Foreclosure Crisis Triggers Debate on Role of Mortgage Registry
On July 1, a federal judge took away Robert Bellistri’s house in Arnold, Missouri.
Bellistri, who bought the house as an investment after it was seized for non-payment of taxes, failed to notify Mortgage Electronic Registration Systems Inc. of his purchase, the judge said. A state appeals court last year had ruled otherwise, finding Bellistri didn’t need to tell MERS, a company that lets banks electronically register their sales of home loans so they can avoid trudging down to the county land-records office.
The case highlights a debate raging in courts on the role MERS has, if any, in home foreclosures. How it’s resolved will determine whether MERS’s involvement produced a defective process and clouded millions of property titles. A definitive ruling against MERS might slow any future bundling of mortgages into securities since the company played a role in that process.
“MERS is the central device by which the banks have tried to opt out of the legal system and the real-property record system,” U.S. Representative Alan Grayson of Florida said in an interview. “They have taken it upon themselves, with the supposed consent of the borrowers, to violate a system of property record-keeping that we’ve had going back centuries.”
Attorneys general of all 50 states opened a joint investigation into home foreclosures Oct. 13, saying they will seek an immediate halt to any improper practices at banks and mortgage companies. The announcement came after several banks, including Bank of America Corp., halted foreclosures in either all states or the 23 with judicial supervision of foreclosures.
MERS, whose parent company is Merscorp Inc., bills itself as a provider of “support services to the mortgage industry,” specifically tracking the servicing rights and ownership interests in mortgage loans on its electronic registry.
Merscorp, based in Reston, Virginia, was created by industry leaders in 1995 to improve servicing after county offices couldn’t deal with the flood of mortgage assignments, Karmela Lejarde, a spokeswoman for MERS, said in an interview.
“That bottleneck got mitigated,” she said. The company’s tagline is “Process Loans, Not Paperwork.”
According to its Website, MERS is owned by the largest lenders in the country including Bank of America, Citigroup Inc., JPMorgan Chase & Co. and Wells Fargo & Co., in addition to Fannie Mae and Freddie Mac, which own or guarantee more than half of the $11 trillion U.S. mortgage market.
The company’s net operating revenue last year was $32 million, she said.
Under the MERS system, a borrower who takes out a loan agrees to allow the company to act as the lender’s nominee, or agent, on the mortgage or deed of trust securing the property. That means MERS holds the lien, according to the company.
MERS continues to be the mortgagee of record as long as the note promising the borrower’s repayment is owned by a MERS member. If it’s sold to an outside entity, the assignment is recorded with the appropriate county.
About 60 percent of newly originated loans are on the MERS system, Lejarde said. Since its inception in 1995, it has carried 66 million loans and currently has between 23 million and 25 million active loans, she said.
“The problem with MERS is it takes a public function and puts it into a private entity that doesn’t seem to have any clear accountability,” said Alan White, a law professor at Valparaiso University in Indiana. “And it does it on legal grounds that seem tenuous.”
MERS played a key role in the bundling of mortgages into securities that reached a frenzy before the economic decline of 2008, critics including Grayson of Florida said. It allowed banks to sell and resell home loans faster, easier and cheaper, he said.
“MERS was a facilitator of securitization,” said Grayson, a Democratic member of the House Financial Services Committee.
MERS disagrees. It was created to provide clarity and transparency and not “to enable faster securitization,” it said in an Oct. 9 statement.
“MERS probably served a necessary purpose given the volume of securitization that went on,” Talcott Franklin, a lawyer in Dallas who represents investors in mortgage-backed securities, said in a phone interview. “But for MERS, do you know how overwhelmed the county recorder offices would have been by the volume of assignments that had to go through there?”
A big selling point for the company is its cost savings. It charges $6.95 for every loan registered, Lejarde said. With an average cost of about $40 for filing a mortgage assignment with local counties, MERS has saved the industry about $2.4 billion, Merscorp Chief Executive Officer R.K. Arnold said in a September 2009 deposition in an Alabama suit.
The company is accused in two whistleblower suits filed this year of cheating California and Nevada counties out of millions of dollars in recording fees. In 2006, New York State’s highest court told one county it had to record MERS mortgages against its wishes. The county said MERS cost it $1 million a year.
Several courts have expressed confusion that MERS positions itself as both mortgage owner and representative of a mortgage owner. That stems from its use of mortgage language that typically states it is both the mortgagee and “acting solely as nominee for Lender and Lender’s successors and assigns.”
Agent and Principal
“It is axiomatic the same entity cannot simultaneously be both an agent and a principal with respect to the same property right,” Christopher Peterson, a law professor at the University of Utah in Salt Lake City, wrote in a law-review article about MERS this year.
Peterson wrote that courts should look to the actual economics of the transaction, which some have done, finding that MERS has no standing in proceedings to seize delinquent borrowers’ homes.
In a March 2009 ruling, U.S. Bankruptcy Judge Linda B. Riegle in Las Vegas decided MERS wasn’t a true beneficiary under a trust deed.
“If it doesn’t walk like a duck, talk like a duck and quack like a duck, then it’s not a duck,” she wrote.
Consumer advocates and bankruptcy attorneys who criticize MERS say it has no right to foreclose when it doesn’t hold both the promissory note and the security instrument -- the mortgage or trust deed. The U.S. Supreme Court ruled in 1872 that a mortgage has no separate existence from the note, Peterson wrote.
“It appears that on a widespread and probably pervasive basis, they did not take the steps necessary to own the note,” Grayson said in a Sept. 30 video he recorded about MERS, “which means that in 45 out of the 50 states they lack the legal right to foreclose.”
