ALL IN ONE BASKET: THE BANKRUPTCY RISK OF A NATIONAL AGENT-BASEDMORTGAGE RECORDING SYSTEM
John Patrick Hunt
Mortgage Electronic Registration Systems, Inc.
owns legal title to some30 million mortgages in the United States. The company, which was a key part of the mortgagesecuritization apparatus in the late 1990s and 2000s, is now under intense pressure from publicand private lawsuits and investigations and faces a very real threat of insolvency. Policymakersare looking ahead to potential replacements for MERS, Inc., as a recent Fed staff proposal for asubstitute system indicates. This Article examines what might happen to the mortgages that MERS, Inc. at least nominally owns in the event that the company enters bankruptcy, a questionthat apparently has never been explored in a publicly available analysis. Although the legal analysis underlying the design of MERS, Inc. does not appear to be publicly available, a key assumption seems to have been that if the company ever entered
bankruptcy, the mortgages in its hands would not enter the company’s bankruptcy estate and
would not be available to creditors. This Article challenges that assumption, pointing to thebroad authority the Bankruptcy Code confers on the bankruptcy trustee with respect to interestsin real property, such as mortgages. Most courts that have considered the issue have found that the bankruptcy trustee can bring into the estate any real property interest that the debtor could have conveyed to a good-faith purchaser. There is a significant risk that MERS, Inc. can convey MERS mortgages to a purchaser acting in good faith. Although part of that risk arises from
conduct in making and acquiescingin claims in court that the company can sell the mortgages, has constitutionally protected property interests in the mortgages, is a creditor of mortgage borrowers, and owns a beneficialinterest in the mortgages, part of the risk is inherent in any mortgage recording system that operates nationally and holds mortgages as an agent. Policymakers should consider that risk asthey consider whether MERS should be replaced and what form the replacement should take.
Assistant Professor of Law, University of California, Davis School of Law, firstname.lastname@example.org.A.B.
Harvard College, J.D. Yale Law School. M.F.E. (Master’s in Financial Engineering) University of California,
Berkeley Haas School of Business.
Professor of Finance, Kingsford Capital Management Chair in Business, University of CaliforniaBerkeley Haas School of Business, email@example.com.B.A., M.A. Cambridge University, Ph.D. Stanford
Professor of Real Estate and Finance, Lisle and Roslyn Payne Chair in Real Estate and Capital Markets,University of California, Berkeley Haas School of Business, firstname.lastname@example.org,B.A. University of
Michigan, Maîtrise, Université de Paris, VIII, Ph.D. University of Michigan. The authors gratefully acknowledgehelpful contributions from and discussions with Jack Ayer, Andrea Bjorklund, Anupam Chander, Joel Dobris,Katherine Florey, Jesse Fried, Robert W. Hillman, Dwight Jaffee, Meredith Kane, Tobias Keller, Christopher Klein,Evelyn Lewis, Lance Liebman, Eric Talley, Ken Taymor, and Rebecca Tushnet. We also appreciate excellentresearch assistance from Ronny Clausner and Sumair Khan. All opinions and errors are the authors' own.