Peterson Written Test to House of Rep

8/6/2019 Peterson Written Test to House of Rep

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United States House of RepresentativesCommittee on the Judiciary

Hearing on: Foreclosed Justice: Causes and Effects of the Foreclosure

Crisis

Written Testimony of

Christopher L. PetersonAssociate Dean for Academic Affairs and Professor of Law

University of Utah, S.J. Quinney College of LawSalt Lake City, Utah

December 2, 201010:00 a.m.


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ItisanhonortoappeartodaybeforethisCommittee.Thankyoufortheopportunitytoshare

somethoughtsonournationalforeclosurecrisis.MynameisChristopherPetersonandIamthe

AssociateDeanforAcademicAffairsandaProfessorofLawattheUniversityofUtahwhereIteach

contractandcommerciallawclasses. Icommendyou,ChairmanConyers,RepresentativeSmith,and

othermembersoftheCommitteefororganizingthesehearingsandforprovidinganopportunityto

discussthisimportantandtimelynationalissue.

Theforeclosurecrisisisanextremelycomplexproblem.Withsomanyfundamentalchanges,

opportunitiesformoralhazard,agencycostproblems,consumerabuses,andimpendinglawsuits,itis

easytolosetrackofsomeofthebasiclegalandbusinesspracticeproblemsthatdepartedfrompast

traditionsandhelpedbringustoourpresentsituation.Inparticular,itissomewhatperplexingthat

relativelylittleattentionhasbeenpaidtotheonecompanythathasbeenapartyinmoreproblematic

mortgageloansthananyotherinstitution. MortgageElectronicRegistrationSystems,Inc.,commonly

knownasMERS,isacorporationregisteredinDelawareandheadquarteredinReston,Virginia.1MERS

operatesacomputerdatabasethatincludessomeinformationonservicingandownershiprightsof

mortgageloans.2 Originators,servicers,andotherfinancialinstitutionspaymembershipduesandper

transactionfeestoMERSinexchangefortherighttouseandaccessMERSrecords.3Inadditionto

operatingitscomputerdatabase,MERSalsopretendstoownmortgageloansinordertohelpits

membersavoidpayingfeestocountygovernments.

MytestimonyislargelyderivedfromtwoscholarlyarticlesIhavewrittenonthistopicwhichI

invitethecommitteetoreviewforfurtherinformation.4Mypreparedstatementtodaywill:(1)discuss

theOriginandBusinessPracticesofMERS;(2)exploretheproblematiclegalfoundationofMERS;(3)

suggestthatMERSisadeceptiveandantidemocraticinstitutiondesignedtodeprivecounty

governmentsofrevenue;(4)explainhowMERSisunderminingmortgageloanandlandtitlerecord

keeping;

(5)

argue

that

MERS

was

a

contributing

factor

in

the

foreclosure

crisis

and

has

made

resolving

foreclosuresmoredifficult;and(6)proposesomesolutionsforthecommitteetoconsider.

I. TheoriginsandBusinessPracticesofMERS

SincethefoundingoftheAmericanrepubliceachcountyintheUnitedStateshasmaintained

recordsofwhoownsthelandwithinthatcounty.5Moststateshavetrackedchangesinownershipof

land,includingmortgagesanddeedsoftrust,bymaintainingrecordsindexedthroughthenamesof

1.CarsonMullen,MERS:TrackingLoansElectronically,MORTGAGEBANKING,May31,2000,at63.

2.HowardSchneider,MERSAidsElectronicMortgageProgram,MORTGAGEBANKING,Jan.1,1997,at42.

3.Id.4Botharticlesareavailablefordownloadfreeofcharge:ChristopherL.Peterson,Foreclosure,SubprimeMortgageLending,and

theMortgageElectronicRegistrationSystem,78U.OFCINCINNATILAWREVIEW1359(2010) (availableat:

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1469749&download=yes);andChristopherL.Peterson,TwoFaces:

DemystifyingtheMortgageElectronicRegistrationSystemsLandTitleTheory,REALPROPERTY,PROBATEANDTRUSTLAWJOURNAL

(forthcoming2010)(publicworkingdraftavailableat:http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1684729).5PATTONANDPALOMARONLANDTITLES4(3ded.2003).
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1469749&download=yeshttp://papers.ssrn.com/sol3/papers.cfm?abstract_id=1684729http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1684729http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1469749&download=yes


