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2425 and MERS Together
Marcy Kaptur (D-OH), a Congresswoman from Toledo, Ohio, has introduced H.R. 2425 a bill known as the “Transparency and Security Mortgage Registration Act of 2011”. The bill is the second such bill introduced by Representative Kaptur in the past two years to address the growing 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 referred to collectively as government sponsored entities or GSEs -- from owning or guaranteeing any mortgage that is assigned to the Mortgage Electronic Registration Systems (MERS) or for which MERS is the mortgagee of record. H.R. 2425, which is not currently co-sponsored, has been introduced into the Republicancontrolled House Financial Services Committee and has little chance of being reported for a general floor vote. However, while the bill is not perfect for various reasons spelled out below, it could represent the beginning of a much-needed national conversation on the subject of MERS and the damage MERS has brought to local county recorders, the land title records they maintain and the public at large. What is MERS? MERS is a creation of some of the most powerfully consolidated forces in the real estate and mortgage banking industries. In the mid-1990’s mortgage bankers decided they no longer wanted to pay recording fees for assigning mortgages between institutions. The mortgage banking industry viewed the traditional requirements of mortgage recording laws in the fifty states as too slow and cumbersome for the new forms of risky mortgage investments they wanted to 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 trust and selling income from the trust to investors on Wall Street. Securitization is the same process under so much scrutiny as one of the causes of the Great Recession of 2008. Rather than learn and abide by the local county recording customs for mortgage recording and assignments or pay the associated cost of doing so, the mortgage banking industry needed to devise a plan to hasten the assignment process and avoid the cost of paying for assigning each individual mortgage – all
to the detriment of the public and the local county recorders who depend upon recording income to support their offices and the integrity of the records they maintain. To avoid paying county recording fees each time the mortgages were assigned, mortgage bankers and the title insurance industry formed a plan to create one shell company that would pretend to own all the mortgages in the country. By doing so, the mortgage bankers and their investment partners 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. or MERS. 60% of the nation’s mortgages are now held by MERS, whether as a nominee or as the actual mortgagee. At present, the number of mortgages “tracked” in the MERS system is roughly 31 million. Prior to the mortgage meltdown in 2008, the number of mortgages in the MERS system was nearly twice that number, or approximately 61 million mortgages. The registry 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 access to 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 Title Insurance 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, HSBC, Chase Home Mortgage Corporation, the Mortgage Bankers Association, Fannie Mae and Freddie Mac. The CEO of the American Land Title Association, Kurt Pfotenhauer, is the Chairman of the Board for MERS. Investment in the MERS venture has reaped huge rewards for the closely consolidated owners of the registry. Thus, the effort to protect MERS from opponents of the registry has been vigorous. Where Does MERS Go Wrong? In the typical MERS scenario, Bank A lends money to a borrower via a promissory note secured by a mortgage. Bank A, as a participant in the MERS system, permits MERS to appear on the mortgage 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, the promissory 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 the note and mortgage in order to foreclose. Because the manner by which MERS tracks the assignments in its registry, often times the assignments are lost, the information contained in the registry is erroneous or, worse, the individual with purported authority to assign the MERS note
and/or mortgage has no tangible relationship to MERS or the underlying financial institution participating in the registry (i.e. a robo-signer). Procedurally speaking, MERS participates in the plan to hold mortgages in two ways: as assignee and/or as nominee. 