Much has already been written about the Mortgage Electronic Registration System -- the mortgage industry's effort to avoid paying local governments hundreds of millions of dollars in fees while facilitating trading in mortgages -- and its problematic legal foundation. I refer to the "mortgage industry" -- rather than just banks -- because Fannie Mae and Freddie Mac played important roles in the creation of MERS. However, in the context of MERS in foreclosures, "banks" is equally appropriate.

As foreclosure-related litigation challenging the MERS business model has progressed around the nation, the banks have won some and lost some, with the decisions hinging on state law. That spotty track record should outrage everyone. The mortgage industry subverted a property-ownership system that had functioned well since before the American Revolution, essentially replacing it with MERS. And whether or not MERS works as intended turns out to be based on accidents of geography.

MERS Is National, But Real Estate Law Is Local

State laws governing how homes are bought and sold vary widely because each modern law is the organic result of hundreds of years of court decisions and laws rooted in a state's history and culture. Some states have mortgages while others have "deeds of trust," some have "title theory" and some "lien theory." Some states require going through the courts to foreclose, while others don't -- and some allow both procedures, but usually use just one. Such variation shouldn't be surprising: Nothing is more local than land.

Against that complex legal backdrop, MERS makes contradictory claims about its status and powers. For example, MERS claims to be simultaneously the owner of the mortgage and the agent of the owner of the mortgage. Given the complexities, judges within each state don't always agree on MERS's ability to do what it says it can do.

As a result, MERS has proven to be the opposite of the business-friendly entity it was intended to be, because the most business-unfriendly legal environment possible is total uncertainty, and that's what MERS has produced. Banks hoping to enforce mortgages that name MERS as an interested party don't know what will happen when they try.

Like the outsourcing of foreclosures I discussed last week, the banks' embrace of MERS in an effort to save themselves millions of dollars has shifted huge costs to the rest of us. And both strategies are proving penny-wise and pound-foolish from the banks' perspective -- perverse kinds of grand lose-lose scenarios. Ultimately, the MERS mess is even worse than the foreclosure-outsourcing mess, because it affects a vastly larger number of mortgages.

MERS Model Invalid in New York

Last week, Judge Robert Grossman of the U.S. Bankruptcy Court of the Eastern District of New York decided in a case called Agard that MERS's business model fails as a matter of New York law. In short, MERS does not have the power to assign mortgages under New York law, and a bank hoping to foreclose on a MERS loan needs both the note and a valid assignment of the mortgage. Having the note alone is not enough. That's because a MERS mortgage, he found, does not follow the note:
"By MERS's own account, the Note in this case was transferred among its members, while the Mortgage remained in MERS's name. MERS admits that the very foundation of its business model as described herein requires that the Note and Mortgage travel on divergent paths. Because the Note and Mortgage did not travel together [to foreclose, a bank has to prove both were validly assigned to it.]"
As a result, banks don't have the right to foreclose on a MERS loan even if they have the note. They also have to have the mortgage. And with MERS unable to assign a mortgage, it's hard to see how a bank could get it.

To be clear, Agard is not a ruling by New York's highest court, and as such, it's not a definitive statement of New York law. But if many other judges are persuaded by Judge Grossman's reasoning, an awful lot of mortgage debt could turn out to be unsecured, just like credit card debt.

Going Far Beyond Their Legal Rights


So, under New York law, why can't MERS assign mortgages?

First, MERS claimed that mortgages naming it the "nominee" for the lender created a relationship between MERS and the lender that gave MERS the power to assign the mortgage. Judge Grossman explains that's not the case because the lender never gives MERS written authority specifically saying MERS has the power to assign the mortgage. Under New York law, nominees not only need specific authority to act, but in the case of real estate, they need that authority in writing.

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Second, MERS claims that when the mortgage separately calls it the "mortgagee of record," that label gives it the power to assign mortgages. Unfortunately for MERS, New York law doesn't include any such power, and Judge Grossman totally dismissed the argument: "MERS's position that it can be both the mortgagee and the agent of the mortgagee is absurd, at best."

MERS also argues that because the debtor signed the mortgage, and the mortgage says MERS has these powers, MERS must have them. Judge Grossman dismissed that position, too, noting the debtor has no power to create a relationship between the lender and MERS.

Third, MERS claims that its membership agreement means that all MERS members have made MERS their agent with the power to assign mortgages on behalf of its members. But Judge Grossman notes that as currently written, the membership agreement doesn't, under New York law, create an agency relationship between it and its members. Fundamentally, that's because the membership agreement never explicitly says MERS is the agent for its members nor does it "grant any clear authority to MERS to take any action with respect to the mortgages held by MERS members."

Next, Judge Grossman discusses the MERS assignment that the loan servicer attempting to foreclose gave the court. The document says that the original lender, First Franklin, assigned the mortgage to U.S. Bank, which is the trustee for a mortgage securitization trust.

But that's not really what happened. U.S. Bank, following MERS protocol, assigned the mortgage to itself. Judge Grossman notes the document is "stunningly inconsistent with what the parties define as the facts of this case." He doesn't critique it further, however, since he'd already ruled MERS couldn't do an assignment anyway.

