WASH POST: MERS HEADED FOR EXTINCTION

COMBO Title and Securitization Search, Report, Documents, Analysis & Commentary COMBO Title and Securitization Search, Report, Documents, Analysis & Commentary

EDITOR’S ANALYSIS: There is little doubt that MERS, MERSCORP and its progeny are headed for extinction. The effect of this, in my opinion, is to admit that in 60 million alleged mortgage transactions, title has been either clouded or fatally corrupted. In plain English the use of MERS invalidates both the note and the alleged security interest. The mortgage deed or deed of trust become wild deeds that have no effect. The obligation still exists in theory but it would take a legitimate creditor (someone who could show a loss of money from their own pocket) to assert an equitable claim or lien.

This is why I think that millions of homeowners and people who THINK they are FORMER homeowners are in the driver’s seat. Between the use of MERS and the improper use of credit bids at auction, title never changed hands. The property was never encumbered. It is the same issue as the robo-signing revelations — where our assertion here that the loans were never actually transferred was finally corroborated. The money moved but the documents didn’t.

The meaning of this, in my opinion, is that the massive transfer of wealth never legally happened. Everyone still owns their home and there MIGHT be an obligation but it is not secured by a mortgage. The illusion of securitization was simply a lie which by countless repetition, sometimes even here on this blog, was made to sound true. For the most part there was no securitization. In reality all you had was a few guys around the campfire splitting up the money regardless of what any documents said and in total violation of the terms and provisions of the governing statutes, the documents themselves and the promises and representations made to investors and “borrowers” who were surreptitiously converted into investors into the biggest PONZI scheme in world history — a milestone that will probably stand undisturbed for centuries.

NOTABLE QUOTES FROM ARTICLE: READ STORY IN WASHINGTON POST

“Phyllis K. Walters, a recorder from Illinois who led the opposition to MERS in the 1990s, said that in her district the chain of title for a parcel of land goes back to 1839 and never got broken until banks started recording, and foreclosing, in the name of MERS.

“If things had been recorded in our offices,” she said, “we wouldn’t be in this mess.”

“somewhere along the way MERS became a stripped down version of the original idea. The first thing to go was the vault for keeping documents. MERS instead became a giant electronic card catalogue that tracked who was managing a particular loan as it was sold and resold, but it left the companies themselves responsible for guarding the mortgage (or deed of trust) and the promissory note (or IOU) – the two critical pieces of paper that prove who owns a loan.”

“By 2007, MERS had more than 60 million mortgages on file and said that it had saved the banking business $1 billion in recording fees and other costs. Meanwhile, the volume of securitized mortgages soared, becoming the nation’s largest asset class and contributing to a $12 trillion bubble in the real estate market – before it all broke down.”

“At the March 1994 meeting between mortgage giants and the county recorders, the recorders ran through their list of concerns: whether consumers would be able to get access to their own information; how data errors would be corrected; whether the registry was consistent with state laws; whether the chain of title would be broken if documents weren’t recorded properly; and whether too much power would be concentrated in the hands of those who would manage and own the clearinghouse.”

How a mortgage clearinghouse became a villain in the foreclosure mess

By Ariana Eunjung Cha and Steven Mufson
Washington Post Staff Writers
Thursday, December 30, 2010; 3:15 PM

In the early 1990s, the biggest names in the mortgage industry hatched a plan for a new electronic clearinghouse that would transform the home loan business – and unlock billions of dollars of new investments and profits.

At the time, mortgage documents were moved almost exclusively by hand and mail, a throwback to an era in which people kept stock certificates, too. That made it hard for banks to buy and sell packages of home loans to investors. By contrast, a central electronic clearinghouse would allow the companies to transfer thousands of mortgages instantaneously, greasing the wheels of a system in which loans could be repeatedly and quickly bought and sold.

“Assignments are creatures of 17th-century real property law; they do not coexist easily with high-volume, late 20th-century secondary mortgage market transactions,” Phyllis K. Slesinger, then senior director of investor relations for the Mortgage Bankers Association of America, wrote in paper explaining the system.