1. MERS as Assignee. The originating lender, Bank A makes a traditional loan by listing itself as the payee on the promissory note and as the mortgagee on the mortgage. The loan is then assigned to a seller for repackaging through securitization for investors. However, instead of recording the assignment to the seller or the trust that will ultimately own the loan; the originator pays MERS a fee to record an assignment to MERS in the county records. Although MERS records an assignment in the real property records, the promissory note which creates the legal obligation to repay the debt is not negotiated to MERS. The promissory note is not assigned to MERS because no interests are transferred on the MERS system, only tracked. Thus, Bank A continues to hold the note in its own name. While the mortgage itself may be assigned by Bank A to another bank or servicer, it is only at the moment that foreclosure is required on that mortgage that MERS then either attempts to assign the mortgage to the bank or attempts to foreclose on the mortgage in its own name. Again, the note is not actually assigned, if at all, until the need for foreclosure arises. Often times, the note is several holders back in the chain of transfers within the MERS system or worse yet, lost. 2. MERS as Mortgagee. Start with the same facts as above. Bank A is the payee on the note and the mortgagee. The mortgage contains the following language: “MERS is a separate corporation that is acting solely as nominee for Lender and Lender’s successors and assigns. MERS is the mortgagee under this Security Instrument.” Upon default, Bank A allows MERS to act as the real party in interest filing the foreclosure on behalf of MERS, not Bank A. Thus, not only is MERS a “nominee” or agent, but in the same document MERS also makes the statement that it is the “mortgagee” or principal. However, one cannot 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 principal with regard to the ownership of mortgages, but not actually own or hold the promissory note. In other 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 sever the promissory note from the mortgage and foreclose. Since the 19th century a long and still precedential line of cases has held that mortgages and deeds of trust may not be separated from
the promissory notes that create the underlying obligation triggering foreclosure rights.1 If those interests are severed, as they are in the MERS system, a lender lacks the ability to enforce the mortgage. If MERS is just an agent or nominee, there are state land title recording acts that prevent shell companies, nominees or other forms of agents from holding title to real estate. Thus, however MERS “holds” a mortgage, the construction is, at best, problematic. Again, if it cannot hold title as a nominee, MERS and its lender assignees cannot enforce the mortgage. 3. MERS as a Microcosm for What’s Wrong with the Entire Real Estate Settlement Industry. The idea of improving the process of land title recordation is a noble pursuit. The desire to create a land title recording system and the importance of maintaining the integrity of those records has roots as far back as the Plymouth Bay Colony in the 17th century. Unfortunately, the idea of the MERS registry fails in one key area: it was created to benefit the players at the expense of the game. The MERS shareholders are all closely-related entities in the mortgage finance and title industries who have abandoned the benefits of maintaining the land record system in order to create a vehicle for short-term profiteering. Rather than simplify local county land titles, MERS has created more clouds on title and made it more difficult to accurately track “who owns” the title to the real estate. Rather than supporting the unique and often complex differences between states regarding their respective recording statutes, MERS has unraveled the spool and confused courtrooms across the United States by negating jurisdictional standing in foreclosure cases. MERS has allowed for fraudulent actors, and their supporters, to access the land recording system by permitting robo-signed mortgage assignments to permeate land title records, jeopardized the sanctity of the mortgage foreclosure process and inserted uncertainty into the mortgage finance process. All of this has hastened mortgage securitization and MERS profits, which in turn, helped to facilitate the current housing crisis. At the heart of MERS and its shareholders is the fact that there are too many divergent interests involved in a process that requires consistency and accuracy. For instance, mortgage finance, lending and title insurance do not always converge on the same level. What may be perfectly acceptable for a mortgage company or lender to underwrite on a particular mortgage loan may conflict with the underwriting decisions of the title insurance underwriter and vice versa. To allow parties with necessary checks and balances the ability to control the land title records through the MERS registry pits sometime underwriting adversaries in the position of trying to
In re Bird, 2007 WL 2684265, at ¶¶2-4 (Bkrtcy.D.MD.2007); In re Leisure Time Sports, Inc., 194 B.R. 859, 861 (9th Cir.1996); In re BNT Terminals, Inc., 125 B.R. 963 (Bankr.N.D. Ill. 1990); Yoi-Lee Realty Corp. v. 177th Street Realty Associates, 208 A.D.2d 185, 626 N.Y.S.2d 61, 64 (N.Y.A.D. 1 Dept., 1995); In re AMSCO, Inc., 26 B.R. 358, 361 (Bkrtcy.Conn., 1982); Barton v. Perryman, 577 S.W.2d 596, 600 (Ark., 1979); Trane Co. v. Wortham, 428 S.W.2d 417, 419 (Tex. Civ.App. 1968); Kirby Lumber Corp. v. Williams, 230 F.2d 330, 333 (5th Cir.1956); Kelley v. Upshaw, 39 Cal.2d 179, 192, 246 P.2d 23 (1952); Hill v. Favour, 52 Ariz. 561, 84 P.2d 575 (Ariz. 1938); West v. First Baptist Church of Taft, 123 Tex. 388, 71 S.W.2d 1090, 1098 (Tex. 1934); First Nat. Bank v. Vagg, 65 Mont.34, 212 P.509, 511 (Mont. 1922); Southerin v. Mendum, 5 N.H. 420, 1831 WL 1104, at ¶7 (N.H. 1831); Carpenter v. Longan, 83 U.S. 271, 274, (1872).
