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What's wrong with MERS — Mortgage Electronic Registration System?

Christopher L. Peterson, a consumer rights attorney and professor at the University of Utah's law school, was confused when he first heard about MERS, the Mortgage Electronic Registration System, which was created by U.S. bankers to track mortgage loans.

"It didn't add up," he said of the electronic database that, unbeknownst to most homeowners, holds 60 percent of the nation's residential mortgages. "At first I thought I didn't understand, but after studying it for a few years, it became clear there are basic and quite fundamental problems with MERS."

Those problems have been exacerbated as millions of foreclosures work their way through the legal system and MERS' role as the mortgage holder, invisible in good times, gets scrutinized when homeowners default. Peterson, who taught at University of Florida's law school until 2008, believes MERS is a shell company that usurped the traditional role of county clerks to the benefit of lenders and the detriment of borrowers.

MERS, based in Reston, Va., and owned by its members, defends its operation, saying, "MERS has been designed to operate within the existing legal framework of all 50 states."

Today, Peterson will testify before the U.S. House of Representatives Judiciary Committee, which is investigating the foreclosure crisis. Earlier this week, he told the St. Petersburg Times why he believes the nation's long-standing property records system was hijacked by mortgage bankers, creating chaos in foreclosure courts.

What does MERS do?

People talk about a mortgage loan as if it is one thing, but it is two different but related rights. The first is the right to receive payment from a borrower, and that's embodied in the promissory note. The second is the right to foreclose or take back land that's been pledged as collateral. The foreclosure right is created in the mortgage document. The mortgage document and the promissory note were always inextricably intertwined and transferred at the same time. But about 12 years ago, this changed with MERS.

It used to be that every time a mortgage loan changed hands, the new mortgage owner would go into the county clerk's office and record the document, memorializing that the loan had changed hands. But since loans were changing hands five and six times in the first few months with the securitization of mortgages, the financial institutions didn't want to record the loan assignments, particularly since they'd have to pay about $35 each time. So they designed this shell company that pretends to own all these mortgages.

Who ensures the accuracy of the MERS database?

Think of it as a big Microsoft Excel spreadsheet that has information entered into it by the MERS members. Mortgage loan originators or servicing companies can enter information about changes in loan ownership if they want to. But there are no penalties if they don't. That's unlike the traditional legal system, where if you don't put information into the county record, you can lose your priority claim over the land. You don't have those same incentives in the MERS system. The result is in many cases the MERS database is inadequate, and we don't have reliable information about who owns what mortgage loans.

MERS says it's as an "innovative process that simplifies the way mortgage ownership and servicing rights are originated, sold and tracked." Problem?

First, I have a problem because they never got permission from a democratically elected legislature to do it. Second, it doesn't simplify anything, but has made it much more complicated. The new system also makes it much more difficult for homeowners to negotiate with somebody with authority to modify their mortgage loan.

It's also inherently deceptive. Since MERS is a relatively small company, with not enough employees to engage the millions of mortgage loans it pretends to own, it has to pretend to have employees who don't work for it. Employees at service companies and law firms can go on MERS' Web page, fill in a blank form, press submit, then MERS kicks back a corporate resolution that purports to make these employees assistant secretaries or vice presidents of MERS to do business with the courts. It is a simple falsehood. The notion that we have invested 60 percent of the country's mortgages in a system with such basic untruthfulness seems a terrible mistake. It's a foundation of sand.

Is MERS being challenged?

Rep. Marcy Kaptur (D-Ohio) introduced a bill to prohibit Fannie Mae and Freddie Mac from purchasing any more loans drawn out of MERS. Given that Freddie and Fannie have been receiving massive taxpayer bailouts, why continue to invest in mortgages that are so risky, complicated and problematic?

County governments are starting to wise up that this is a bad deal. There are a lot of arguments as to why they might be able to sue MERS and the investment banks to recover back fees. What do they have to lose?

Kris Hundley can be reached at or (727) 892-2996.

Response from MERS' spokeswoman Karmela Lejarde to Peterson's testimony

It is important to note that there are numerous cases upholding the legal validity of MERS. To date, MERS has received more than 200 court decisions nationwide determining that MERS may hold and/or foreclose mortgage liens. To name just a few, see In re Mortgage Electronic Registration Systems (MERS) Litigation, (D.Ariz., Sept. 30, 2010, MDL Docket No. 09-2119-JAT) dismissing six class action complaints and finding that MERS has the right to foreclose; Cervantes v. Countrywide Home Loans, Inc., et al. 2:09-cv-00517 (D. Az., 2009), holding that MERS is the beneficiary under the deed of trust; Ciardi v. The Lending Company, Inc. et al., 2010 WL 2079735 (D. Ariz.) holding that MERS is the beneficiary with the authority to foreclose; Mortgage Electronic Registration Systems, Inc. v. Azize, (965 So. 2d 151, 153-54 Fla. Dist. Ct. App. 2007), holding MERS can foreclose when it is the holder of the note; Athey v. Mortgage Electronic Registration Systems, Inc., 2010 WL 1634066 (Tex. App. – Beaumont) holding that MERS is the beneficiary of the deed of trust, with the authority to proceed with foreclosure; In re Huggins, 2006 WL 3718179 (Bankr. D. Mass. 2006), holding that MERS was the mortgagee with the authority to foreclose. In the case of Burnett v. Mortgage Electronic Registration Systems, Inc., 09-69 (D. Ut. 2009), the court affirmed that MERS was the beneficiary on the Deed of Trust and authorized to commence foreclosure. Additionally, in Rodeback v. Utah Financial, et al., 09-134 (D. Ut., 2010), the court found that when MERS is the mortgagee as the nominee for the noteholder, the Deed of Trust is valid and enforceable. Numerous other decisions in Utah have followed these cases and rejected challenges brought against MERS.

Additionally, many courts have found that MERS' relationship to the promissory noteholder does not support the suggestion that when the borrower grants MERS the mortgage lien as the mortgagee as the nominee for the promissory note-owner, that MERS somehow runs afoul of longstanding precedent on the inseparability of promissory notes and mortgages. Mortgage law is abundantly clear that a promissory note owner may empower an agent with the authority to hold and enforce a mortgage lien on behalf of the note owner, and that courts should make every effort to recognize this agency relationship. [See Restatement (Third) Property, § 5.4, comment ].

What's wrong with MERS — Mortgage Electronic Registration System? 12/14/10 [Last modified: Friday, December 17, 2010 12:37pm]
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