Will Other Judges Follow Grossman's Lead?


So what does Judge Grossman's opinion mean? Well, for cases that come before him, banks that want to foreclose MERS loans will have to produce both the note and a valid assignment of mortgage. Presumably that means an assignment from MERS and a document authorizing MERS to do that assignment -- presumably from the original lender. Or MERS would need to produce the note and an assignment from the last mortgage-holder, again, presumably the original lender. Either way, getting a validly assigned mortgage is going to be tricky. And what if the original lender is no longer in existence, as many are not?

These requirements will be imposed by any other judge persuaded by Judge Grossman's reasoning.

Despite all the criticism of courts as bastions of activism, the judiciary is an inherently conservative institution because each decision must take into account those that preceded it. Precedent's role favors incremental change while simultaneously buttressing the overall framework of existing law. And precedent leads to paragraphs like this one from Judge Grossman:
"The Court recognizes that an adverse ruling regarding MERS's authority to assign mortgages or act on behalf of its member/lenders could have a significant impact on MERS and upon the lenders which do business with MERS throughout the United States. However, the Court must resolve the instant matter by applying the laws as they exist today. It is up to the legislative branch, if it chooses, to amend the current statutes to confer upon MERS the requisite authority to assign mortgages under its current business practices. MERS and its partners made the decision to create and operate under a business model that was designed in large part to avoid the requirements of the traditional mortgage recording process. This Court does not accept the argument that because MERS may be involved with 50% of all residential mortgages in the country, that is reason enough for this Court to turn a blind eye to the fact that this process does not comply with the law."
Judge Grossman's tone, and his conclusion that a basic mortgage industry business practice is illegal under New York law, is reminiscent of the Massachusetts Supreme Judicial Court decision in the Ibanez case, which noted that a key practice in the typical securitization deal violated a century of Massachusetts law.

Note to homeowners hoping their MERS mortgage is a path to a free home: At most, Judge Grossman's opinion means your debt is unsecured. That is, you still owe the money, but the bank can't foreclose on you to make you pay. And it's important to remember that as persuasive as it is, Judge Grossman's decision is just one bankruptcy judge's opinion, not an edict from the top of the legal pyramid.

Another "Cost-Saving" Lose-Lose From the Banks

How did we get to this place where MERS hurts everyone, even the banks that otherwise benefit from it? Just think of the legal fees MERS members are paying as they try, sometimes unsuccessfully, to defend its basic business model. I'll bet they didn't plan on that.

What were the lawyers thinking when they blessed MERS's structure? Did they really analyze the MERS business model in light of 50 states' real property and agency laws? It's hard to believe they did, given the number of cases MERS has lost. It's also hard to believe they didn't, given the nature of the undertaking.

But that's all water under the bridge now. At present, the MERS model, like the outsourcing of foreclosures, is just another example of how the mortgage industry has tried to save itself big bucks without paying due attention to the law. And for a long time to come, all of us will be paying for it.

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leviegranicus

If you don't have clear title on your home you can't sell it. Forget about defaults, foreclosure, the MERS delivery system has tainted every title it has touched. If you have a mortgage on your home and it is in any way tied to MERS I would contact a lawyer to see if you really have clear title to ownership.

February 17 2011 at 7:54 AM Report abuse +1 rate up rate down Reply
donut999

just another attempt to get something for nothing. if you don't pay your mortgage, you lose your house. what does it matter about the underlying strata of paper? does the repo man hold your car loan? no, he acts as an agent. other parts of MERS aside, it cannot be used as an excuse to not foreclose. if these crybabies wanted anything but a free home, might have some sympathy. if the legal system is so indignant this week about MERS system, how did we get here? why wasn't this nipped or disallowed to start with? hardly any banks that issue credit cards actually manage the a/c's. they farm it out. MERS is no different.

February 17 2011 at 7:30 AM Report abuse -1 rate up rate down Reply
2 replies to donut999's comment
Wayne

donut999 - obviously you have no clue, but let me give you the bottom line.
I won't waste my time trying to explain to you all the wrongs about all of this because Abigail does a very good job at this. Only if you would read them you would understand. So here, let me give you the bottom line that even a 10 year old can understand. I have no paperwork of any of your real property, not your home or your car ... but becuse I say so, I want you to pay me your house payment ... ok and if you don't I will foreclose on you.
How's that donut999 .... Simple to the point and straight foreward ... so give me your address and I will send you a bill. I will be looking forward of your payment. OK ....