MERS says it has the right to foreclose because the borrower grants the company legal title to the mortgage and it forecloses as agent for the promissory-note holder. “Courts around the country have repeatedly upheld and recognized this right,” MERS said in an Oct. 4 e-mailed statement.
Since March 2009, supreme courts in Arkansas, Kansas and Maine have found that MERS had no standing in foreclosure proceedings under their states’ laws. The company lends no money and suffers no injury, the panels said.
MERS’s relationship to the bank that owned a loan in question was “more akin to that of a straw man than to a party possessing all the rights given a buyer,” the Kansas Supreme Court wrote. “What stake in the outcome of an independent action for foreclosure could MERS have?”
MERS won a high-court victory last year when the Minnesota Supreme Court declared the company doesn’t have to record the sale of a promissory note, as opposed to a mortgage, at the county office before a foreclosure can begin.
Citing a 2004 state law it called “the MERS statute,” the Minnesota court said “the legislature appears to have given approval to MERS’s operating system for purposes of recording.” A MERS lawyer helped draft the law, Arnold, the company CEO, said in the deposition last year.
In response to the Kansas decision, the state legislature there changed court-procedure rules this year to require a “nominee of record” to be made part of such lawsuits.
Eventually high courts in states with judicial oversight of foreclosures will have to review MERS’s role, Patrick A. Randolph, a professor at the University of Missouri-Kansas City specializing in real-estate law, said in an interview.
“It’s a question of state law,” Randolph said. “The problem is simply confusion about a word the courts are not used to seeing in this context -- the word ‘nominee.’”
Under its contracts, MERS is the mortgage owner’s agent and has the right to foreclose, said Randolph, who is also affiliated with a St. Louis law firm, Husch Blackwell LLP, which works for MERS, though he doesn’t handle those cases he said.
Complicating matters, MERS doesn’t handle foreclosures itself. Home-loan owners, including trustees of mortgage-backed entities, do so in its name. MERS Inc., which holds the liens, has no employees, and MERSCORP, the parent, has only about 50, Lejarde said.
MERS has also come under fire for allowing members to appoint their employees as MERS certifying officers -- as assistant secretaries or vice presidents of MERS -- to sign documents, including assignments. MERS has deputized “thousands” of such certifying officers, Arnold said.
New York Supreme Court Justice Arthur M. Schack, a trial- level judge in Brooklyn, is particularly vexed by the practice and has tossed foreclosure actions in part because of it.
He has pointed out what he sees as a potentially serious conflict: The same person, as an “employee” of MERS -- with duties owed to the entity selling a mortgage -- assigns that mortgage to a bank at presumably market value, and then the same person, as the bank’s employee, swears an affidavit in the foreclosure case.
Schack has demanded that two-hat-wearing signers provide him with their employment histories.
Lejarde, the MERS spokeswoman, said the certifying officers are employees of the lenders, not MERS, and must follow both companies’ policies.
MERS’s certifying officers represent for the company’s critics what they see as its role in muddying mortgage titles, to the point borrowers don’t know who owns their loans -- a charge MERS strongly denies.
In his case, Bellistri had notified BNC Mortgage Inc., the previous homeowner’s lender, that he bought the house in Arnold, about 18 miles southwest of St. Louis. He didn’t notify MERS, which was listed as BNC’s nominee on the trust deed.
By that time, BNC had conveyed the note to Deutsche Bank AG, as trustee of a mortgage-backed investment vehicle, though Bellistri had no way of knowing that. MERS continued to hold “legal title to the beneficial interests in the deed of trust on behalf of Deutsche Bank,” according to the federal judge’s ruling.
In the proceeding Bellistri initiated, a Missouri state court and the Missouri Court of Appeals in St. Louis named him the property’s rightful owner. Deutsche Bank had hired Ocwen Financial Corp. as servicer. MERS assigned the deed to Ocwen and said the note went with it.
The appeals court disagreed, saying MERS had no right to grant Ocwen the note because records showed it was still owned by BNC. So Ocwen lacked standing to contest Bellistri’s deed, it said. Under Missouri law, the note and deed go together, and therefore Bellistri keeps the house, the appeals court said.
MERS filed a federal suit at U.S. District Court for the Eastern District of Missouri, where judge Charles A. Shaw ruled the other way. Shaw said that Bellistri failed to properly notify MERS of its redemption rights and that the state-court decision threatened MERS’s “overall business model -- at least in Missouri.”
Lawsuits elsewhere attack that business model. In Delaware federal court, homeowners accuse MERS of forcing them to pay inflated fees related to their foreclosures.
MERS and its members have been sued this year for racketeering in New York, Florida and Kentucky federal courts, accused of conspiring to falsely foreclose on loans and “to undermine and eventually eviscerate long-standing principles of real-property law.”
Dozens of lawsuits claiming MERS itself is a fraud have been consolidated for pretrial proceedings in federal court in Phoenix. The homeowners haven’t fared well there. In September 2009, U.S. District Judge James Teilborg threw out an earlier case with similar accusations. On Sept. 30, he tossed six proposed class-action, or group, lawsuits.
Teilborg found the defaulting homeowners failed to sufficiently allege that MERS and its members conspired to commit fraud because it’s not a true beneficiary under the trust deed. They also fail to explain how MERS, as a “’sham’ beneficiary,” diminishes their need to pay back the money they borrowed, the judge said.
“At most, plaintiffs find the MERS system to be disagreeable and inconvenient to them as consumers,” Teilborg wrote.
The Bellistri case is Mortgage Electronic Registration Systems Inc. v. Bellistri, 09-cv-731, U.S. District Court, Eastern District of Missouri (St. Louis) and Bellistri v. Ocwen Loan Servicing LLC, ED91369, Missouri Court of Appeals, Eastern District (St. Louis).
To contact the editor responsible for this story: David E. Rovella at email@example.com.