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LOSING OUR HOMES, LOSING OUR WAY, OR BOTH?
FORECLOSURE, COUNTY PROPERTY RECORDS, ANDTHE MORTGAGE ELECTRONIC REGISTRATION
SYSTEMCHRISTOPHERL.PETERSON*
I would like to begin by echoing some thank yous, the first to
Professor Myron Grauer for his fine hospitality. He has taken such good
care of Steven and I while we have been in town. I would also like to
thank Dean Simpson for his kind hospitality, and I would also like to thank
Capital University Law Review, as they have been great to work with,
particularly Rachel Gagnon, the Editor in Chief. As we were chatting this
morning, I learned that she does not have a job yet and she has been aconsummate professional, so I would like to place a sort of help wanted
brokerage kind of thing hereif any of you are looking for an associate I
think you could do significantly worse. With that, thank you for the honor
of appearing today. It is a real pleasure to be here.
Goldman Sachs is projecting twelve million foreclosures on all types
of loans over the next five years.1 That is twelve million foreclosures. The
number comes out easily, but lets think about what that number actually
means. If we just assume for a moment that there is one person living in
each of those houses (obviously average families are about 2.5 people and
keep in mind some of these homes are investment propertiesso well
Copyright 2012, Christopher L. Peterson.* Associate Dean for Academic Affairs and Professor of Law, University of Utah, S.J.
Quinney College of Law. This article is based on a transcript of Dean Petersons speech
delivered on October 28, 2011 at the Capital University Law Schools Symposium entitled
The Foreclosure Crisis: New Strategies for Addressing the National and Local Calamity.
The Capital University Law Review has included light citations and editorial revisions to
the transcript for purposes of documentation and clarity. The subject matter of this
presentation draws, in part, upon: Christopher L. Peterson, Two Faces: Demystifying the
Mortgage Electronic Registration Systems Land Title Theory, 53 WM. & MARY L. REV.
111 (2011) and Christopher L. Peterson,Foreclosure, Subprime Mortgage Lending, and the
Mortgage Electronic Registration System, 78 U.CIN.L.REV. 1359 (2010). The views and
opinions expressed herein are solely Dean Petersons.1 Jan Hatzius & Michael A. Marschoun, Home Prices and Credit Losses: Projections
and Policy Options 16 (Goldman Sachs, Global Economics Paper No. 177, 2009)
(predicting 13 million defaults beginning in 2008Q4 until the end of 2014 . . . .).
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take the conservative assumption of one person per home), the
demographic group of individuals facing the loss of their homes exceedsthe total combined populations of twelve states: Wyoming, Vermont,
North Dakota, Alaska, South Dakota, Delaware, Montana, Rhode Island,
Hawaii, Maine, New Hampshire, and Idaho.2 Imagine for a moment that
you tried to ask everyone in Vermont to get up and move to New
Hampshire, and everyone in New Hampshire to get up and move to
Vermont. This is the kind of forced dislocation that one would expect with
a small civil war or a catastrophic natural disaster. It is probably the
largest forced dislocation of Americans since the Civil War, or maybe the
Great Depression.3 It is a huge impact.
Fitch ratings estimates that about 50% of sub-prime mortgages
originated since 2006 are going to end in foreclosure.4 Half of sub-prime
mortgages are going to result in foreclosure. Sixty-one percent of 2006sub-prime loans also went to people who could not qualify for prime loans
with better terms.5 It is not just that there were risky borrowers making
2 SeePopulation Estimates; Annual Population Estimates, U.S.CENSUS BUREAU, http://
www.census.gov/popest/data/state/totals/2009/tables/NST-EST2009-01.xls (last visited
Mar. 19, 2012).3 More than 2.75 million soldiers fought during the civil war. SeeSoldiers and Camp
Life, LIBRARY OF VA., http://www.lva.virginia.gov/public/guides/Civil-War/Soldiers.htm
(last visited Mar. 19, 2012). Estimates of the number of confederate civilians displaced by
the war exceed 400,000. See Unhappiness Abroad-Civil War Refugees, CITY OF
ALEXANDRIA VA. (Mar. 29, 2011, 11:00 PM), http://alexandriava.gov/historic/fortward/
default.aspx?id=40306. The Dust Bowl condition that coincided with the economic
disruptions during the Great Depression era resulted in a mass migration of millions of
people from the Great Plains to the Western U.S. in search of jobs and better living
conditions. North American Drought: A Paleo Perspective, NATL OCEANIC AND
ATMOSPHERIC ADMIN. (Nov. 12, 2003), http://www.ncdc.noaa.gov/paleo/drought/
drght_home.html. Ironically, California, which was the destination for many Dust Bowl
famers in the 1930s, is now experiencing its own wave of displacement. See Anne J.
Martin, After Foreclosure: The Displacement Crisis and the Social and Spatial
Reproduction of Inequality 1 (Inst. for the Study of Soc. Change, Working Paper No. 2009-
2010.48, 2009).4 Grant Bailey, Vincent Barberio & Glenn Costello,Revised Loss Expectations for 2006
and 2007 Subprime Vintage Collateral(Fitch Ratings, 2006) ([L]oss severity expectations
are 58% for 2006 loans and 64% for 2007.).5 Rick Brooks and Ruth Simon, Subprime Debacle Traps Even Very Credit-Worthy,
WALL STREET J.,Dec. 3, 2007, at A1.
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loans, there were risky loans that were being sold to borrowers who
qualified for better loans.Add to these twelve million familiesI want to point out the real and
meaningful human impact on individualsindividuals such as Vincenza
Garcia who owned her home since 1996.6 She lived in Milford,
Connecticut.7 She won the Freedom Lawn Contest for her yard
landscaping.8 She agreed to a hybrid ARM loan, and when the price was
re-cast, she could not afford the interest rates and she could not afford her
payments.9 The night before the police came to evict her, she wrote an
eleven-page note to her family, locked her cats in the bathroom, and shot
herself in the head.10 Addie Polk was from Ohio.11 She was a ninety-one
year old widow in Akron and a Deaconess at her church.12 Addie could
not make her payments on her loan that she probably never should have
taken out, and when they came to foreclose, she shot herself in the chest.13Betty Lipply was a seventy-two year old woman from East Palestine, Ohio,
who hung herself when the police came to take her house.14 Greg Bellows
was from Philadelphiahe shot himself.15 Carlene Balderrama was a
mom in Taunton, Massachusettsshe shot herself ninety minutes before
6 Frank Juliano,Foreclosure Notice Leads to Suicide of Nice Lady,CTPOST.COM (Jan.
3, 2010, 12:57 AM), http://www.ctpost.com/local/article/Foreclosure-notice-leads-to-
suicide-of-nice-lady-307253.php.7Id.8Id.9See id.10 Id.11 Craig Johnson, Homeowner Who Shot Herself Amid Eviction Dies, CNN (Mar. 31,
2009), http://articles.cnn.com/2009-03-31/us/eviction.suicide.death_1_eviction-notices-
fannie-mae-joyce-smith?_s=PM:US.12Id.13Id.14Family Says Suicide Caused by Foreclosure Action, VINDY.COM (Feb. 12, 2009),
http://www.vindy.com/news/2009/feb/12/family-files-suit-after-suicide/.15Foreclosure Threat Drives Some to Suicide, CBSNEWS (Mar. 24, 2010, 4:57 PM),
http://www.cbsnews.com/stories/2010/03/24/national/main6329383.shtml ([O]wner
Gregory Bellows shot and killed himself shortly before deputies arrived to evict him from
his Roxborough home.).