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grantorsandgrantees.6 Thesegrantorgranteeindexesallowindividualsandbusinessescontemplating

thepurchaseoflandtoinvestigate(orhireatitleinsurertoinvestigate)whetherasellerormortgagor

actuallyownsthelandtheyareofferingforsaleormortgage.Communitieshavetraditionallyelected

theircountyrecordersorregistersofdeed,providinganimportantdemocraticcheckandbalanceinthe

preservationofpropertyrights.Apublic,enduring,authoritative,transparentrecordofallland

ownershipprovidesavitalinformationinfrastructurethathasprovenindispensibleinfacilitatingnot

onlymortgagefinance,butvirtuallyallformsofcommerce.7Countyrealpropertyrecordsaretheoldest

andhithertomoststablemetrictrackingtheAmericandreamoffamilyhomeownership.

Tofacilitatethisservice,countyrecorderschargemodestfeesondocumentstheyrecord.While

thereisconsiderablevarietyinamountandinthemethodofcalculatingthesefees,achargeofabout

$35.00foramortgageistypical. Countyrecordersusethesefeestofundtheirofficesaswellasto

contributetocountyandstaterevenue.Somecountysuserealpropertyrecordingfeestofundtheir

courts,legalaidoffices,schools,andpolicedepartments.

ForcenturiesAmericanmortgagelendershaveeagerlyrecordedtheirmortgagesloanswith

countyrecordersbecauseofincentivescreatedbystatelandtitlelaws.Forexample,ifamortgageefails

toproperlyrecorditsmortgage,andthensomeonesubsequentlybuysorlendsagainstthehome,the

subsequentpurchasercanoftentakepriorityoverthefirstmortgagee.8Similarly,whereamortgagee

assignsamortgagetoaninvestor,thatinvestorwouldeagerlyrecorddocumentationreflectingthe

assignmenttoprotectherselffromthepossibilitythattheoriginalmortgageewouldassignthesame

mortgagetoadifferentinvestor.9

Inthemid1990smortgagebankersdecidedtheydidnotwanttopayrecordingfeesfor

assigningmortgagesanymore.10Thisdecisionwasdrivenbysecuritizationaprocessofpoolingmany

mortgagesintoatrustandsellingincomefromthetrusttoinvestorsonWallStreet.Securitization,also

sometimescalledstructuredfinance,usuallyrequiredseveralsuccessivemortgageassignmentsto

differentcompanies.Toavoidpayingcountyrecordingfees,mortgagebankersformedaplantocreate

oneshellcompanythatwouldpretendtoownallthemortgagesinthecountrythatway,themortgage

bankerswouldneverhavetorecordassignmentssincethesamecompanywouldalwaysownallthe

614POWELLONREALPROPERTY82.03[2][b].7GaryAJeffress&LynnC.Holstein,AnInternationalSurveyofRealPropertyRecordingCostsandSomeCharacteristics:A

PreliminaryEvaluation,5URISAJ.53,53(1993)(internationalsurveysuggestingrecordingsystemsareapreconditionofan

efficientlandmarket).8POWELLONREALPROPERTY82.02[1][a]. 9See,e.g.,ConnecticutMut.LifeIns.Co.v.Talbot,14N.E.586(Ind.1887)(Itissettledeverywherethatunrecorded

assignmentsofmortgagesarevoidasagainstsubsequentpurchasers,whoseinterestsmaybeaffectedthereby,andwhose

conveyancesaredulyrecorded,providedsuchassignmentsareembracedbytherecordingacts.);Baconv.VanSchoonhoven,

42Sickels446,1882WL12538(N.Y.1882)(Theassignmentsofthe...mortgagearealsoconveyanceswithintheact.Thisis

wellsettledbyauthority,andsuchassignments,ifnotrecorded,arevoid,notmerelyasagainstsubsequentpurchasersofthe

samemortgage,butalsoasagainstsubsequentpurchasersofthemortgagedpremises,whoseinterestsmaybeaffectedby

suchassignments,andwhoseconveyancesarefirstrecorded.)10

PhyllisK.Slesinger&DanielMcLaughlin,MortgageElectronicRegistrationSystem,31ID.L.REV.805,81012(1995)(describing

anErnst&Youngstudycommissionedbymortgagebankertostudyhowmuchmoney theycouldavoidpayingtocounty

governmentsthroughtheMERSsystem).