On March 4, 1994, the MBA unveiled its plan to county recorders who were charged with keeping track of title, signifying the ownership of land. Not everyone was sold on the idea. “There needs to be some outside control or oversight,” one recorder said, according to a transcript of the meeting. Another said that if errors were put into the electronic system, “they’re really hard to track further down the road.”

Sixteen years down the road, the mortgage business is a mess. The electronic clearinghouse has become a reality: The Virginia-based Mortgage Electronic Registrations Systems, a registry with 67 million mortgages on file, has become part of the industry’s standard operating procedure.

But critics say promises of transparency and of ironing out wrinkles in record-keeping haven’t panned out. The firm, which tracks more than 60 percent of the country’s residential mortgages but whose parent company employs just 45 people in a Reston office building, is on the firing line now.

Clerks from counties across the country are suing MERS to collect unpaid filing fees. Several state courts have rejected attempts by MERS to act on behalf of banks seeking to foreclose on delinquent mortgages. And Congress is weighing legislation that would bar home loan giant Fannie Mae from buying any mortgage listed in MERS, potentially a death knell for the registry.

Merscorp, the registry’s parent company, argues that it helps borrowers. Spokeswoman Karmela Lejarde said MERS has kept costs low, reduced the risk of record-keeping errors and made it easier to keep track of loans.

“MERS,” Lejarde said, “plays an important role in building and sustaining confidence in the mortgage process.”

But in the recent uproar over improperly prepared paperwork in foreclosures, MERS has become the central villain.

“They’ve tried to turn the mortgage business into … a production line, but in reality you’re dealing with humans, you’re not building cars or widgets,” said banking lobbyist Rick Hohlt.

The blueprint

The impetus for a nationwide electronic database of mortgages originally came from the biggest players in the mortgage business – the MBA, Fannie Mae, Freddie Mac and Ginnie Mae – during the early 1990s.

“The original thought was that the process was one of the most manual, labor- intensive, town hall-to-town hall processes. And there was a kind of broad industry effort to improve on that,” said Daniel Mudd, former Fannie Mae chief executive and now chief executive of Fortress Capital, a private equity firm.

The savings and loan crisis had just passed and the mortgage business was picking up again. At the time, an unconventional entrepreneur named Angelo Mozilo was on the MBA board. Eventually Mozilo would pay a $67.5 million to settle Securities and Exchange Commission allegations of fraud and insider trading. But back then Mozilo was one of the industry’s most admired executives, known for his inventiveness and technology investments at his firm Countrywide Financial, which in 1992 catapulted to first place among the nation’s mortgage originators.

Mozilo began brainstorming with a young MBA technology expert, Brian Hershkowitz, about ways to computerize and centralize the way the industry did business to take it to a new level.

“Angelo Mozilo loved to think about that,” Hershkowitz recalled. He was “the inspiration” for what would eventually become MERS.

In the fall of 1993, the MBA began circulating a white paper, “a blueprint for the future” that Hershkowitz wrote outlining a new central registry for mortgages.

Hershokwitz, who would later join Mozilo at Countrywide, modeled the new system on a clearinghouse for stocks called the Depository Trust Co. That company not only kept track of the stock ownership, it kept the physical certificates in a vault. Before the DTC had been created, brokers hired thousands of messengers to ferry certificates across New York City – a process that grew prohibitively expensive and inefficient as the volume of stock trades skyrocketed.

The mortgage industry was facing a similar problem. As interest rates sank, the number of new mortgages and refinancings soared. County recorders’ offices – which at that time were not automated – were having trouble keeping up.

Although the bankers touted the registry as a way to make mortgage processing more efficient, thus benefiting borrowers, they weren’t shy about admitting their main goal: more profits. They estimated that the cost of preparing, recording and mailing 11.1 million loan documents totaled about $210 million in the previous year alone.

In addition, the mortgage bankers had greater ambitions of hyper-charging the market for mortgage-backed securities. Invented in the late 1970s by a trader at Salomon Brothers, these investment packages pooled together thousands of mortgages. They were then sold not only to banks, but to pensions, insurance companies and other big investors.

The only thing holding back wider securitization, they believed, was the time-consuming and costly chore of recording and re-recording ownership of the individual mortgages.

In the years to come, the growth of MERS and securitization went hand in hand.