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the police showed up to do the foreclosure and evict her from her home. 16
Carlene left a note for her family, telling them to take the life insuranceproceeds and use that to pay off the house so that they could continue to
live there.17 Of course, in addition to not understanding her loan, she also
did not understand her insurance policy, which had an exemption that
allowed the insurance company not to pay out on the life insurance because
she had killed herself.18 When they were taking the body out, investors
that were looking to buy the home in the foreclosure sale showed up and
tried to go through the house while her family was taking her body to the
morgue.19 Those stories have been told by a lot of peoplea lot of chilling
statistics. I try to be funny, but this is not funny. I want us to remember
these kinds of families.
Here is one more statistic that has received much less coverage,
although increasingly there has been more debate about it in the press andWashington: About 60% of American residential mortgages are now
nominally owned by a company called the Mortgage Electronic
Registration System, Inc. (MERS).20 Many of you are familiar with
MERS; however, some of you may have never heard of MERS before.
What is interesting about this company is that this company has affected or
has been involved in more mortgage loans than any other institution in our
country, including Fannie Mae or Freddie Mac.21 In terms of the absolute
number of contracts, it is the most involved company in the entire
16 Michael Levenson, Facing Foreclosure, Taunton Woman Commits Suicide,
BOSTON.COM (July 23, 2008, 12:17 PM), http://www.boston.com/news/local/breaking_
news/2008/07/facing_foreclos.html.16Id. (Police say that Balderrama shot herself Tuesday afternoon 90 minutes before
her foreclosed home on Duffy Drive was scheduled to be sold at auction . . . . She left a
note for her family saying they should take the [life] insurance money and pay for the
house . . . .).17Id.18 Cf. id. (discussing the note she left instructing her family to use her life insurance
money to pay for the home).19 Charles Winokoor, Husband Reflects on Wifes Suicide and the Threat of
Foreclosure, THE METROWEST DAILY NEWS (Aug. 29, 2008, 7:59 AM),
http://www.metrowestdailynews.com/state/x1311852231/Husband-reflects-on-wife-s-
suicide-and-the-threat-of-foreclosure?zc_p=1.20 Kate Berry,Foreclosures Turn Up Heat on MERS,AM.BANKER, July 10, 2007, at 1.21 Christopher L. Peterson, Foreclosure, Subprime Mortgage Lending, and the
Mortgage Electronic Registration System, 78 U.CIN.L.REV. 1359, 1361 (2010).
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securitization debacle.22 Yet, it is hardly talked about. This is very
puzzling, and it presents the following questions: What was MERSs rolein the American foreclosure crisis? Does MERS have anything to do with
all this? How does it affect things? What are its underlying legal
implications?
First, I will discuss the legal and political backgrounds of our land title
recording systems. Second, I will discuss the business practices and what I
believe is a problematic legal foundation for this new MERS system that
has replaced the older traditional system. Finally, I will offer a bit of
analysis at the end about what I think MERS tells us about the financial
crisis, our public information infrastructure that supports commerce in our
society, and some thoughts about democratic governance of commerce.
First is a little background about the state land title recording systems.
The other lecturer, Professor Schwarcz, pointed out how it is difficult inour society, and all societies, to know who owns some things. For
example, some things are easiermy necktie. Everyone feels pretty
comfortable with the knowledge that I own my necktie. We dont need to
have a system that records who owns neckties. It is around my neck, it is
not worth that much; everyone is willing to guess that yes, that is
probably his necktie. We do not need to spend too much time on that.
Although we do have an Article 9 personal property system where we
could, I suppose, record security interests in neckties. Often it is not done
because it is just not worth it.23
On the other hand, land is much more important, it is much more
expensive, and there is no intimate personal connection between land
ownership and the physical body of people. You can be on a piece of land
all the timeyou might be a tenantbut that doesnt mean you actually
have any fee simple ownership interest. You can own land and never even
see that land. You may live on a different continent, but nonetheless, you
still want your property rights associated with that land to be clear. Trying
to deal with the opacity of who owns land, societies began developing land
title recordings systems early on to try and create some recognizable public
connection between the owner of the land and the land itself.24 This was
22Id. at 137374.23See, e.g., Linda J. Rusch, The Article 9 Filing System: Why a Race-Recording Model
Is Unworkable, 79 MINN L.REV. 565, 56970 (1995) (examining the relative costs of filing
for personalty with the costs of recording for real property).24 JESSE DUKEMINIER,JAMES E.KRIER,GREGORY S.ALEXANDER&MICHAEL H.SCHILL,
PROPERTY 645 (7th ed. 2010).
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very common in the early United States, much more so than Europe.25 In
Europe, the connection between who owns the land and the land itself wasoften as simple as looking at the highest hillit was the rich white guy in
the castle up there who owns the land.26 They had less of a need for
recording systems. Here in the United States, when European colonists
came over, our vision was of a different society.27 Here, there was going to
be more middle class ownership of land interests,28 more farmers that
owned their own land. Early on it became clear that we had to have some
public records of who owned what.29
The first American recording statute was adopted in 1636 in the
Plymouth Bay Colony.30 It said that all mortgages had to be committed to
the public record.31 Three years later, Connecticut required that all
mortgages shall be accounted of no value until they be recorded.32 It
was not just Yankeesdown in Virginia they also adopted a recordingstatute that same year.33 In fact, by the American Revolution, all thirteen
colonies had adopted recording statutes.34 For example, the Pennsylvania
recording statute, which was adopted in 1717 (long before the United
States Constitution) is still enforced today with essentially the same terms
that it had back then.35 These old and venerable statutes empowered
county recorderswho are usually elected officials in each county in the
United States36to be the repository of information that identifies who
25Id. at 64546.
26See WILLIAM B.STOEBUCK&DALE A.WHITMAN,THE LAW OF PROPERTY 16 (3d ed.
2000) (discussing the feudal system following the Norman conquest).27Id. at 21.28Cf. id. (Throughout the . . . United States, it seems clear that tenure never existed.).29Id. at 869.30 RICHARD R.POWELL &PATRICKJ.ROHAN,POWELL ON REAL PROPERTY 1046(1968).31Id.32 JOYCE PALOMAR,PATTON AND PALOMAR ON LAND TITLES 10 (3d ed. 2003).33Id. at 11 n.7.34Id. at 10.35Id. at 11 n.7.36 See 76 C.J.S. Registers of Deeds 3 (2007) (describing the office as either
appointive or elective). AccordNatl Assn of Cnty. Recorders, Election Officials and
Clerks, Welcome, NACRC, http://www.nacrc.org/ (last visited Mar. 20, 2012) (noting that
NACRC is a professional organization of elected and appointed county administrative
officials . . . .).
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owns land.37 Sometimes they are called registers of deed in other states.38
How does that old public system of ownership recording link up with thesecuritization structure discussed in Professor Schwarczs earlier lecture
and article?
This schematic represents how we traditionally recorded mortgages in
a structured finance conduit of sub-prime mortgages. There is an
originatora mortgage lending company that makes the loan to a
homeowner. This originator places a copy of the mortgage with the county
recording office. Then of course, the originator can sell that loan to
probably one intervening company or entity between the trust and the
originator. The reality is that, particularly in private label securitizations,
on late vintage private label securitizations there could be six
37 POWELL &ROHAN,supra note 30, at 1047.38 76 C.J.S.Registers of Deeds 1 (2007).
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transactionsor conceivably even morelinking the originator to the
trust. In the traditional view, however, the expectation would be that thenext person that purchases this mortgage records a document (an
assignment of that mortgage) with the county recorders office to maintain
and update the public records so that everyone knows who owns that
interest in the land. Then, the trustee, on behalf of the trust, would also be
expected to record a copy of the assignment from the depositorthe last
owner of the loanbefore it is placed into the trust on behalf of the
investors. With respect to each of these transactions, the county recorders
office collects a small fee every time you record somethingthey expect
you to pay a fee. It is not too much, the average or typical fee would be
about $35.39 A little bit more in say, New Jersey; a little bit less in a state
such as Utah where I live.40
That is how it was designed to work. If the mortgage owner needed toforeclose on the land because the family could not make the payments, it is
the trustee on behalf of the trust, or possibly a servicer acting as an agent of
the trustee, that goes and takes the house away from the family.