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mortgages.11TheyincorporatedtheshellcompanyinDelawareandcalleditMortgageElectronic

RegistrationSystems,Inc.12

Eventhoughnotasinglestatelegislatureorappellatecourthadauthorizedthischangeinthe

realpropertyrecording,investorsinterestedinsubprimeandexoticmortgagebackedsecuritieswere

stillwillingtobuymortgagesrecordedthroughthisnewproxysystem.13

Becausethenewsystemcut

outpaymentofcountyrecordingfeesitwassignificantlycheaperforintermediarymortgagecompanies

andtheinvestmentbanksthatpackagedmortgagesecurities.Actingontheimpulsetomaximizeprofits

byavoidingpaymentoffeestocountygovernmentsmuchofthenationalresidentialmortgagemarket

shiftedtothenewproxyrecordingsysteminonlyafewyears.Nowabout60%ofthenationsresidential

mortgagesarerecordedinthenameofMERS,Inc.ratherthanthebank,trust,orcompanythatactually

hasameaningfuleconomicinterestintherepaymentofthedebt.14Forthefirsttimeinthenations

history,thereisnolongeranauthoritative,publicrecordofwhoownslandineachcounty.

MERSCORP,Inc.,acompanycloselyaffiliatedwithMERS,Inc.,nowmaintainsanelectronic

databasethattracksmortgageservicingrightstherightofacompanytocollectmonthlypaymentson

behalfoftheactualeconomicownerorownersofaloan.Insteadofpayingcountygovernments,

financialinstitutionspayMERSCORPmembershipfeesandpertransactionfeesforaccesstotheMERS

databaseandtocompensateMERS,Inc.forpretendingtoownthemortgagesthesefinancialinstitutions

registerontheMERSCORPdatabase.15SometimesMERSCORPalsotracksownershiprightsthatis

actualassignmentsbutonlyifinvestorswillinglyvolunteerthisinformation.16Financialinstitutions

havebeencavalieraboutinformingMERSCORPofchangesinservicingandownershiprightsof

mortgagesbecausetheybelievetherearenolegalpenaltiesforneglectingtomakethisinformation

available.

II. TheproblematiclegalfoundationofMERS

MERSsrightsvisvismortgagesregisteredontheMERSCORPdatabasehavecreatedaconundrum

forcourts,borrowers,andforeclosureattorneys.Inboilerplatesecurityagreementsincludedin

mortgagesaroundthecountry,lendersincludedthisclause:

11Peterson,Foreclosure,supranote4,at136873;HowardSchneider,MERSAidsElectronicMortgageProgram,MORTGAGE

BANKING,January1,1997.12

HowardSchneider,MERSAidsElectronicMortgageProgram,MORTGAGEBANKING,January1,1997;CarsonMullen,MERS:

TrackingLoansElectronically,MORTGAGEBANKING,May31,2000,62.13

Peterson,Foreclosuresupranote4,at136873.Atleastonestate,Minnesota,laterexplicitlyauthorizedMERSrecordingby

amendingitsrecordingacttoexpresslypermitnomineestorecord[a]nassignment,satisfaction,release,orpowerofattorney

toforeclose.ActofApr.6,2004,ch.153,2,2004Minn.Laws76,7677(codifiedatMinn.Stat.507.413(2008)).See

generallyJacksonv.MortgageElectronicRegistrationSystems,Inc.,770N.W.2d487(Minn.2009)(interpretingthisstatute).

However,thislegalchangewasnotenacteduntillongafterfinancialinstitutionshadalreadybeenusingtheMERSsystemin

thatstate.Similarchangeshavenotbeenenactednationwide.14

KateBerry,ForeclosuresTurnUpHeatonMERS,AM.BANKER,July10,2007,at1.15

HowardSchneider,MERSAidsElectronicMortgageProgram,MORTGAGEBANKING,January1,1997.Unlikemortgageloan

servicers,whicharecompensatedforforeclosureservices,MERSdoesnotreceiveanycompensationforassistingin

foreclosures.DepositionofR.K.Arnold,Hendersonv.MERSCORP,INC.,etal.,CV08900805.00,CircuitCourtforMontgomery