Countrywide, which had become a pioneer in securitization, saw its profits soar from $60.2 million in 1992 when MERS was still just an idea to $2.67 billion by 2006 at the peak of the boom.

By 2007, MERS had more than 60 million mortgages on file and said that it had saved the banking business $1 billion in recording fees and other costs. Meanwhile, the volume of securitized mortgages soared, becoming the nation’s largest asset class and contributing to a $12 trillion bubble in the real estate market – before it all broke down.

Doubts

From the beginning, the clearinghouse idea had its doubters.

At the March 1994 meeting between mortgage giants and the county recorders, the recorders ran through their list of concerns: whether consumers would be able to get access to their own information; how data errors would be corrected; whether the registry was consistent with state laws; whether the chain of title would be broken if documents weren’t recorded properly; and whether too much power would be concentrated in the hands of those who would manage and own the clearinghouse.

“This one group of people, the investors, the people that benefit, are in total control,” one county recorder warned, according to minutes of the meeting. Another commented that “it seems to me it creates a whole new system – different than anything that has been before.”

The bankers brushed off such questions.

The chairman of the industry’s legal team, Edmond R. Browne Jr., said the system would comply with the land recording laws in all 50 states.

“I don’t think it can really hurt as long as things are handled effectively,” he said. “It doesn’t take anything away from the existing system â?¦ but it’s an additional layer that has some economies of scale and some efficiencies.”

But somewhere along the way MERS became a stripped down version of the original idea. The first thing to go was the vault for keeping documents. MERS instead became a giant electronic card catalogue that tracked who was managing a particular loan as it was sold and resold, but it left the companies themselves responsible for guarding the mortgage (or deed of trust) and the promissory note (or IOU) – the two critical pieces of paper that prove who owns a loan.

Next to go was transparency, critics say.

When a home loan is securitized, at least a half-dozen parties are typically involved. The loan might be originated by a mortgage finance firm, sold to a company that aggregates them into a pool and then sells them to an investor such as a pension fund. A different “servicer” such as Bank of America is usually responsible for collecting payments. Most loans are bought and sold several times, and the servicer can change, too.

The mortgage bankers decided that to simplify record-keeping, MERS would be listed as a “nominee” for the mortgage holder in local land records offices. When the loans changed hands, the new owner or servicer would register the transaction electronically in the MERS system without having to re-record the transaction across the country.

But Mark Monacelli, a county recorder in Duluth, Minn., who was the lead negotiator for the association representing recorders from most of the nation’s 3,600 counties, said that practice makes it difficult for homeowners to be able to trace the chain of ownership of their loan.

“MERS turned out to be something completely different than what we originally thought,” Monacelli said.

MERS insists that it has not kept information from the public. “The MERS System actually fills an information void in the county land records system,” Lejarde, the spokeswoman, said. She said that although county land records list information about only the owner of loans, MERS tracks both the owner and the servicer.

Lejarde acknowledged, however, that some borrowers don’t have access to all that information. MERS gives investors the right to withhold their names from being displayed in the database, and about 3 percent do so.

In the mid-1990s, some of the recorders lobbied states and Congress for legislation to block the creation of MERS but failed. By 1999, just two years after MERS went live, the number of loans in the MERS system hit the 1 million milestone and Lehman Brothers issued the first “AAA” rated security with MERS registered loans.

Crisis

The collapse of the housing market over the past three years has drawn the curtains back on the shortcomings of MERS.

As millions of homes fell into foreclosure, MERS found itself in a tricky legal position because its name was listed as the mortgage holder in local land records. Because the law allows only the mortgagee to foreclose, MERS had to either file court papers in its own name or transfer the mortgage back to the real owner. Both scenarios require huge amounts of paperwork.

But with only a handful of employees – most of them computer technicians – MERS was in no position to do so. So MERS authorized employees at mortgage servicers, debt collectors and foreclosure law firms – 22,000 at most recent count – to identify themselves in records or court papers as “vice president” or “assistant secretary” of MERS Inc.

Distressed homeowners have bombarded MERS with hate mail. And thousands of borrowers have challenged the right of MERS and these agents to act on behalf of lenders or service firms, effectively calling into question the company’s business model.