There are some problems with this system. I dont mean to eulogize
land recording systems as a utopia of the past. A lot of county recording
offices became out of date, particularly as commerce began moving faster
and faster.41 They had a hard time processing the paperwork, particularly
in smaller rural counties where there are not that many people in the
county. It is not cost effective to buy complicated and expensive computer
39 Andrew Lipton,Mortgage Electronic Registration Systems, Inc. (MERS): Its Impact
on the Credit Quality of First-Mortgage Jumbo MBS Transactions 2 (Moodys, 1999).40 See, e.g., Registration of Deeds & Mortgages, CAMDEN COUNTY N.J.,
http://www.camdencounty.com/government/county-services/registration-deeds-mortgages
(last visited Mar. 18, 2012) (showing a fee of $30 for the first page and $10 for each page
thereafter); Recording Requirements and Fees, SALT LAKE COUNTY RECORDER, http://
slcorecorder.siredocs.com/RecHome/OfficeFees.aspx#Requirements (last visited Mar. 18,
2012) (showing a fee of $10 for the first page and $2 for each page thereafter).41 Cf. John L. McCormack, Torrens and Recording: Land Title Assurance in the
Computer Age, 18WM.MITCHELL L.REV. 62, 6465 (1992) (discussing how inadequately
funded recording systems undercut attempts at Torrens-type legislative reforms to the
recording process);Charles Szypszak,Public Registries and Private Solutions: An Evolving
American Real Estate Conveyance Regime, 24 WHITTIER L. REV. 663, 66567 (2003)
(noting that attempts to introduce more regulation into the recording system would be
difficult to reconcile with the fast-paced American economy, of which real estate
conveyances play a major part).
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systems to record and publish everything on the Internet, because they do
not have that many records coming through the door. In some larger urbanareas, recorders have become overwhelmed with the problems of urban
decay and have had a hard time maintaining effective recording systems.42
On the other hand, there are about 500 to 600 counties around the country
that now have their process completely slick. It is all on the Internet, all
digital, and all very effective. Where Im from, you can search everything
online.43 It is all very convenient. Some county recorders were doing a
good job, others were not. That was part of the incentive for creating the
new system, that is, the innovation of MERS.
In 1993, a mortgage finance company white paper was released at the
annual convention of the Mortgage Bankers Association.44 They came up
with a business plan in 1995, and in 1996 recruited a group of servicers,
investors, originators, and Fannie Mae and Freddie Mac to form anagreement to create MERS.45
MERS incorporated in Delaware46 and began recording loan
assignments, not in the name of the party that actually had a financial
interest in the loan, but instead in the name of MERS.47 The big turning
point in the acceptance of MERS was an opinion that Moodys issued
endorsing MERS in 1999.48 This opinion reads like a legal opinion. It
reads like a case that an appellate court would write saying that MERS
system for interfacing with the public system is legally acceptable. The
problemlooking at it from the perspective of a law professoris that it
does not cite any law.49 It is a legal opinion, but there are no footnotes,
42 For a classic discussion of factors influencing the decline of many American cities in
the later twentieth century seeKATHARINE L.BRADBURY,ANTHONY DOWNS &KENNETH A.
SMALL,URBAN DECLINE AND THE FUTURE OF AMERICAN CITIES 28 (1982).43Document Search, SALT LAKE COUNTY RECORDER, http://slcorecorder.siredocs.com/
RecHome2/RecLogin.aspx?ReturnUrl=%2fRecHome2%2fDocSearch.aspx (last visited
Mar. 20, 2012).44 See Phyllis K. Slesinger & Daniel McLaughlin, Mortgage Electronic Registration
System,31IDAHO L. REV. 805, 81011 (1995) (describing the purpose, process, and goals
set forth in the whitepaper).45See id.; Howard Schneider, MERS Aids Electronic Mortgage Program,MORTGAGE
BANKING, Jan. 1, 1997, at 43.46 R. K. Arnold, Yes, There Is Life on MERS, PROBATE &PROP., JulyAug. 1997, at 33.47Id. at 34.48 Lipton,supra note 39.49Id.
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there are no cases cited, there are no statutes that say this is acceptable.50
Nonetheless, even though there were no statutes that any legislatureadopted endorsing this idea, millions of loans started getting plowed into
this MERS system.
How did it start out? The originator makes the loan to the lender,
recording the original mortgage in the name of MERS with the county
recorders office; but as the seller purchases it, instead of having an
assignment of the mortgage recorded along with the transfer of the note,
the financial institution will simply record an assignment of the mortgage
or the deed of trust to MERS.51 Perhaps the ownership of the note is
transferred as an Article 3 transfer, an indorsement of the note; or, it could
be an Article 9 transfer where they just say they are buying it instead of
physically transferring the note. The county real property records
increasingly show the name of MERS repeated over and over and over.Instead of the actual companies involved, MERS is a placeholderit
pretends to own the loan in the county real property recording system.52
The advantage is that assignments do not have to be recorded any more as
the loan goes down the line. If you are going to see it sold four, five, or six
times, you only have to pay that one assignment fee. It saves you $200, or
so, in recordings fees on that particular mortgage. In the grand scheme of
things, that $200 is not very much with respect to that particular loan. On
the other hand, if you are going to make a million loans over the next three
years, and you can save $200 per loan, thats $200,000,000 in clearly
unattributed funds that can go nicely into an executives bonus or
commissions.
Eventually, the mortgage finance industry figured out how to make it
even simpler than that. They decided, Why pay that initial assignment
fee? Instead, they began recording the initial mortgage in the name of
MERS. The originators name is never listed in the county real property
records as the owner of the right to foreclose. Instead, the mortgagee, or in
a deed of trust state, the beneficiary of the deed of trust, is listed as MERS
from the very beginning. Then parties in real chain of loan ownership
never have to pay a single assignment recording fee, ever.53 All that
50Id.51 Arnold,supra note 46, at 32, 34.52Id.53SeeFrequently Asked Questions, MERS, http://mersinc.org/why_mers/faq.aspx (last
visited Mar. 18, 2012) ([Y]oull save $30 or more per loan when you specify MERS as the
Original Mortgagee (MOM) of Record in the mortgage or deed of trust.).
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money can be preserved for the company and for the profits of the people
who are managing it.Of course, if the loan doesnt pay out, who is going to bring the
foreclosure action? Typically, judges would expect that it is the mortgagee
(the person who is the owner of the mortgage) that would bring the
foreclosure action. In the county real property records, the mortgagee is
MERS. So the expectationthe way the system was designedis that
there would be a new national foreclosure plaintiff. That is how it has
worked for quite a few years. MERS brings the foreclosure action because
MERS is the mortgagee, as listed in the public recording system.54 That is
a big change. In the past, we had actual lenders or actual servicers that
would foreclose on people.55 In this new system, we have one national
foreclosure plaintiff that always has the standing to foreclose on everyone.
