're going to do, and you're going to have trustees suing the securitization sponsors for violating their representations and warrantees about what they were transferring.
Josh Rosner, of Graham-Fisher, put the following out in a note today, claiming violations of pooling and servicing agreements on mortgages could dwarf the Lehman weekend:Nearly all Pooling and Servicing Agreements require that “On the Closing Date, the Purchaser will assign to the Trustee pursuant to the Pooling and Servicing Agreement all of its right, title and interest in and to the Mortgage Loans and its rights under this Agreement (to the extent set forth in Section 15), and the Trustee shall succeed to such right, title and interest in and to the Mortgage Loans and the Purchaser's rights under this Agreement (to the extent set forth in Section 15)”. Also, an Assignment of Mortgage must accompany each note and this almost never happens.We believe nearly every single loan transferred was transferred to the Trust in “blank” name. That is to say the actual loans were apparently not, as of either the cut-off or closing dates, assigned to the Trust as required by the PSA.Rather than continue to fight for the “put-back” of individual loans the investors may be able to sue for and argue that the “true sale” was never achieved.Quite the can of worms. Anyone who says that the banks will fix all this in a few months is seriously delusional.
Citi's conference call is even more dramatic when you remember that CitiMortgage is one of the main owners of MERS. Here's more from Citi:
MERS (Mortgage Electronic Registration Systems) functions as a centralized electronic registry of mortgages and tracks ownership of mortgages. MERS allows mortgage ownership to change hands efficiently and relatively quickly since it is electronic and allows all parties to forgo making a filing in local land records. Indeed, MERS was designed to function as a substitute for local land records.
Although MERS was designed to enhance efficiency in the mortgage assignment process, Levitin argued it may not conform with the law. “Slowly but surely” courts are issuing decisions which “cast validity on the MERS process.” Although ~60% of mortgages list MERS as the “nominee” which owns the mortgage, a handful of recent court cases have ruled that MERS has no standing in foreclosure actions either because (1) physical paperwork must be transferred when a mortgage is assigned by one party to another or (2) MERS has no true economic interest in the mortgage in question since it collects no payments from the borrowers.
Finally, the above-described Real Property, Trust and Estate Law Journal article also comments on the illegality of MERS (the indented quotes are from the article; the rest is Denninger's commentary):
Worse, MERS may have literally "split the baby" and rendered millions of mortgages unsecured:
Typically, the same person holds both the note and the deed of trust. In the event that the note and the deed of trust are split, the note, as a practical matter becomes unsecured. Restatement (Third) of Property (Mortgages) § 5.4. Comment. The practical effect of splitting the deed of trust from the promissory note is to make it impossible for the holder of the note to foreclose, unless the holder of the deed of trust is the agent of the holder of the note. Id. Without the agency relationship, the person holding only the note lacks the power to foreclose in the event of default. The person holding only the deed of trust will never experience default because only the holder of the note is entitled to payment of the underlying obligation. Id. The mortgage loan became ineffectual when the note holder did not also hold the deed of trust.
That's an actual holding of the Missouri Court of Appeals.
It gets worse.
If the growing line of cases asserting that MERS is neither a mortgagee nor a deed of trust beneficiary is correct, then courts must soon confront profound questions about the very enforceability of MERS’ security agreements. ... There is a compelling legal argument that loans originated through the MERS system fail to create enforceable liens.
The mortgage industry has premised its proxy recording strategy on this separation despite the U.S. Supreme Court’s holding that “the note and the mortgage are inseparable.” If today’s courts take the Carpenter decision at its word, then what do we make of a document purporting to create a mortgage entirely independent of an obligation to pay? If the Supreme court is right that a “mortgage can have no separate existence” from a promissory note, then a security agreement that purports to grant a mortgage independent of the promissory note attempts to convey something that cannot exist.
While this argument will surely strike a discordant note with the mortgage bankers that invested billions of dollars in loans originated with this simple flaw, the position is consistent with a long and hitherto uncontroversial line of cases. Many courts have held that a document attempting to convey an interest in realty fails to convey that interest when an eligible grantee is not named. Courts all around the country have long held: “there must be, in every grant, a grantor, a grantee and a thing granted, and a deed wanting in either essential is absolutely void.”
Now consider this - assignments of the Grantee in blank are thus invalid too. Oh, yeah, they went there.
Nonetheless, in Chauncey, the trial court, intermediate appellate court and New York’s highest court all agreed that the attempt to convey an “in blank” mortgage failed. The Court of Appeals explained, “No mortgagee or obligee was named in [the security agreement], and no right to maintain an action thereon, or to enforce the same, was given therein to the plaintiff or any other person. It was, per se, of no more legal force than a simple piece of blank paper.”
And then, in a very nice throwback to something I wrote we get this:Then there's the little problem with REMICs that don't actually have title because MERS claims to (well, sometimes)
In a stunning betrayal of the policies that ground the ancient statute of frauds principal commanding that we commit transfers of land interests to writing, mortgage bankers wrote millions of mortgage loans that did not specify who the actual mortgagee was. For over a hundred years, our courts have held that “legal title to real property may not be established by parole”....
And, all rights to a mortgage loan must be deposited into the trust for it to achieve tax exempt status under federal REMIC law—which does not contemplate the use of a proxy mortgagee. Yet, despite claiming sole ownership of mortgages sold to investors, in documents regularly recorded with county officials these same institutions maintain that MERS is the sole owner of the mortgage. The chain of financial institutions linking originators to securitization depositors collectively want to have their lien and sell it too.
That should go over well with the IRS.
Communities around the country have elected and hired county recorders to act as their custodian of property rights. Those recorders who agree the MERS system poses a threat to real property records have an obligation arising from their office to reclaim and restore faith in land title records. While some individual county recorders may reasonably feel reluctant to take on a powerful national system backed by some of the nation’s largest financial institutions, this is precisely what they were hired to do. If county recorders do not protect county real property records, who will? A pathway to reclaiming authority over real property records could involve joining with other recorders to raise a unified voice. State and national county recorder trade associations could have a significant impact on pending cases by submitting amicus curiae briefs. Courts are likely to respect county recorders’ expertise in maintaining and preserving transparent records, both because of recorders’ experience but also because of their democratic mandate. Even more to the point, county recorders should consider appealing to the courts directly to stop financial institutions from recording false documents. In lawsuits to recover unpaid recording fees counties could hire private counsel on contingent fee agreements that would place no financial burden county taxpayers.
It is time to take this edifice and throw it in the trashcan, after forcing its members to fix all the titles they have damaged - at their expense - and record true and correct assignment information.
Oh wait - that's a problem isn't it..... what if the assignments never actually happened, and the REMICs hold an empty box? Why that could get messy..... Hmmmm....
Indeed, as a prominent economist said
recently: "At the root of the crisis we find the largest financial
swindle in world history", where "counterfeit" mortgages were
"laundered" by the banks.
MERS was a large part of that laundering process.