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SSRN-id2162508

SSRN-id2162508

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Published by A. Campbell
Written by Professor Levitin, published at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2162508
Written by Professor Levitin, published at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2162508

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Published by: A. Campbell on Nov 20, 2013
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L
EVITIN IN
P
RINTER
(D
O
 N
OT
D
ELETE
) 11/13/2013
 
5:55
 
PM
THE PAPER CHASE: SECURITIZATION, FORECLOSURE, AND THE UNCERTAINTY OF MORTGAGE TITLE
A
DAM
J.
 
L
EVITIN
A
BSTRACT
 
The mortgage foreclosure crisis raises legal questions as important as its economic impact. Questions that were straightforward and uncontroversial a generation ago today threaten the stability of a $13 trillion mortgage market: Who has standing to foreclose? If a  foreclosure was done improperly, what is the effect? And what is the  proper legal method for transferring mortgages? These questions implicate the clarity of title for property nationwide and pose a too-big-to-fail problem for the courts. The legal confusion stems from the existence of competing systems  for establishing title to mortgages and transferring those rights. Historically, mortgage title was established and transferred through the “public demonstration” regimes of UCC Article 3 and land recordation systems. This arrangement worked satisfactorily when mortgages were rarely transferred. Mortgage finance, however, shifted to securitization, which involves repeated bulk transfers of mortgages. To facilitate securitization, deal architects developed alternative “contracting” regimes for mortgage title: UCC Article 9 and MERS, a  private mortgage registry. These new regimes reduced the cost of  securitization by dispensing with demonstrative formalities, but at the expense of reduced clarity of title, which raised the costs of mortgage enforcement. This trade-off benefitted the securitization industry at the expense of securitization investors because it became apparent only subsequently with the rise in mortgage foreclosures. The harm, however, has not been limited to securitization investors. Clouded
Copyright © 2013 Adam J. Levitin. Professor of Law, Georgetown University Law Center. The author would like to thank William Bratton, Kathleen Cully, Anna Gelpern, Edward Janger, Andrew Kaufman, Robert Lawless, Katherine Porter, John Pottow, Elizabeth Renuart, Joseph Singer, David Super, Robert Thompson, Rebecca Tushnet, Alan White and the participants in the Harvard Law School Faculty Workshop for their comments, and Devin Mauney and Laura Mumm for outstanding research assistance.
 
L
EVITIN IN
P
RINTER
(D
O
 N
OT
D
ELETE
) 11/13/2013
 
5:55
 
PM
638
DUKE LAW JOURNAL
 [Vol. 63:637
mortgage title has significant negative externalities on the economy as a whole. This Article proposes reconciling the competing title systems through an integrated system of note registration and mortgage recordation, with compliance as a prerequisite to foreclosure. Such a  system would resolve questions about standing, remove the potential cloud to real-estate title, and facilitate mortgage financing by clarifying property rights.
T
ABLE OF
C
ONTENTS
 Introduction ............................................................................................. 639
 
I. Traditional Mortgage Title Systems ................................................. 652
 
A.
 
UCC Article 3 ........................................................................ 655
 
1.
Scope
 ................................................................................... 655
 
2.
UCC Article 3 as a Note Transfer System
 ....................... 657
 
3.
UCC Article 3 as a Note Title System
 .............................. 659
 
4.
UCC Article 3 as a Mortgage Title-and-Transfer System
 ............................................................................... 664
 
B.
 
Land Recordation Systems .................................................. 665
 
C.
 
The Uneasy Coexistence of UCC Article 3 and Land Records ................................................................................... 669
 
II. The Shift in Mortgage Financing to Securitization ....................... 670
 
III. Securitization-Era Mortgage Title Systems .................................. 676
 
A.
 
MERS ..................................................................................... 677
 
1.
MERS Background
 ........................................................... 677
 
2.
Structural Problems with MERS
 ...................................... 680
 
B.
 
Revised UCC Articles 1 and 9 ............................................. 688
 
C.
 
Pooling and Servicing Agreements ..................................... 697
 
D.
 
The Political Economy of Title Systems ............................. 702
 
IV. The Reform of Mortgage Title Systems ........................................ 711
 
A.
 
Existing Reform Proposals ................................................... 711
 
1.
Reformation of Land Recordation Systems
 .................... 712
 
2.
Reformation of MERS
 ...................................................... 712
 
3.
Creation of a National Lien Registry
 ............................... 713
 
4.
Elimination of Negotiability
 ............................................. 715
 
5.
Merger of Note and Mortgage
 .......................................... 716
 
B.
 