However, as we will see, this new plaintiff was never going to acceptresponsibility for things such as violations of the Truth in Lending Act, or
a broker lying about whether a loan carries a fixed interest rate versus an
initial teaser interest rate that adjusted to a much more expensive rate six
months down the road. MERS was not going to take responsibility for
that.
All that being said, I still have not really answered what MERS is.
That is part of the problem. What follows is a boilerplate clause that
appears in security agreements or mortgages that were issued millions of
times all around the country. There is a similar clause in deeds and trusts
for deed of trust states, but lets focus on the mortgage, because its a little
easier to read. There are two sentences in this contract that we have to
look at carefully and think about to understand what has happened in our
society. The first sentence says, MERS is a separate corporation that is
acting solely as nominee for Lender and Lenders successors and
assigns.56
54 See, e.g., MERS Recommended Foreclosure Procedures for Alabama (Nov. 1999),
http://www.mersinc.org/foreclosures/details.aspx?state=AL (Foreclosing a loan in the
name of Mortgage Electronic Registration Systems, Inc. is something new in the
foreclosure arena. However . . . MERS stands in the same position to foreclose as the
servicer. MERS, like the servicer, will be the record mortgage holder.).55Id.56See Legal Documents, Instructions, EFANNIEMAE.COM,https://www.efanniemae.com/
sf/formsdocs/documents/secinstruments/doc/3045.doc (last visited Mar. 20, 2012)
[hereinafterLegal Documents].
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What is a nominee? A nominee is a form of special purpose agent.57 It
is an agent that acts on behalf of someone else. So when I read thatsentence, it seems to mean that the lender is the party that has the real
financial interestthe party that owns the mortgageand thus owns the
right to foreclose, but MERS will represent the lender as an agent. That
makes sense. However, the very next sentence in the documents says,
MERS is the mortgagee.58 When I read that for the first time, I really
scratched my head. These are legal terms. People throw stuff in contracts
all the time; it did not really bother me too much. However, it left me a
little unsettled, because I did not quite understand how those two sentences
went with each other. Is MERS the nominee of the mortgagee? Or, is
MERS the mortgagee itself? Because if anything, you cannot both own
and not own the mortgage at the same time. Someone is the owner of that
mortgage and somebody is not the owner of the mortgage. So which isMERS?
After thinking about this for about two years, and getting more and
more frustrated, never hearing anyone give me what seemed to me a
satisfactory answer that I could understand, I decided that MERS is not the
mortgagee. I know the contract says that, but MERS is not really the
mortgagee, and here is why. First, MERS is not entitled to receive the
proceeds of the foreclosure sale. Whoever it is that gets the money and is
entitled to that money at the end of the day when the foreclosure dust
settles is really the mortgagee. That person owns the lien. Second, MERS
is not entitled to receive any monthly payments on the note. Third, MERS
does not pay any value for its lien. Imagine that I went to Citibank and
said Citibank, I would like to purchase some of your valuable lien
foreclosure rights. Can I have them for free? I think that they probably
would not do that. In fact, in the inverse, financial institutions pay MERS
for the right to pretend that MERS is the owner of the lien. Normally, if
you are acquiring something, MERS would have to pay the financial
institutions for the right. Therefore, if you look at who is paying for what,
it does not make any sense to say that MERS has actually owned
something, since MERS is not buying anything. Finally, fourth, we have a
venerable tradition in our society of looking at economic substance to
57 BLACKS LAW DICTIONARY 1076 (8th ed. 2004).58Legal Documents,supra note 56.
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define contracts, particularly contracts that create liens.59 For example,
along the border of Article 2A of the U.C.C. on leases and Article 9 onSecurity Interests, courts use an underlying economic reality test to
distinguish between a security interest and a lease.60 Courts have always
looked past the ink on paper that says lease or security interest.61
Instead the law focuses on the underlying reality of whether there is an
economic reversionary interest that the purported lessor retains after the
end of the transaction.62 It seems that the underlying economic reality is
that MERS is not the mortgagee or the beneficiary of the deed of trust. At
best, MERS is an agent.
If that is the case then, what are the implications? If I say MERS is not
the mortgagee, nobody really cares. However, take a look at this quote
from the Supreme Court of the United States, in Carpenter v. Longan63 in
1872. This case has not been reversed, and it has been quoted a milliontimes since 1872. It said, The note and mortgage are inseparable; the
former as essential, the latter as an incident. An assignment of the note
carries the mortgage with it, while an assignment of the latter alone is a
nullity.64
In a standard MERS as mortgagee transaction, the payee on the
promissory notemeaning the party that is entitled to the paymentsis
the lender. The lender is the payee on the note. The mortgagee,
remember, according to the mortgage, is MERS. So if the payee on the
note is the lender and MERS is the mortgagee, that seems that you have
attempted to separate the note and the mortgage. Only, being a simple
man, I thought that the note and the mortgage are inseparable. Inseparable
does not mean that usually they are together; it means that they are not
capable of being separated. So how is it that MERS can be the mortgagee
if the note and the mortgage are inseparable and MERS is not listed as the
payee on the note? This simple analysis seems to be that MERS is not
really the mortgagee. That is the end of the discussion, at least if the courts
59 See Christopher L. Peterson, Two Faces: Demystifying the Mortgage Electronic
Registration Systems Land Title Theory, 53 WM. & MARY L. REV. 111, 14142 (2011)
(discussing the historical evolution of the equitable lien)60 See, e.g., In re Fleming Companies, 308 B.R. 693, 69697 (Bankr. D. De. 2004)
(stating and then applying the economic realities test).61Id. at 696 ([T]he form or title chosen by the parties is not determinative.).62Id.63 83 U.S. 271 (1872).64Id. at 274.
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are going to follow what the Supreme Court of the United States held in
Carpenter v. Longan. As it turns out, some courts have come to thatrealization in recent years.
First, I dont think we have yet quite answered who MERS is. To
know what people are involved with MERS, we have to read a corporate
resolution or a letter. There is a corporate resolution that MERS issued for
years, appointing what are called certifying officers of MERS. As it turns
out, there are actually two MERS companies.65 It is common to talk about
MERS as though it is one company, but there is actually MERS Corp.
which operates a database, and then there is a wholly-owned subsidiary of
MERS Corp. called MERS, Inc.66 MERS Inc. is the company that is
listed as the mortgagee or the beneficiary of the deeds of trusts in 60% of
our home loans, including mine.67 MERS Inc., it turns out, has no
employees.68 It is just a company that is registered in Delaware, but doesnot actually have any employees. 69 MERS Corp., on the other hand, has
about forty or fifty employees that run their databasea relatively small
company.70 MERS Inc., though, has no employees. So how is it that they
do business? How is it that they keep track of and interface with all this
controversial litigation in all fifty states?
MERS, Inc. does this by using a corporate resolution.71 If you are an
employee of a servicing company or a foreclosure law firm, or a debt
collection agency, you go on the MERS web page and there is a boilerplate
template where you put your name in, you put your company in, and you
65 Deposition of R.K. Arnold at 22, Henderson v. Merscorp, Inc., No. CV-08-900805.00
(Ala. Cir. Ct. Sept. 25, 2009).66Id. at 2223.67Id. at 57.68 Deposition of William Hultman at 70, Bank of New York as Trustee for the
Certificate Holders CWABS, Inc. Asset-Backed Certificates, Series 2005-AB3 v. Ukpe, No.
F-10209-08 (N.J. Super Ct. Ch. Div. 2008).69Remarks and Testimony of R.K. Arnold President and CEO of MERSCORP, Inc.