profit together on the same conflicted transaction. Conflicts of interest are likely to result. Currently, there is nothing being done to resolve those conflicts. If anything, MERS and its shareholders have allowed these conflicts to worsen. The integrity of land title records and the consuming public now hang in the balance. MERS is a microcosm for the main problems that exist in the real estate settlement industry, which are consolidation and unfair market conduct. It cannot be underscored enough. When one entity made up of lending, mortgage finance, realtors and title insurance actors converge to create a product, it ultimately leads to bad results and millions of dollars in damage. Can H.R. 2425 Help Fix MERS? H.R. 2425 is by no means a finished product in the eyes of the National Association of Independent Land Title Agents (NAILTA). Unlike other lobby groups, NAILTA has had positive discussions with Representative Kaptur’s office concerning the current bill which includes critiques of the proposal to create a federal land registration program. NAILTA remains unconvinced that a Federal Torrens system is possible or even in the best interests of land title professionals and the public. However, NAILTA does believe that a conversation with Congress and HUD (or the Consumer Financial Protection Bureau (CFPB)) concerning how to remedy the well-documented failings of MERS is worth investigation and participation through the bill. Opponents of H.R. 2425, including the American Land Title Association, fear the loss of revenue caused by the GSE’s inability to participate in the MERS registry, even though those same opponents have contributed to the problem by ignoring long standing state recording laws in the construction and use of MERS. Arguing the loss of income related to the clouding of title is an untenable and disingenuous position, especially when such an argument is made by members of the title insurance industry. Those same opponents of the bill are the shareholders who, under the bill, would not be able to double-dip from the MERS-generated revenue. NAILTA believes there is a better way to improve the recording process. One way would be to allow local county recorders, in accordance with their respective state recording statutes, to employ the necessary technological advances to safely and efficiently quicken the pace of land title recording while preserving the data for the public’s use. There needs to be an infrastructure investment, like a highway or a bridge, in preserving the integrity and accuracy of land title records. H.R. 2425, or its progeny, could be used as an appropriations vehicle to help local county recorders modernize their records and maintain land title records across the United States by taking the best of the MERS registry (i.e. the goal to speed up the process for consumers) and eliminating the worst of the MERS registry (i.e. the profiteering and degradation of the land title records by its participants). New electronic data storage facilities and encryption technologies are being developed or available now to make recording simpler, faster and safer. Keeping the revenues for accessing those technologies with the county recorders who are entrusted with the gatekeeping function for land titles removes the conflicted nature of the MERS model and destroys the market incentive to compromise the records which currently infects the MERS registry. 5
At the end of the debate on the merits of H.R. 2425, if MERS and its proponents cannot justify to Congress or to the consuming public that it creates a system which aids the process of real estate consumption for the public and preserves the integrity of land title records, there is no justification for MERS to continue in its current form. Opponents of H.R. 2425 have not made a convincing argument in favor of preserving the MERS status quo and NAILTA invites a dialogue to continue on H.R. 2425 so that a final bill can address the well-documented problems caused by MERS.
About NAILTA The National Association of Independent Land Title Agents (NAILTA) is a non-profit trade association that represents the interests of independent title insurance agents and independent real estate settlement professionals from across the United States. It was created by independent real estate settlement professionals to further the agenda of small business owners from within the title insurance, abstracting, surveying, and real estate community who lack representation at local, state and national levels. To contact NAILTA, please visit our website at www.nailta.org.