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NAILTA: Why Congress Should Examine HR 2425 and MERS Together

NAILTA: Why Congress Should Examine HR 2425 and MERS Together

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Published by OAITA
NAILTA's second position paper on MERS-related bills to limit MERS' access to government sponsored enterprises.
NAILTA's second position paper on MERS-related bills to limit MERS' access to government sponsored enterprises.

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Published by: OAITA on Jul 27, 2011
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Why Congress Should Examine H.R. 2425 and MERS Together
Marcy Kaptur (D-OH), a Congresswoman from Toledo, Ohio, has introduced H.R. 2425 a billknown as the “Transparency and Security Mortgage Registration Act of 2011”. The bill is thesecond such bill introduced by Representative Kaptur in the past two years to address thegrowing problems associated with the Mortgage Electronic Registration Systems, Inc. (MERS)recording registry. The last bill was H.R. 6460 and her latest version mirrors the first.The bill is designed to prohibit Fannie Mae, Freddie Mac, and Ginnie Mae – otherwise referredto collectively as government sponsored entities or GSEs -- from owning or guaranteeing anymortgage that is assigned to the Mortgage Electronic Registration Systems (MERS) or for whichMERS is the mortgagee of record.H.R. 2425, which is not currently co-sponsored, has been introduced into the Republican-controlled House Financial Services Committee and has little chance of being reported for ageneral floor vote. However, while the bill is not perfect for various reasons spelled out below, itcould represent the beginning of a much-needed national conversation on the subject of MERSand the damage MERS has brought to local county recorders, the land title records they maintainand the public at large.
What is MERS?
MERS is a creation of some of the most powerfully consolidated forces in the real estate andmortgage banking industries. In the mid-1990’s mortgage bankers decided they no longerwanted to pay recording fees for assigning mortgages between institutions. The mortgagebanking industry viewed the traditional requirements of mortgage recording laws in the fiftystates as too slow and cumbersome for the new forms of risky mortgage investments they wantedto create so they determined a way in which they could circumvent the process entirely.This decision was driven by securitization – a process of pooling many mortgages into a trustand selling income from the trust to investors on Wall Street. Securitization is the same processunder so much scrutiny as one of the causes of the Great Recession of 2008. Rather than learnand abide by the local county recording customs for mortgage recording and assignments or paythe associated cost of doing so, the mortgage banking industry needed to devise a plan to hastenthe assignment process and avoid the cost of paying for assigning each individual mortgage – all
2to the detriment of the public and the local county recorders who depend upon recording incometo support their offices and the integrity of the records they maintain.To avoid paying county recording fees each time the mortgages were assigned, mortgage bankersand the title insurance industry formed a plan to create one shell company that would pretend toown all the mortgages in the country. By doing so, the mortgage bankers and their investmentpartners would never have to record assignments since the same company would always “own”all the mortgages.The company they created is now known as Mortgage Electronic Registration Systems, Inc. orMERS. 60% of the nation’s mortgages are now held by MERS, whether as a nominee or as theactual mortgagee. At present, the number of mortgages “tracked” in the MERS system isroughly 31 million. Prior to the mortgage meltdown in 2008, the number of mortgages in theMERS system was nearly twice that number, or approximately 61 million mortgages. Theregistry fees paid by member banks to participate in the MERS system has generated millions of dollars in revenue for MERS owners and given the mortgage banking industry unfettered accessto the securitization market where billions of dollars have changed hands since 1997.
Who is MERS?
MERS is a wholly-owned subsidiary of a Delaware corporation that is owned by a broad base of organizations in the mortgage, banking and title industries known as MERSCORP, Inc.Shareholders in MERS include: the
American Land Title Association
First American TitleInsurance Corporation
(First American),
Stewart Title Guaranty Company
(Stewart Title),
Bank of America
CitiMortgage, Inc.
Merrill Lynch
AIG United Guaranty Corporation
Wells Fargo Bank
Washington Mutual Bank
Chase Home Mortgage Corporation
Mortgage Bankers Association
Fannie Mae
Freddie Mac
.The CEO of the American Land Title Association, Kurt Pfotenhauer, is the Chairman of theBoard for MERS. Investment in the MERS venture has reaped huge rewards for the closelyconsolidated owners of the registry. Thus, the effort to protect MERS from opponents of theregistry has been vigorous.
Where Does MERS Go Wrong?
In the typical MERS scenario, Bank A lends money to a borrower via a promissory note securedby a mortgage. Bank A, as a participant in the MERS system, permits MERS to appear on themortgage or deed of trust for the perceived purpose of holding title to the mortgage or deed of trust as nominee for Bank A, whether as the mortgagee or as an assignee. From there, thepromissory note travels the secondary market through various assignments and holders until,upon default or thereafter, the foreclosing entity requires proof in court that it is the holder of thenote and mortgage in order to foreclose. Because the manner by which MERS tracks theassignments in its registry, often times the assignments are lost, the information contained in theregistry is erroneous or, worse, the individual with purported authority to assign the MERS note
3and/or mortgage has no tangible relationship to MERS or the underlying financial institutionparticipating in the registry (i.e. a robo-signer).Procedurally speaking, MERS participates in the plan to hold mortgages in two ways: asassignee and/or as nominee.
MERS as Assignee.
The originating lender, Bank A makes a traditional loan by listing itself as the payee on thepromissory note and as the mortgagee on the mortgage. The loan is then assigned to a seller forrepackaging through securitization for investors. However, instead of recording the assignmentto the seller or the trust that will ultimately own the loan; the originator pays MERS a fee torecord an assignment to MERS in the county records. Although MERS records an assignment inthe real property records, the promissory note which creates the legal obligation to repay the debtis not negotiated to MERS.The promissory note is not assigned to MERS because no interests are transferred on the MERSsystem, only tracked. Thus, Bank A continues to hold the note in its own name. While themortgage itself may be assigned by Bank A to another bank or servicer, it is only at the momentthat foreclosure is required on that mortgage that MERS then either attempts to assign themortgage to the bank or attempts to foreclose on the mortgage in its own name. Again, the noteis not actually assigned, if at all, until the need for foreclosure arises. Often times, the note isseveral holders back in the chain of transfers within the MERS system or worse yet, lost.
MERS as Mortgagee.
Start with the same facts as above. Bank A is the payee on the note and the mortgagee. Themortgage contains the following language:“MERS is a separate corporation that is acting solely as nomineefor Lender and Lender’s successors and assigns. MERS is themortgagee under this Security Instrument.”Upon default, Bank A allows MERS to act as the real party in interest filing the foreclosure onbehalf of MERS, not Bank A. Thus, not only is MERS a “nominee” or agent, but in the samedocument MERS also makes the statement that it is the “mortgagee” or principal. However, onecannot be both agent and principal of the same instrument.The MERS system is predicated upon the belief that it can act as both an agent and a principalwith regard to the ownership of mortgages, but not actually own or hold the promissory note. Inother words, MERS is never really there. The MERS system is a tracking system. However, if MERS is a mortgagee, as it sometimes presents itself to be in order to foreclose, it cannot severthe promissory note from the mortgage and foreclose. Since the 19
century a long and stillprecedential line of cases has held that mortgages and deeds of trust may not be separated from

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