Before the Subcommittee on Housing and Community Opportunity House Financial
Services Committee, MERS (Nov. 18, 2010), http://www.mersinc.org/mersproducts/
publications.aspx?mpid=1 [hereinafterRemarks and Testimony].70Id. at 11.71 Corporate Resolution Request Form, MERS, http://web.archive.org/web/
20090321015658/http://mersinc.org/MersProducts/forms/crrf/crrf.aspx (last visited Mar. 20,
2012) (formerly available at http://www.mersinc.org/MersProducts/forms/crrf/crrf.aspx).
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fill in your address.72 Then you press submit. The webpage
automatically regurgitates and sends back this boilerplate corporateresolution,73 which reads:
RE: MERS Corporate Resolution Appointing MERS Certifying
Officers
Dear Sir or Madam:
Enclosed is a MERS Corporate Resolution appointing MERS
certifying officers.74
A certifying officer holds the title of an assistant secretary of
MERS and that is the title that should be put on all documents that
are signed for MERS by a certifying officer. However, in a fewstates it has been brought to our attention that it is required that the
signatory hold the office of a vice president or above. Therefore, it
is acceptable to use the title of vice president in Maryland,
Mississippi, Nebraska, Oklahoma, Kansas, North Carolina, South
Carolina and Pennsylvania. Please let me know if you are aware
of other states that require documents to be signed by an individual
with another title other than an assistant secretary.
The corporate seals are $25.00 each plus shipping. MERS will
send an invoice for the cost of the seal(s) and shipping at a later
date.
If you have any questions or comments please feel free to contact
me via email at [email protected] or by phone at (703) 761-
2111.
Very truly yours,
Camelia Martin
Paralegal
Enclosures75
72Id.73Id.74Id.75Id.
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Q: Do you file any reports with MERS relating to assignments?
A: No.Q: Do you know who the president of MERS is?
A: No.
Q: And I guess at some point, somebody explained to you that you
were a Certified Officer is that correct?
. . .
A: Yes.
Q: And what do you remember as to their explanation as to what
that meant?
A: Why I was being chosen as a Certified Officer?
Q: Yes.
A: That it was actually a group of us, we had one meeting and they
explained that people that had an understanding of what anassignment was were going to go ahead and become certified
officers because we then had authorization to execute on behalf of
MERS. 78
Some of you have heard of the robo-signing scandal in the press.
All of these robo-signers are vice presidents of MERS.79 That is who
they are.
Now I want to turn to the problematic legal foundation of MERS. I
think that this structure, this business model, actually has some legal
problems.
At first thought, it seems that MERS should not have standing in
foreclosure cases without a properly indorsed promissory note. Unless
they are a holder of that note, they are not the appropriate party to bring a
foreclosure action.
Why do I think that? Recalling theLongan case, the Supreme Court of
Kansas held that MERS did not demonstrate, in fact did not attempt to
demonstrate, that [they] possessed any tangible interest in the mortgage
beyond a nominal designation as the mortgagor.80 The court said
mortgagorI think they mean mortgagee. Having suffered no injury,
[MERS] does not qualify for protection under the Due Process Clause of
78 See Deposition of Kimberly Litchfield at 36, Wells Fargo Bank, N.A. v. Van
Siegman, No. 16-2008-CA-009724 (Fla. Cir. Ct. July 28, 2008).79See, e.g., Gretchen Morgenson, The Banks Still Want a Waiver, N.Y.TIMES, July 23,
2011, at BU1.80 Landmark Natl Bank v. Kesler, 216 P.3d 158, 169 (Kan. 2009).
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either the United States or the Kansas Constitutions.81 The Supreme
Court of Kansas has held MERS has no ownership interest.82 If whateveryou own is not protected by the Constitution that probably means you do
not own anything. This, in turn, means that you are not the party that has
suffered a real injury and are not the party that should be litigating that
case. MERS, as a mortgagee, has no right, in my view, to bring a
foreclosure action and should not be doing that. More courts are starting to
agree, other than just Kansas. The Supreme Court of Arkansas and the
Supreme Court of Maine have also gone along with this holding.83
The Supreme Court of Maine noted: MERS is not a
mortgagee . . . because it has no enforceable right in the debt obligation
securing the mortgage.84 So it turns out that the Supreme Court of Maine
agrees with me. Remember that sentence in all of those mortgages? It
said: MERS is the mortgagee. The Supreme Court of Maine said:MERS is not a mortgagee.85 That seems to be a pretty big discrepancy
pretty close to x and not x. This may be a real, underlying problem for
some of the other ideas that are behind all this. Do not take me to
represent that all of the cases are going against MERS. In fact, I think the
majority of the cases are going along with MERS. It is just that, in my
humble opinion, those cases do not make any sense. I do not understand
them and I do not understand how MERS can both be an agent and a
mortgagee at the same time.
It also seems that MERS should really be regarded as a debt collector
under the Federal Fair Debt Collection Practices Act.86 Recall that a debt
collector, under this consumer protection statute, means any person in the
business, the principal purpose of which is the collection of any debts
owed to somebody else, to another person.87 If MERS does not really own
anything, what is it actually doing?
81Id. at 170.82Id. at 16768.83See Mortg. Elec. Registration Sys. Inc. v. Sw. Homes of Ark., Inc., 301 S.W.3d 1, 5
(Ark. 2009) (reaching the same conclusion as the Supreme Court of Kansas nearly five
months beforeKeslerwas decided); Mortg. Elec. Registration Sys. Inc. v. Saunders, 2 A.3d.
289, 295 (Me. 2010).84Saunders, 2 A.3d at 297.85Id.86 15 U.S.C. 1692ap (2006).87 15 U.S.C. 1692a(6).
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What I think it is trying to do is facilitate these foreclosure actions. It
was expected to be the single national foreclosure plaintiff for ourcountry.88 Moreover, the term debt collector does not include a person
collecting a debt on behalf of another to the extent that such activity
concerns a debt that was not in default at the time it was obtained.89
The argument for MERS not being a debt collector is that they were
the mortgagee from the very beginning of the transactionbefore the debt
ever went into default. However, what if you look past the simple
designation of MERS as the mortgagee and decide for yourself that MERS
is not the mortgagee? What is its involvement in the loan, beyond placing
some ink on that paper?
MERS only becomes involved in the loan once the loan is in default
and they initiate the foreclosure action. That is the same sort of role that a
debt collection agency plays. We ought to have the debt collection statueapply to the company that is the debt collector for all the delinquent
mortgages. I do not want to belabor it, but one more provision in that
statute says:
It is unlawful to design, compile, and furnish any form
knowing that such form would be used to create the false
belief in a consumer that a person other than the creditor of
such consumer is participating in the collection of or in an
attempt to collect a debt . . . when in fact such person is
not so participating.90
Is that not exactly the kind of thing that is happening in our foreclosure
actions? The paperwork that facilitates foreclosure would lead somebody
to believe that someone other than the creditor is attempting to collect the
debt. When what we really have is an employee of the servicer who is
pretending to be MERS, who is pretending to own the loan on behalf of the
servicer. It is a 360-degree illusion that is created through these agency
ideas. In any event it seems that this is misleading to the least
sophisticated consumer.91 We ought to be more candid and forthcoming
when we take homes away from peoplepeople like Carlene Balderrama.
88 Peterson,supra note 21, at 1374.89Id.90 15 U.S.C. 1692j(a).91See Miller v. Javitch, Block & Rathbone, 561 F.3d 588, 592 (6th Cir. 2009) (applying
the least-sophisticated-consumer test to a Fair Debt Collection Practices Act claim).