Reconciling Title Systems .................................................... 717
 
Conclusion ................................................................................................ 723
 
Appendix .................................................................................................. 727
 
 
L
EVITIN IN
P
RINTER
(D
O
 N
OT
D
ELETE
) 11/13/2013
 
5:55
 
PM
2013]
THE PAPER CHASE
 639 I
NTRODUCTION
 Since 2007, an estimated seven-million or more homes have been sold in foreclosure or distressed sales,
1
 a loss in homeownership unparalleled in American history. The impact of these foreclosures on households, communities, and the macroeconomy is widely recognized.
2
 The foreclosure crisis, however, raises equally weighty legal issues. The foreclosure crisis is forcing a reexamination of the nineteenth-century commercial- and real-property-law systems that continue to undergird critical sectors of the U.S. economy in the twenty-first century. This reexamination is occurring in the shadow of a too-big-to-fail problem, because a court’s decision to uphold well-established law could trigger a financial crisis. Problems in the foreclosure process have been apparent since the start of the foreclosure crisis,
3
 but the issue burst onto the national scene in the fall of 2010 with the emergence of the “robosigning” scandal involving banks’ use of fraudulent affidavits to establish standing to foreclose.
4
 Then, in January 2011, the Massachusetts Supreme Judicial Court sent shockwaves through the real-estate- and commercial-law world by issuing a unanimous ruling in
U.S. Bank
1
.
I arrived at the seven-million figure by adding industry extrapolations and metrics from July 2007–June 2013 (6.5 million foreclosure sales completed),
 see Industry Extrapolations and Metrics (June 2013)
,
 
HOPE
 
NOW
 
5
 
(Aug. 12, 2013), http://www.hopenow.com/industry-data/2013-06-04-HopeNow.Ful_%20Report_(June).DRAFT.pdf, and my own estimate of foreclosure sales from January–June 2007 and July–December 2013 (more than 0.5 million foreclosure sales completed). 2.
See, e.g.
, C
ONG
.
 
O
VERSIGHT
P
ANEL
,
 
O
CTOBER
O
VERSIGHT
R
EPORT
:
 
A
N
A
SSESSMENT OF
F
ORECLOSURE
M
ITIGATION
E
FFORTS
A
FTER
S
IX
M
ONTHS
5–6
 
(2009),
 
available at
http://www.gpo.gov/fdsys/pkg/CPRT-111JPRT52671/pdf/CPRT-111JPRT52671.pdf 
 
(detailing the effect of foreclosures on neighboring property values, educational and religious institutions, foreclosing banks, and the economy as a whole);
 
K
ATHLEEN
C.
 
E
NGEL
&
 
P
ATRICIA
A.
 
M
C
C
OY
,
 
T
HE
S
UBPRIME
V
IRUS
:
 
R
ECKLESS
C
REDIT
,
 
R
EGULATORY
F
AILURE
,
 AND
N
EXT
S
TEPS
124
 
(2011)
 
(partially attributing the national economic woes of early 2009 to skyrocketing foreclosures); F
IN
.
 
C
RISIS
I
NQUIRY
C
OMM
N
,
 
F
INAL
R
EPORT OF THE
N
ATIONAL
C
OMMISSION ON THE
C
AUSES OF THE
F
INANCIAL AND
E
CONOMIC
C
RISIS IN THE
U
NITED
S
TATES
402–10
 
(2011),
 
available at
http://www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf 
 
(documenting the impact of the foreclosure crisis on individual homeowners, housing markets, and financial institutions); D
AN
I
MMERGLUCK
,
 
F
ORECLOSED
:
 
H
IGH
-R
ISK
L
ENDING
,
 
D
EREGULATION
,
 AND THE
U
NDERMINING OF
A
MERICA
S
M
ORTGAGE
M
ARKET
133–66
 
(2009)
 
(examining the costs of high-risk mortgage lending for borrowers, lenders, investors, neighborhoods, cities, renters, and the national and international economies).
 
3.
See
Gretchen Morgenson,
Foreclosures Hit a Snag for Lenders
,
 
N.Y.
 
T
IMES
, Nov. 15, 2007, at C1 (reporting on a 2007 federal judicial decision that “rais[ed] questions about the legal standing of investors in mortgage securities pools”). 4.
See
 Gretchen Morgenson,
Banks’ Flawed Paperwork Throws Some Foreclosures into Chaos
, N.Y.
 
T
IMES
, Oct. 4, 2010, at A1 (noting banks’ use of “dubiously prepared” affidavits).

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