“MERS is both a cause and a symptom of cavalier documentation practices in the mortgage industry,” University of Utah professor Christopher L. Peterson said. “It goes back to a slogan of theirs: ‘Process loans not paperwork.’ MERS created the illusion of record-keeping when it wasn’t really done.”

In a recent paper, Peterson wrote, “As a practical matter, the incoherence of MERS’ legal position is exacerbated by a corporate structure that is so unorthodox as to arguably be considered fraudulent.”

Some state courts agree. The Missouri court of appeals said in June 2009 that MERS lacked the authority to assign a mortgage from one service company to another. Because the transfer by MERS “had no force,” the court ruled, the owner of the loan “lacks a legally cognizable interest” and could not pursue the delinquent borrower.

The Kansas Supreme Court ruled in August 2009 that MERS did not have any interest in the underlying property of a bankrupt borrower whose home was auctioned – even though MERS was listed as the mortgagee. Moreover, the court said that the MERS transfer of the mortgage was invalid because the owner, Sovereign, had never recorded its interest in Ford County, Kan.

In October, a federal judge in Oregon issued an injunction preventing Bank of America from foreclosing on a home, because of the use of MERS.

In testimony before Congress, Merscorp president R.K. Arnold said he believes MERS “is based on sound legal principles” and that its role in such cases will be upheld on appeal.

Politics

More than half a century ago, the uniform commercial code ensured that commercial transactions didn’t need to comply with countless state rules. But real estate transactions remained protected.

Now, in the wake of the foreclosure wave, states are asserting themselves in ways that undercut efforts to make MERS a tool for unifying the mortgage business. A key bone of contention is whether MERS can be listed as the mortgage holder without actually owning the loan.

In the District, Attorney General Peter Nickles in October said that all transfers of mortgages should be inscribed in the land records within 30 days and that listing MERS does not meet this requirement. In Massachusetts, a county recorder has called on the attorney general to investigate whether MERS failed to pay the proper recording fees.

MERS says it believes it is in compliance with D.C. law and that in Massachusetts “no fee is due because there is nothing to record.”

Virginia delegate Bob Marshall, who has proposed tighter recording requirements, said that “the practice of MERS is going to destroy 400 years of guarantees that American law has sought to give people.”

Flawed concept?

In retrospect, MERS was a key component in a machine that was tearing up the traditional mortgage business. It both furthered and embodied the growing automation and anonymity of the booming home loan industry.

Whether MERS was a flawed concept or whether it was simply poorly constructed remains a matter of dispute.

Hershkowitz, author of the original white paper, said, “Perhaps the vision I had might have been better if it had been fully seen through.” He said that foreclosures were far from the minds of mortgage industry officials in the early 1990s. They were simply trying to boost the volume of mortgages they could handle.

Kurt Pfotenhauer, chief executive of the American Land Title Association, said that MERS is an “elegant solution” to the inefficiencies of paperwork. Though he’d welcome more regulatory oversight, he said title companies have found the database to be accurate and that its main flaw is that it doesn’t contain every mortgage in America.

“I think if you didn’t have MERS you’d have to invent it today,” he said.

William E. Kelvie, a former chief information officer for Fannie Mae who was a founding board member of MERS in 1997 and is now chief executive of Overture, a software company for the mortgage industry, said the real problem is not that the industry automated too fast, it’s that it went too slowly. If every component of a mortgage were digitized then there would be no paperwork controversy because there wouldn’t be any paperwork in the first place.

Others have the opposite view.

“In theory it’s a good idea because it saves everyone a lot of money,” said Howard A. Lax, a real estate expert at the law firm of Lipson, Neilson, Cole, Seltzer & Garin. But in practice, he added, MERS “relies on all these people from different financial institutions to give them accurate information. Nobody at MERS is responsible for due diligence, to go back and question whether the information they’re getting is accurate. It’s just like a computer program. If you’re going to put garbage in, you’re going to get garbage out.”

Phyllis K. Walters, a recorder from Illinois who led the opposition to MERS in the 1990s, said that in her district the chain of title for a parcel of land goes back to 1839 and never got broken until banks started recording, and foreclosing, in the name of MERS.