February 17 2011 at 6:05 PM Report abuse rate up rate down Reply
defensebykv

It's all about laws that have been ignored. The banking industry created this Sh!t, and now they have to eat it. A primary reason for creating MERS was to cheat State and County Governments of taxes when a property sells. When a property sells, every State requires recording of the deed at the County of sale, and the counties require payment of a transfer or recording tax When you purchase a home and sign a NOTE, that NOTE is a negotiable instrument, whoever has possession of the ORIGINAL NOTE (and deed or mortgage) has a claim against the property. No NOTE, no valid claim. An even more reprehensible consequence of MERS has been the trampling of homeowner rights and laws of the States and United States Constitution to faciliated fradulent foreclosures of a majority of the foreclosures since 2008. It will take some time for this to play out, but it is likely that this time, top executives of the biggest banks in the USA will go to jail. It's the banks that created MERS as an enabler to perpetuate the fraud everyday.

December 18 2011 at 11:34 AM Report abuse rate up rate down Reply
donut999

just another attempt to get something for nothing. if you don't pay your mortgage, you lose your house. what does it matter about the underlying strata of paper? does the repo man hold your car loan? no, he acts as an agent. other parts of MERS aside, it cannot be used as an excuse to not foreclose. if these crybabies wanted anything but a free home, might have some sympathy. if the legal system is so indignant this week about MERS system, how did we get here? why wasn't this nipped or disallowed to start with? hardly any banks that issue credit cards actually manage the a/c's. they farm it out. MERS is no different.

February 17 2011 at 7:30 AM Report abuse -1 rate up rate down Reply
donut999

just another attempt to get something for nothing. if you don't pay your mortgage, you lose your house. what does it matter about the underlying strata of paper? does the repo man hold your car loan? no, he acts as an agent. other parts of MERS aside, it cannot be used as an excuse to not foreclose. if these crybabies wanted anything but a free home, might have some sympathy. if the legal system is so indignant this week about MERS system, how did we get here? why wasn't this nipped or disallowed to start with? hardly any banks that issue credit cards actually manage the a/c's. they farm it out. MERS is no different.

February 17 2011 at 7:30 AM Report abuse -1 rate up rate down Reply
leviegranicus

What happens to all the mortgages that our government purchased in the bail out of the banks? It stands to reason that some or all of these mortgages may have passed through the MERS pipeline. Are we the taxpayors also holding the bag on these? It is hard to believe that a company (MERS) who only employs approximately 42 people can bring our judicial system to it's knees.

February 17 2011 at 7:23 AM Report abuse rate up rate down Reply
1 reply to leviegranicus's comment
defensebykv

MERS sold the NOTES to Wall Street who bundled them and sold them as stocks and bonds. The investors got screwed, but they are now going after the Banks who perpetuated the same fraud on them. Eventually everyone pays for it in one way or another, particularly when the Fed Gov't decides to bail out criminal institutions so they can continue with their criminal activity, which is what these home foreclosures is all about.
It is

December 18 2011 at 11:53 AM Report abuse rate up rate down Reply
lpwack

Another question: If the debt is unsecured and not a mortgage, does it fall into the realm of other unsecured (e.g. credit card) debt in a bankruptcy proceeding? Wouldn't that be a kick in the head. File bankruptcy, clear your credit card and home debt, walk away...

February 17 2011 at 7:16 AM Report abuse rate up rate down Reply
lpwack

Question: If I paid a fee for document handling and title registration, was I fraudulently charged? If the documents weren't registered with the county, then why was there a fee?

February 17 2011 at 7:10 AM Report abuse rate up rate down Reply
2 replies to lpwack's comment
donut999

your deed was recorded and the associated liens. this is not about local filing of property changing hands.

February 17 2011 at 7:35 AM Report abuse rate up rate down Reply
defensebykv

At the time you purchased your home there was probably no fraud. The fraud first occurred when MERS facilitated the transfer of your note/deed/mortgage to Wall Street without it being recorded in your local county land office records. The in-your-face fraud occurs when MERS later facilitates the transfer of these documents (or one of them such as the deed) back to a lender, who is often no more than a servicer of your note, for the sole purpose of defrauding the homeowner through an illegal foreclosure. Often the "lender" who foreclosues does not have a dime invested in your property other than the fees they pay to a local foreclosure mill law firm.

December 18 2011 at 12:03 PM Report abuse rate up rate down Reply
leviegranicus

Thank you for clearly presenting the facts about MERS. Wall Street and the Banksters through the MERS delivery system have stolen millions of dollars in recording fees from every state in this country. They have attempted to usurp state real estate laws and created a nightmare of title flaws. All in all, they through MERS, have totally screwed the tax payor.

February 17 2011 at 7:04 AM Report abuse rate up rate down Reply
daveswrath0704

the only way this mess is to stop everyone stop making house payment theycant take all the home and start putting banker in jail and over night thing would get better everyone home would going up and we the people again would have the power again not the greed of bank

February 17 2011 at 6:14 AM Report abuse rate up rate down Reply
1 reply to daveswrath0704's comment
donut999

you must have a mortgage. i don't. zero owed on my home or vacation home. just pay your mortgage payment and you will have no problems.

February 17 2011 at 7:33 AM Report abuse rate up rate down Reply
mike edwards

the banks just stopped paying good people interest id even call it outrageous what they have done to the average person trying to retire on interest

February 17 2011 at 6:00 AM Report abuse +1 rate up rate down Reply