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Third, loans registered with the MERS system arguably lack priority in
some property disputes. The following is a holding from the SupremeCourt of Iowa over a century ago: It has been frequently held that slight
omissions in the acknowledgment of a deed destroy the effect of the record
as constructive notice. A fortiori, it seems to us, should so important and
vital an omission as that of the name of the grantee have that effect.92
Under this case, if you recorded a mortgage in Iowa and that mortgage
happened to omit the name of the mortgagee, then this was not sufficient to
provide notice, because the recorder could not include the conveyance in
the grantor or grantee index that tracks the chain of title.93 In effect, it
meant that that lien was an unperfected lien.
Here we have something slightly different. It is not that there is no
grantee listed. Instead what we have is a shell company that has no
employees but 20,000 vice presidents that is listed as the grantee of thelien. Is that enough to perfect it? This should be chilling to everyone. The
fact that this is even a plausible question is a testament to how aggressive
its securitization strategy was with respect to some basic legal rights.
In this case, I am talking about MOM mortgages, or MERS as
original mortgagee transactions. This is different from the initial way
they did it, where they had an actual mortgagee and they recorded an
assignment to MERS. It turns out the vast majority of MERS mortgage
loans list MERS as the original mortgagee now. There are some that do
not, from earlier vintages from the early 2000s or late 1990s. However,
once they started using MERS, no one wanted to pay that initial recording
fee. It was about $35 cheaper to do it with MERS as the original
mortgagee. What we have then are millions and millions of mortgage
loans that list MERS as the original mortgagee.
In any event, this is pretty similar to the case ofDisque v. Wright.94 Of
course it is an old case, but the reality is that you do not see mortgage loans
very often where the parties who are going to receive the right to foreclose
does not write down their name on the document. It just does not happen
very often.
Similarly, the court in Chauncey v. Arnold95 held: No mortgagee or
obligee was named in [a mortgage], and no right to maintain an action
thereon, or to enforce the same, was given therein to the plaintiff or any
92 Disque v. Wright, 49 Iowa 538, 540 (Iowa 1878).93Id.94Id.95 24 N.Y. 330 (N.Y. 1862).
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other person. It was, per se, of no more legal force than a simple piece of
blank paper.96 Corpus Juris Secundum reads: Notice may be deemed notpresent in cases of insufficient attestation or where the instrument itself is
so defective as to be void as a matter of law, as where it wholly omits the
name of the mortgagee.97
Another big potential problem is that county recording offices may be
entitled to recover unpaid recording fees on mortgage and deeds of trust
assignments. Here is the argument: Regular good old-fashioned unjust
enrichment theory from your first year in law school says that unjust
enrichment requires
(1) a benefit conferred upon the defendant by the plaintiff;
(2) an appreciation or knowledge by the defendant of the
benefit; and (3) the acceptance and retention by thedefendant of the benefit under such circumstances as to
make it inequitable for the defendant to retain the benefit
without the payment of its value.98
The county recorders give mortgagees the benefit of having a perfected
lien. There is an appreciation by the mortgage finance companies of the
service that the county provides. The tough question is whether the
finance company is accepting or retaining the benefit of a perfected lien
under these circumstances that make it inequitable for the company to
retain the benefit of a perfected lien without paying all of those intervening
assignment fees that traditionally they would have paid.
If you do not believe that the lien is unperfected, then it seems that this
becomes your bigger problem. If the lien is perfected and they sold a lien
that had full value to investors on Wall Street, they surely did not pay the
counties for the value of the services the county provided. Financial
institutions did this by saying something that, arguably, is not truethat
MERS is the mortgagee.
I think that, perhaps, there is an argument whether the mortgage
conveyance is even effective. Is there actually a valid mortgage that is
created? Whitaker v. Miller,99 an Illinois case, held that [t]here must be,
96Id. at 335.97 59 C.J.S.Mortgages 306 (2009).98 66 AM.JUR.2DRestitution and Implied Contracts 11 (2011).99 83 Ill. 381 (Ill. 1876).
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in every grant, a grantor, a grantee and a thing granted, and a deed wanting
in either essential is absolutely void.100So who is the grantee on a MERS mortgage? If you read the whole
document, the only person ever listed as a grantee of the property right is
MERS. Thus, MERS is the mortgagee.101 Only at least in Maine,
MERS is not the mortgagee.102 So who is the grantee? Does that mean
that we automatically reform the grantee to be the lender, even though the
lender was not named as such? My sense is that under good old-fashioned
property law, courts do not just start picking a new grantee. If the deed did
not list somebody who is an eligible grantee, then that means that the deed
failed as a conveyance, and you have to try it again.103 That is not to say
we could not have an equitable mortgage instead, just like, for example,
promissory estoppel can sometimes replace a standard contract. It seems
like this is a perfect case for an equitable mortgage. Again though, thisshould be breathtakingthe notion that 60% of our nations residential
mortgage loans face a colorable, basic argument that because they just
failed to name a grantee, according to Blackstones commentaries104 and
several old cases,105 these mortgages are facially defective. That is
chilling. Do not look at me like its my faultI am not the one that
created this situation. I am just merely pointing out an obvious, basic
defect. I did not make this mess. I am just quoting a case that says that if
you do not name a grantee, then it is not a valid lien.
A bit of free advice, to all of you out there who represent financial
institutions: Going forward, why dont you tell your financial institutions
you work with to stop making and buying MERS loans, at least for the
100Id. at 385.101See Mortg. Elec. Registration Sys., Inc. v. Saunders, 2 A.3d 289, 294 (Me. 2010).102Id. at 297.103See LEONARD A.JONES, ATREATISE ON THE LAW OF MORTGAGES OF REAL PROPERTY
43 (6th ed. 1904).104See 2 WILLIAM BLACKSTONE,COMMENTARIES (Univ. of Chicago Press, 2d ed. 2002)
(1766) 15758.105See Davidson v. Ala. Iron & Steel Co., 19 So. 390, 39091 (Ala. 1896) (detailing the
importance of accurately and fully recording the names of the parties to a deed); Richey v.
Sinclair, 47 N.E. 364, 365 (Ill. 1897) (The law is well settled that a deed without the name
of a grantee is invalid.); Menage v. Burke, 45 N.W. 155, 156 (Minn. 1890) ([I]t is
necessary to the legal validity of such instruments that there be a grantee having a legal
existence, capable of taking and certainly designated, or so designated that his identity can
be certainly ascertained . . . .).
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time being. There is a cloud of uncertainty surrounding this company. It
might make sense to just do it the old-fashioned way and pay those $35fees for the time being.
Does MERS have a role in the subprime and exotic mortgage mess? I
think that it does. It seems that MERS created an illusion of permanence
that did not really exist. A lot of investors knew that these sub-prime
mortgage lenders were thinly capitalized and were not going to be in it for
the long haul if there was ever a down-turn in the economy.
However, by listing MERS as the mortgagee, it created the illusion that
there would always be a placeholder in the county real property records
that could bring foreclosure actions.106 It turns out that really, in the end,
MERS is a bit of legal snake oil. It is Uncle MERS Magic Lien
Perfecting Serum. It was expected to be this perfect way that you could
just put one name in the county real property records, never have to payrecording fees, and always be able to foreclose.107
The fact that MERS was expected to be the foreclosing entity is part of
the reason the securitization documentation practices were so bad. 108 You
do not need to keep track of all the promissory notes, make sure that you
have documents demonstrating the recording of assignments, nor make
sure it all gets to the securitization trustee or the document custodian.
Why? Because who is going to foreclose? We will simply foreclose in the
name of MERS. It does not matter whether we actually have documents
that say that we own anything, because MERS owns it. Problem solved.