“If things had been recorded in our offices,” she said, “we wouldn’t be in this mess.”

chaa@washpost.com mufsons@washpost.com

7 Responses

  1. @Boots the confusion about the number of employees MERS actually employs is caused by the structure of MERS. The 20,302 ‘Certifying Officers’ representing MERS are actually employees of Fannie Mae, Freddie Mac, and other loan servicing entities and mortgage lenders. MERS merely assigns them as administrators.

    The stories we have heard and testimony in depositions seem to point to very sloppy administration and very little concern for quality control in the deed registration process. Also, you might find it interesting that in the hearing you mention, Mr. Arnold submitted his written testimony, but he did not provide oral testimony and he was not questioned. All of the other testifiers at the hearing gave oral testimony and answered questions. I don’t believe the Congress people read Mr. Arnolds testimony before the hearing, so they were not prepared to ask Mr. Arnold any questions. There is a video of the hearing on the Committee website.

  2. NEVA Said – Thousands of counties throughout the USA have lost millions in recording fees which has helped to fuel the bad economy

    No, No, No …you are hitting the target dead center and walking away a loser.

    Stop and thnk about what your saying. *W I N N E R* Your on the perfect argument. Think through what your saying here. . . the county NEVER lost a cent. Not one cent!

    Why? . . . .Think! Then go claim back your title.

    M.Soliman

  3. MERS Attack Again! EasyDoes it!
    By expert.witness@live.com

    The fact is a nominal interest MERS is misbehaving, beyond the rules of procedure in transferring interests in title. Court will not see it however.

    Its wrongful conduct is clearly set in procedure and as set forth in a one action state or civil laws in a foreclosure state.

    It’s none the less meaningless in either jurisdiction. MERS is a Nominal interest; that we know. And as such MERS does serve its purpose as a MERS to MERS assignment. ((Key))

    Therein is the argument not against MER’s rather “controlling” “unenforcable”, “willfull” and woefully manipulative acts endured prior to effecting an assignment?

    A nominal bid price or nominal anything is just that – insignificant for any meaning or purposeful other than as alleged and for the object of that purpose. (The FED’s testimony before the grand jury will cite the same language, so please don’t mis interpret it as gibberish).

    MERS is acting as a successor as was elected to do so by the maker of the note. The borrower has acknowledged such in its execution of the deed of trust.

    Counsel shall consider it okay you see, “if” your client did execute the note and mortgage with MERS listed therein.

    MERS is potentially working for you and I say that for a number of reasons. This is the reason I cite that I did not use them when I was a lender. Mortgage Guarantee used CitiFinancial for a warehouse line and they did not use MERS either; in open and notorious manner.

    MERS is an assignee by acknowledgement or by recorded assignment. Too many attorneys let this one slip away.

    MERS web site refers to this as a
    (1) MERS to MERS or
    (2) Non MERS to MERS.

    See for yourself! Under both scenarios there is an advantage to the consumer in every foreclosure sufficient to gain a reversal or rescission if arguments are brought in proper jurisdiction.

    The advantage to the borrower fades if you’re not playing the cards right.

    MERS registers a promissory note for what purposes?
    Answer: A successor’s rights to the security as a nominal interest.

    MERS registers a promissory note and for the benefits of whom?
    Answer: The benefit of the securities holder’s.

    MERS is alleged therefore to be acting in what capacity?
    Answer: Custodian for the security.

    MERS is therefore acting as which party in interest?
    Answer: The Beneficiary, “is therefore”

    MERS is not the beneficiary for a deed but for the stock certificates called Pass- through Trust Preferred Certificates.

    See the pooling and servicing agreements (if you must). Nor is MERS the Beneficiary for the lien or encumbrance and this is the most critical point to get across in the court room.

    This is why nothing is ever recorded in MERS name but only relies on MERS as a party to the assignment. It’s a sustainable fact due to “divesture” of the promissory note. This is the mockery of the California, Oregon, Washington, Arizona and Rhode Island one action state non judicial process.

    It is not for perjorative purposes I’ve heard said , let the ignorant leave the court as entered, ignorant.

    What you do not know in a non-judicial matter is for you and that party to get right as the State is sure as anything certain – not going to get involved in a “private parties dispute. Especially with raising questions of one rights and where no government state or federal actor is involved.

    Isn’t that right FDIC? Hmmm !