CountyAlabama,September25,2009,at88(hereinafter:ArnoldDeposition).16

FinancialinstitutionshavenotreliablyupdatedtheMERSmaintaineddatabasewhentheyassignloanstobusinessesthatare

notmembersoftheMERSsystem.SeeInreHawkins,2009WL901766,atn.35(B.D.Nev).
http://web2.westlaw.com/find/default.wl?tc=-1&docname=MNSTS507.413&rp=%2ffind%2fdefault.wl&sv=Split&rs=WLW10.08&db=1000044&tf=-1&findtype=L&fn=_top&mt=208&vr=2.0&pbc=C6D569B6&ordoc=2019595075http://web2.westlaw.com/find/default.wl?tc=-1&docname=MNSTS507.413&rp=%2ffind%2fdefault.wl&sv=Split&rs=WLW10.08&db=1000044&tf=-1&findtype=L&fn=_top&mt=208&vr=2.0&pbc=C6D569B6&ordoc=2019595075http://web2.westlaw.com/find/default.wl?tc=-1&docname=MNSTS507.413&rp=%2ffind%2fdefault.wl&sv=Split&rs=WLW10.08&db=1000044&tf=-1&findtype=L&fn=_top&mt=208&vr=2.0&pbc=C6D569B6&ordoc=2019595075http://web2.westlaw.com/find/default.wl?tc=-1&docname=MNSTS507.413&rp=%2ffind%2fdefault.wl&sv=Split&rs=WLW10.08&db=1000044&tf=-1&findtype=L&fn=_top&mt=208&vr=2.0&pbc=C6D569B6&ordoc=2019595075http://web2.westlaw.com/find/default.wl?tc=-1&docname=MNSTS507.413&rp=%2ffind%2fdefault.wl&sv=Split&rs=WLW10.08&db=1000044&tf=-1&findtype=L&fn=_top&mt=208&vr=2.0&pbc=C6D569B6&ordoc=2019595075http://web2.westlaw.com/find/default.wl?tc=-1&docname=MNSTS507.413&rp=%2ffind%2fdefault.wl&sv=Split&rs=WLW10.08&db=1000044&tf=-1&findtype=L&fn=_top&mt=208&vr=2.0&pbc=C6D569B6&ordoc=2019595075http://web2.westlaw.com/find/default.wl?tc=-1&docname=MNSTS507.413&rp=%2ffind%2fdefault.wl&sv=Split&rs=WLW10.08&db=1000044&tf=-1&findtype=L&fn=_top&mt=208&vr=2.0&pbc=C6D569B6&ordoc=2019595075http://web2.westlaw.com/find/default.wl?tc=-1&docname=MNSTS507.413&rp=%2ffind%2fdefault.wl&sv=Split&rs=WLW10.08&db=1000044&tf=-1&findtype=L&fn=_top&mt=208&vr=2.0&pbc=C6D569B6&ordoc=2019595075


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MERSisMortgageElectronicRegistrationSystems,Inc. MERSisaseparatecorporation

thatisactingsolelyasnomineeforLenderandLenderssuccessorsandassigns.MERSisthe

mortgageeunderthisSecurityInstrument.MERSisorganizedandexistingunderthelawsof

Delaware,andhasanaddressandtelephonenumberofP.O.Box2026,Flint,MI48501

2026,tel.(888)679MERS.17

Thispassage,andasimilarpassagenamingMERSthebeneficiaryindeedsoftrust,isconfusingto

courts,borrowers,andevenforeclosureattorneys.Ontheonehand,MERSpurportstobeactingasa

nomineeaformofanagent.Ontheotherhand,italsoisclaimingtobeanactualmortgagee,whichis

tosayanowneroftherealpropertyrighttoforecloseuponthesecurityinterest.Itisaxiomaticthata

companycannotbebothanagentandaprincipalwithrespecttothesameright.18Inlitigationallacross

thecountry,attorneysrepresentingMERSfrequentlytakeinconsistentpositionsonthelegalstatusof

thecompany,dependingonthelegalissueathand.

BoththeMERSasanagentandtheMERSasanactualmortgageetheorieshavesignificant

legalproblems.IfMERSismerelyanagentoftheactuallender,itisextremelyunclearthatithasthe

authoritytolistitselfasamortgageeordeedoftrustbeneficiaryunderstatelandtitlerecordingacts.