Only it turns out that some courts have agreed with me: MERS is not an
appropriate party to bring a foreclosure action.109 In a growing number of
106 See Creola Johnson, Fight Blight: Cities Sue to Hold Lenders Responsible for the
Rise in Foreclosures and Abandoned Properties,2008 UTAH L.REV. 1169, 1185 (2008).107See id.108 See Raymond H. Brescia, Beyond Balls and Strikes: Towards a Problem-Solving
Ethic in Foreclosure Proceedings,59 CASE W.RES. L.REV. 305, 345 (2009) (discussing
judicial activism to protect the due process rights of mortgagors); Chris Markus et al.,From
Main Street to Wall Street: Mortgage Loan Securitization and New Challenges Facing
Foreclosure Plaintiffs in Kentucky, 36 N. KY. L. REV. 395, 40708 (2009); Katherine
Porter,Misbehavior and Mistake in Bankruptcy Mortgage Claims,87 TEX.L.REV. 121, 172
(2008) (stating that bankruptcy rules fail to deter mortgagees from disregarding
documentation requirements).109See Mortg. Elec. Registration Sys., Inc. v. Sw. Homes of Ark., Inc., 301 S.W.3d 1, 5
(Ark. 2009) (MERS holds no authority to act as an agent and holds no property interest in
the mortgaged land. It is not a necessary party.); Mortg. Elec. Registration Sys., Inc. v.
(continued)
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jurisdictions this means that in the end, you actually do need all those
documents.110 Now robo-signers have been trying to churn out a bunch ofdocuments to replace all of that.111 It is not that MERS business model
necessitated robo-signing; rather, it is just that it facilitated the situation
which necessitated all the robo-signing.
Second, I think MERS has contributed to the demise of our public
information infrastructure. MERS was sold in the dot-com era. It was
expected to be the new digital solution to an old problem.112 I think that
narrative makes a lot of sense. I like computers and think that we should
have digital records. However, I do not really think that is what was
happening. MERS was not a digital solution. What it really was was an
attempt to privatize. The narrative that is most analogous to this situation
is the bridge in Minnesota that fell down because we neglected our
transportation infrastructure.113 We were neglecting our informationinfrastructure which created the opportunity for a private company to come
in and privatize it, to take it out of the public sphere.
That is a troubling thing, particularly when they never had a state
legislature sign off on it. Maybe we want to privatize the system? Maybe a
private company will be better than all the public real property recorders
who were democratically elected? However, if you are going to do that,
Graham, 247 P.3d 223, 229 (Kan. Ct. App. 2010); Bellistri v. Ocwen Loan Servicing, LLC,
284 S.W.3d 619, 62324 (Mo. Ct. App. 2009).
110 See, e.g., Bank of N.Y. v. Williams, 979 So. 2d 347, 34748 (Fla. Dist. Ct. App.
2008) (affirming dismissal of the foreclosure complaint for failure to show ownership
interest in mortgage and note); HSBC Bank USA v. Perboo, No. 38167/07, 2008 WL
2714686, at *3 (N.Y. Sup. Ct. July 11, 2008) (denying foreclosure plaintiffs application for
default judgment); Wells Fargo Bank, Natl Assn v. Reyes, No.5516/08, 2008 WL
2466257, at *1 (N.Y. Sup. Ct. June 19, 2008) (dismissing complaint for plaintiffs failure to
establish ownership of mortgage); In re Foreclosure Cases, Nos. 1:07CV2282 et al., 2007
WL 3232430, at *2 (N.D. Ohio Oct. 31, 2007) (dismissing consolidated foreclosure cases
for failure to produce evidence demonstrating ownership or assignment of promissory
notes).111Remarks and Testimony,supra note 69, at 3.112 Arnold,supra note 46, at 35.113 See Matthew L. Wald, Faulty Design Led to Minnesota Bridge Collapse, Inquiry
Finds, N.Y.TIMES, Jan. 15, 2008, at A19 (noting that while the design was sufficient when
the bridge opened in the 1960s . . . it gradually gained weight causing a previously
competent but critical connecting plate to fail catastrophically).
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you need to have a legislature make that decision, not a company that just
does it as a matter of private contract law.My last point, then, is about democratic governance. The following a
quote from the MERS CEO who stepped down recently: MERS is owned
and operated by and for the mortgage industry.114
I remember when I read that sentence it really popped off the page for
me. I was trying to think what about the syntax that made it so powerful
for me. MERS is owned and operated by and for the mortgage industry.
Then, it dawned on me, and I realized where that comes from. It was
Lincolns Gettysburg Address, where he exhorted us that government of
the people, by the people, for the people, shall not perish from the
earth.115 MERS used a pretty similar sentence, only they inserted
MERS for the word government and mortgage industry for the word
people.If you were to identify a particular point in time where society
transitions from being properly classified as a democratic republic into a
corporate oligarchy, perhaps that point would be when they decided that
the ownership of land would be maintained, not by a democratically
elected officials, but by a private company. Here, that private company
keeps all the records confidential and is wholly owned by financial
institutions. Here, that company self-proclaims that it is operating for the
benefit of the industry as opposed to the people. Maybe this is key time in
the evolution of a society that is changing between those two types of
governments. The story of MERS seems to tell us a little bit about what
our society is becoming.
In conclusion, I would like to show a picture that features the second
greatest Republican President in the history of our country: Teddy
Roosevelt. In this editorial comic from 1907, President Roosevelt is giving
flim-flam finance a very rigorous bath in honesty soap. 116 It seems that
Teddy Roosevelts example could be useful for us these days.
114 Arnold,supra note 46, at 36.115 GARRY WILLS,LINCOLN AT GETTYSBURG:THE WORDS THAT REMADE AMERICA 145
(1992).116 Udo J. Keppler, You Dirty Boy!, PUCKMAGAZINE, Sept. 1907, cover. Reprinted with
permission from the Theodore Roosevelt Collection, Harvard College Library.
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QUESTION & ANSWER SESSION
QUESTION:
It seems that as a matter of law there should be no problem in
having an agent act on behalf of the beneficial owners. Under the
U.C.C. for example, there is no question that you can have a
security agent. You do not need to disclose who the parties are for
whom the security agent acts. The U.C.C. is different from the
real property law, but real property law would incorporate,
presumably, the common law when we had trust law, where we
had the separation of legal and beneficial title. If the mortgage is
recorded in the name of MERS, its a legal titleholder to the
mortgage and recognizing that the beneficial titleholder would be
parties who own the promissory notes. That would be way Iwould analyze it. I was asking Dean Peterson what he thought of
that analysis.
RESPONSE, DEAN PETERSON:
Starting out with the notion of whether MERS can be the legal
title owner, and then there is a beneficial interest that is the
financial institutions. How does that work, in an example of the
deed of trust? In a deed of trust, the beneficiary of the deed of
trust is typically the lender. The trustee on the deed of trust is the
legal titleholder. This is the same structure of divided ownership.
Now how is that possible when they list MERS as the beneficiary
of the deed of trust? That means, I suppose you are saying,
MERS has legal title to an equitable ownership interest. That
presumes some sort of meta-notion of legal titleness. How can
you have legal title to a beneficial interest? You are sort of
dividing, metaphysically, this notion of beneficiary in a way that I
do not think exists in the real property law. I do not think this
notion really is there in deed of trust states. I am not sure that it is
there in mortgage states either. Although, perhaps it is. I
recognize that courts can and do disagree about this. However, I
think that my more simple interpretation provides a better long-
term foundation for commerce.