    See the Boyko decision as the court misses this opportunity to drop the hammer for good. To assert the manipulative fraud brought by the parties of interest acting as successors by its manipulation of a nominal interest under the guise of Duetsche Bank. Now we are getting into FTC country folks.

    You must recreate the general ledger or this is no hope of demonstrating this point to a competent court. The transfer at sale to the investor, the capitalization of the trust and divestment of the note for security will not fail you in your ability to raise a defense and overcome a theft of your home. ‘

    To this I shall testify for counsel. ©

    M.Soliman

  4. I wonder if the same reasoning applies in the case of a short sale where MERS is the nominee, etc. ?

  5. correction please it not 20, plus

    according to mr. arnold testimony, as of NOV 15, 2010, MERS has 20,302 certifying officers who work with more than 31 million active loans on the MERS system.

  6. even if MERS will ceased to exist, there is still another company by the name of GENPACT that would continue what MERS left behind. MERS equals GENPACT as a matter of fact, all the mortgages has been transferred to GENPACT from MERS as of DEC. 2010. so if Fannie Mae and Freddie Mac will not buy loans under MERS name, they could still buy loans under GENPACT which is MERS extension company? we should shoot MERS, put it in a coffin and bury them and not allow to create another company to continue scheming the homeowners and our state & counties depriving their income in recording fees. i still cannot understand why MERS claim that homeowners could have access to their system identification by identifying the ownership of the loan and could easily identify the ownership but the truth is that the debt collectors, loan servicer and ” foreclosure mills ” attorneys are claiming different entities while MERSId systems claims different owner. i read the remark and testimony of R. K. Arnold pres. and CEO of Merscorp. Inc.before the subcommitte on housing and community opportunity , house financial committee on nov. 18, 2010. his testimony of 82 pages including his exhibits, were half truth, Mr. Arnold why don’t you discuss about how much MERS received for assignment of deed to other third entities such as loan servicer, debt collectors and foreclosure mills lawyers. in your testimony you acknowledged that they were about 20, plus were authorized by MERS to signed on their behalf, which most of these employees are employed by loan servicer? have you read one of those assignment of deed stated FOR VALUE RECEIVED, THE UNDERSIGNED HEREBY GRANTS, ASSIGNS AND TRANSFER TO—————– ALL BENEFICIAL INTEREST UNDER CERTAIN DEED OF TRUST….. SIGNED BY YOUR trusted corporate officer in the name of MERS as vice president or assistant secretary? i talked to your trusted vice president of MERS bill hultman asking him how much MERS paid for assignment of my deed, he answered that it was just a legal wording that needs to be written, but he said MERS never received any money by assigning the deed? this was on OCt 2009. Mr. Arnold why would your trusted officers still continue to assigns the deed with those wording if in fact, you did not received any payment? is it because MERS also conspired with the loans servicer, debt collectors, foreclosure mills attorneys to create and fabricate an assignment of deed in order to look like MERS has a beneficial interest in each mortgage loan in this country because it happens by not our liking that MERS is the nominee of our deed of trust? the execution of assignment of deed from your corporation creates an enormous cloudy of titles and encourages your trusted corporate officer to do more harm by giving them an authority to commit Fraud with the blessings of MERS, Inc. next time Mr. arnold if you testify in the congress again, don’t just explain how mERS saves million of banks fees, but admits that your corporates officers committed fraud by creating & fabricating an assignment of deed in order for the recipient of MERS by virtue of assignment of deed to foreclosed. next time call me to refute your testimony because i knew, i have seven assignment of deed in my files from your beloved MERS, Inc. and I also knew if i will succeed on my lawsuit against MERS. Mers will never pay any dime on any damages because it will be loan servicer who will pay for that damages.

  7. MERS needs to bite the dust. It is bad news and, now millions of mortgages have a broken chain of title. Thousands of counties throughout the USA have lost millions in recording fees which has helped to fuel the bad economy. I hope Mitzi Kapture of Ohio gets her way with the bill in Congress to get rid of MERS by way of not allowing Fannie and Freddie to buy any loans with MERS in the line of title. I have another question: are there MERS-like entities involved in other loans like student loans, car loans, boat loans, etc.?

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