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From the Pages of The Pomerantz Monitor: Homeowners are from Venus, Banks are from . . . MERS?

By Carolyn Moskowitz

As Adam Prussin reports in the current issue of The Pomerantz Monitor, hardly anyone ever heard of a company called MERS. But the odds are pretty good that MERS, the Mortgage Electronic Registration Systems, is the record owner of the mortgage on your house. About 60 percent of mortgages in the United States show up in local records as being owned by this company; yet MERS claims that it does not own any mortgages but merely serves as the recording agent for the banks that do. [Note: This MERS is not to be confused with other, untarnished, entities of the same name, such as the Municipal Employees? Retirement Systems of Michigan and Louisiana.]

Why did the banks set up this peculiar system? To save a few bucks in mortgage transfer tax payments to localities. If bank A assigns a mortgage to bank B, a mortgage transfer tax would be payable. But if both bank A and bank B use MERS as the nominal mortgage holder, record title to the mortgage does not have to change and no transfer tax would have to be paid. Or so they thought. Given the dizzying number of mortgage assignments involved in the securitization process, these little bits quickly add up. 

This may turn out to have been the banks? most boneheaded play yet. According to two law professors, Christopher L. Peterson of the University of Utah and Adam Levitin of Georgetown, if MERS doesn?t really own these mortgages it may not have the right to list itself as a mortgagee. State real estate laws, Peterson said in an interview, ?do not have provisions authorizing financial institutions to use the name of a shell company,? in large part because ?the point of these statutes is to provide a transparent, reliable record of actual ? as opposed to nominal ? land ownership.? 

Mr. Peterson argues that local governments might prevail if they sue for the unpaid mortgage transfer taxes, claiming that designating MERS as the owner was designed to hide that ownership of the mortgage really had passed. In that case, they might be entitled to collect several mortgage recording fees per mortgage. But what if MERS really is the owner of all these mortgages, as it claimed? That could be even worse for the banks, because someone else ? i.e., the banks ? were undoubtedly the owners of the notes, and the owner of the notes and mortgages would be two different entities. Under a long line of precedents, separating a mortgage from the underlying note renders the mortgage unenforceable. 

If these professors are right, thousands of mortgages might have become legally unenforceable because the payment promises made by borrowers when they signed the notes have been decoupled from the mortgages they signed to secure payment of those notes. Homes could be sold without paying off the mortgage. Before you assume that courts would never wreak such havoc on the banking system, guess again. Reportedly, a federal judge in Oregon recently issued an injunction blocking Bank of America from foreclosing on a borrower?s home, holding that under Oregon law, the borrower was likely to prevail on the argument that the use of MERS had invalidated the mortgage, because MERS owned the mortgage but a bank owned the note. If this argument prevails, the borrower would still owe the money, but no foreclosure would be possible and the borrower could sell the home without paying off the mortgage. The lender could sue the borrower, but collecting money from distressed former homeowners might be very difficult in many cases. Moreover, many of these notes are ?non-recourse?: the banks are stuck with what they can get in foreclosure. No right to foreclose? As they say in law school: too bad, so sad. In another case, this one in Arkansas, the owner of a second mortgage foreclosed on a home without notifying MERS, which was listed as owning the first mortgage. When MERS sued to overturn the foreclosure, the state Supreme Court ruled that MERS was not the actual owner of the first mortgage, was not injured and could not sue. This is just what the banking system needed: more sand in the wheels of their massive mortgage foreclosure juggernaut, which has already ground to a halt in many states over ?robo-signing? and other corner-cutting gimmicks the banks employed. Could the MERS imbroglio create a huge windfall for homeowners everywhere? That may be too much to expect, but it will be fun watching the banks squirm over this one.

Full post as published by PomTalk on December 21, 2010 (boomark / email).