There may also have been some agent cases out there wheresome jurisdictions allowed a security agent, particularly for Article
9 purposes. What we do not have is a case where one agent acts
on behalf of everyone in our society so that we no longer have
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meaningful public records. Prior to the MERS era, there was not a
single case in the country that said that financiers could do this.MERS has forced county real property recorders,
democratically elected officials, into conducting a bizarre puppet
show. All the records that they have been maintaining for three
hundred years now increasingly just repeat the word MERS over
and over again.
There was no case that said this agency concept can be used to
try and force the county real property records to no longer have
meaning. The analogy that I would draw is the Irish fable where
the guy catches a leprechaun and makes the leprechaun tell him
where his pot of gold is. The leprechaun says, its right here.
The guy ties a red handkerchief around the tree and then leaves to
try to pick up his shovel. When he comes back, the leprechaun hasgone around and tied red handkerchiefs around every tree in the
entire forest. Then the leprechaun keeps his gold.
That seems that is similar to what MERS has done. There is
no rule that says you cannot have your friend put that handkerchief
on the tree for you. However, if your friend puts handkerchiefs on
every tree in the entire forest, there is no case that says that is all
right. It seems that courts ought to step up to the plate and say that
we have county real property recording systems because we want a
democratic check on Wall Street and financial institutions. We
want to ensure that they do not co-op all the records and keep them
in one undiversified, undemocratic, unaccountable recording
system. Having multiple recorders is a diversification strategy.
QUESTION:
If you are right on MERS, assuming we dont have MERS,
that would mean the mortgage would be recorded in the name of
the originator. The originator would sell it to an SPE, who would
sell it to another SPE, but it would not be a continuous recording.
You would have the exact same problem as you have with MERS,
but it would be in the name of the originator and not in the name of
MERS. Doesnt the inaction in 2001 of U.C.C. effectively
supersede when the whole MERS system came to place in 1999,
before the U.C.C. was amended to enable even mortgage notes tobe transferred without the re-recording?
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RESPONSE, DEAN PETERSON:
The Ibanez117 decision in Massachusetts is illustrative on thispoint. Massachusetts does not follow the Supreme Court of the
United States rule that says you cannot separate the note and the
mortgage.118 Massachusetts mortgagesaccording to a Supreme
Court of Massachusetts decision that came down just a year ago
said each mortgage has to be transferred through an independent
assignment.119 An Article 9 transfer of the note does not carry
along the mortgage with it, at least in Massachusetts.120 Going
forward in Massachusetts, they have to separately transfer the
mortgage between each of the individual entities that own the lien
with an assignment. It is not that hard to come up with a piece of
paper. Also, if the county recorders are digitally sophisticated, and
allow recording of that on the internet, then it is not going to bethat expensive or that inconvenient either. It seems that is the way
we ought to go. We ought to requiremake it clearthat we
want all the transfers to have a record, at least with respect to land.
Maybe not for personal property transfers under Article 9, but with
respect to land, we ought to expect that there is an assignment that
is recorded with each county recorder. To try and make that more
efficient, I would recommend that Congress give out block grants
to county governments in exchange for adopting some uniform
interfacing practices that make it easy for industry to record those
mortgage assignments. The federal government should sponsor
purchasing equipment necessary to facilitate that.
QUESTION:
From a practical standpoint, to the original assertion, couldnt
they just simply assign the mortgage back to the holder of the note
at the point and time of the foreclosure?
RESPONSE, DEAN PETERSON:
That is what they have been doing. That is the strategy they
have adopted in those jurisdictions where judges have said MERS
cannot foreclose. The strategy is to record an assignment, or what
117 U.S. Bank Natl Assn v. Ibanez, 941 N.E.2d 40 (Mass. 2011).118Id. at 5354.119Id.120Id.
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purports to be an assignment, from MERS back to the servicer, or
maybe to the securitization trust, and then the servicer acts onbehalf of the securitization trust through a traditional agency
argument. In Massachusetts it seems that is the strategy that
works. MERS actually is the mortgagee in Massachusetts. The
question I have about that, incidentally, is this: If MERS is the
mortgagee how is there a true sale? If MERS owns that mortgage,
how did they sell it into the securitization trust? The investors do
not own that mortgage. They could not bring a foreclosure action
because they do not own the mortgage. The ownership of the
mortgage and the note have been separated in Massachusetts. That
was not a true sale. Any securitization SPV that has MERS-
recorded Massachusetts loansthose investors do not own those
loans. That seems like a good put-back theory.With respect to foreclosure, I think reuniting the two interests
in Massachusetts works. In states that hold to the notion that the
note and the mortgage are inseparable and that MERS is just an
agent, that assignment from MERS back to the servicer is just
incoherent gibberish in that jurisdiction. It is not an assignment.
You can put the word assignment on a piece of paper, but you
cannot assign something you dont own. MERS does not own it.
However, if enough judges have said this sort of assignment is
legitimateat least then there is a real party that is litigating.
After all, the borrower did not make the payments, so judges let
the real party take the house. That is what happens. However, in
most jurisdictions, I dont think that assignment does anything, its
just nonsense.
QUESTION:
Do you think these mortgage notes are negotiable and if
theyre not, how do we figure out whos entitled to enforce the
debt?
RESPONSE, DEAN PETERSON:
Ronald Mann, who is a professor at Columbia or maybe hes
back in Texas now, has an article that he wrote a while back. It
was a very mischievous article. He points out that the standardboilerplate in Fannie Mae and Freddie Mac promissory notes has
some commitments in it that look like they are extraneous
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undertakings.121 I think one of them is a notice commitment that if
you are going to prepay, then the borrower has to give notice to thelender or to the holder of the note.122 That is not something that is
listed as an exception under Article 3.123 All the courts I have
seenand there are so many cases now it is difficult to keep up
with all of thembut from what I have seen, everyone has just
been operating under the assumption that these notes are
instruments, and they can either be transferred through the Article
3 transfer system or the new Article 9 transfer system, which just
has to meet 9-203(b)(3), I think it is. Under Article 9, you just
have to describe the note being transferred, you dont have to
indorse the note and then transfer a physical possession of it.124 If
the notes are not negotiable instruments, maybe that makes it
easier for the investors to own them, because all you aretransferring is a contract right, an account. The transfer rules are
easier for just accounts, or a payment intangible.
If the note is not negotiable it may be easier to fix the
securitization fail problem. What you dont get is the benefit of
being a holder in due course.125 This will make it much easier to
assert predatory lending type claims against the securitization trust.
On the other hand, those claims are not as serious as perhaps the
put-back lawsuits are, because consumers do not have money to
litigate. They are getting kicked out of their houses. So maybe
that is a better strategy for the industry. We really should have
cleared all this stuff up ahead of time. Before we made all these
millions of loans, if we wanted this type of system, we ought to
have had a statute that says you can have a nominee/mortgagee and
you dont have to record it in the county real property records.
121 Ronald J. Mann, Searching for Negotiability in Payment and Credit Systems, 44
UCLAL.REV.951, 97172 (1997).122Id.123Id.124See U.C.C. 9-203(b)(3) (2000). Under Article 9, the parties to a transaction can
create a security interest in any collateral, including notes, which then attaches to the note
and becomes enforceable when three basic prerequisites exist. Id. at cmt. 1. Those
prerequisites include value . . . rights or power to transfer rights in collateral . . . and
agreement plus satisfaction of an evidentiary requirement . . . . Id. No physical transfer or
indorsement is necessary. Id.125 Mann, supra note 121, at 972.
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You should have had a promissory note that was clearly
negotiable. I guess hindsight is 2020.Thank you.