Thesestatutesdonothaveprovisionsauthorizingfinancialinstitutionstousethenameofoneshell

companyinsteadofalltheactualownersofinterestsinland.Afterall,thepointofthesestatutesisto

provideatransparent,reliable,recordofactualasopposedtonominallandownership.Itislegally

unclearthatrecordingamortgagewithMERSlistedasamortgageeissufficienttocreateaperfected

securityinterest.Abasicobjectiveinrecordingmortgagesistoestablishpriorityvisvisotherlenders,

lienors,andbuyers.WiththeexceptionofMinnesota,everystatelandtitleactthestatutesthatset

outtherulesgrantingprioritythroughrecordingwaswrittenbeforeMERScameintobeing.The

legislaturesthatdraftedthesestatutesdidnotcontemplatethepossibilitythateverylenderinthe

country

would

record

their

loans

in

the

name

of

one

shell

company

owned

by

banks.

State

supreme

courtsarecurrentlyfreetodecidethatrecordinginthenameofthisproxymortgageeshellcompany

doesnotperfectthemortgage.WillstateSupremeCourtsinsistontransparentrealpartyininterest

recordinginthiscontext?Beforethefinancialcrisisandallofthedocumentationproblemsourcountry

isfacingemerged,perhapsitappearedtobeasafebet.Butnow,itismuchlesscertainthatstate

appellatecourtswillallowthefinanceindustrytogetawaywiththispowergrabthatprivatizesthe

centuriesoldpublicrecordkeepingsystem.

CounselforMERSwillnodoubtcontinuetopointtotheoccasionalcasefromourhistorywhere

onecourtoranotherhasallowedsomeformofrecordingwithsomeunusualagencyrelationship

involved.Theywillsaythattheseoccasionalcasesprovetheirconceptislegal.Butthecommittee

shouldstepbackandthinkaboutthisclaimforamoment. Istherereallyacasethatprovesthattheir

conceptislegal?No.Theconceptwastotallynewinthehistoryofthecountrysotherewillbenofacts

thatcouldhavegivenrisetobindingcaselaw.EverycasetheMERSpointstowillhavethepotentialto

bedistinguishedbyastateSupremeCourtthatbelievesitslegislaturedidnotauthorizethistypeof

17MortgageElectronicRegistrationSystems,Inc.v.Bluming,No.GD0516795,CivilDivision,CourtofCommonPleasof

AlleghenyCounty,PA,slipop.(May31,2006)(J.TimothyPatrickOReilly).18

Restatement(Third)ofAgencyLaw1.01,1.02.


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changetothesystem.Andthosecourtswillbeonsolidgroundbecauseletsbehoneststate

legislaturessimplydidnotwillfullygrantpermissionforthisradicalchangeinrecording.Thelandtitle

statutescontemplaterecordingbymanydifferentactualmortgageesanddeedoftrustbeneficiaries,

notbyonesingleashellcompanythatstandsintheplaceoftheentireindustry.CounselforMERSwill

notfindacasethatbindsastatesupremecourttoholdotherwise.Thetrulyconservativepositionon

thesecaseswillbetoinsistthatradicalchangestothelegislatureslandtitleactsbemadeby

legislatures,notbyindustrytradeassociations.SomestateSupremeCourtjusticesarelikelytoresent

turningoverthecountyrecordersdemocraticallymaintainedrecordingsystemenshrinedinlawbythe

democraticallyelectedlegislaturetoabankownedshellcompany.

Conversely,ifMERSisactuallyamortgagee,thenwhileitmayhaveauthoritytorecord

mortgagesinitsownname,bothMERSandfinancialinstitutionsinvestinginMERSrecordedmortgages

runafouloflongstandingprecedentontheinseparabilityofpromissorynotesandmortgages.Sincethe

19thcenturyalongandstillvitallineofcaseshasheldthatmortgagesanddeedsoftrustmaynotbe

separatedfromthepromissorynotesthatcreatetheunderlyingobligationtriggeringforeclosure

rights.19

Thesecasesdonotmerelyholdthatmortgagesfollownotesasamatterofdefaultlaw,butthat

mortgagescannotlegallybeseparatedfromnotes.Thus,inCarpenterv.LongantheUnitedStates

SupremeCourtannouncedtheclassicstatementofthisrule: thenoteandmortgageareinseparable,

19InreBird,2007WL2684265,at24(Bkrtcy.D.MD.2007)(Thenoteandmortgageareinseparable;theformeras

essential,thelatterasanincident.Anassignmentofthenotecarriesthemortgagewithit,whileanassignmentofthelatter

aloneisanullity....Itisequallyabsurdtoassumethatsuchbifurcationwasintendedbecausesuchabifurcationofthenote

fromthedeedoftrustwouldrenderthedebtunsecured.);InreLeisureTimeSports,Inc.194B.R.859,861(9thCir.1996)

(statingthat[a]securityinterestcannotexist,muchlessbetransferred,independentfromtheobligationwhichitsecuresand

that,[i]fthedebtisnottransferred,neitheristhesecurityinterest);InreBNTTerminals,Inc.,125B.R.963(Bankr.N.D.Ill.

1990) (Anassignmentofamortgagewithoutatransferoftheunderlyingnoteisanullity.... Itisaxiomaticthatanyattempt

toassignthemortgagewithouttransferofthedebtwillnotpassthemortgagee'sinteresttotheassignee.);YoiLeeRealty

Corp.v.177thStreetRealtyAssociates,208A.D.2d185,626N.Y.S.2d61,64(N.Y.A.D.1Dept.,1995) (Themortgagenoteis

inseparablefromthemortgage,towhichthenoteexpresslyrefers,andfromwhichthenoteincorporatesprovisionsfor

default.);InreAMSCO,Inc.,26B.R.358,361(Bkrtcy.Conn.,1982)(reaffirmingthat[t]henoteandmortgageare

inseparable);Bartonv.Perryman,577S.W.2d596,600(Ark.,1979)([A]noteandmortgageareinseparable.);TraneCo.v.

Wortham,428S.W.2d417,419(Tex.Civ.App.1968)(Thenoteandmortgageareinseparable....); KirbyLumberCorp.v.

Williams,230F.2d330,333(5th

Cir.1956)(Theruleisfullyrecognizedinthisstatethatamortgagetosecureanegotiable

promissorynoteismerelyanincidenttothedebt,andpassesbyassignmentortransferofthenote.***Thenoteand

mortgageareinseparable....); Kelleyv.Upshaw,39Cal.2d179,192,246P.2d23(1952)(Inanyevent,Kelley'spurported

assignmentofthemortgagewithoutanassignmentofthedebtwhichissecuredwasalegalnullity.);Hillv.Favour,52Ariz.

561,84P.2d575(Ariz.1938)(Thenoteandmortgageareinseparable;theformerasessential,thelatterasanincident.);

Dennistonv.C.I.R.,37B.T.A.834,1938WL373(B.T.A.1938) (Alltheauthoritiesagreethatthedebtistheprincipalthingand

themortgageanaccessory...Themortgagecanhavenoseparateexistence.);Westv.FirstBaptistChurchofTaft,123Tex.

388,71S.W.2d1090,1098(Tex.1934)(Thetrialcourt'sfindingandconclusionignorethesettledprinciplethatamortgage

securinganegotiablenoteisbutanincidenttothenoteandpartakesofitsnegotiablecharacter. ...Thenoteandmortgage

areinseparable;theformerasessential,thelatterasanincident.)(citationsomitted);FirstNat.Bankv.Vagg,65Mont.34,212

P.509,511(Mont.1922)(Amortgage,asdistinctfromthedebtitsecures,isnotathingofvaluenorafitsubjectoftransfer;

henceanassignmentofthemortgagealone,withoutthedebt,isnugatory,andconfersnorightswhateverupontheassignee.

Thenoteandmortgageareinseparable;theformerasessential,thelatterasanincident.Anassignmentofthenotecarriesthe

mortgagewithit,whiletheassignmentofthelatteraloneisanullity.Themortgagecanhavenoseparateexistence.)(citations

omitted);Southerinv.Mendum,5N.H.420,1831WL1104,at7(N.H.1831)([T]heinterestofthemortgageeisnotinfact

realestate,butapersonalchattel,ameresecurityforthedebt,aninterestinthelandinseparablefromthedebt,anincidentto

thedebt,whichcannotbedetachedfromitsprincipal.).
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7/18

theassignmentofthenotecarriesthemortgagewithit,whileanassignmentofthelatteraloneisa

nullity.20

ThisrulingbytheSupremeCourtisfundamentallyintensionwithMERSexplanationofits

ownershipofmortgages.Forinstance,MERShasstated:

MortgageElectronicRegistrationsystems,Inc.(MERS)getsitsauthorityto

assignand/ordischargeamortgagebecauseMERSisthemortgagee,andas

suchholdslegaltitletothemortgage.... Thenomineelanguagedoesnottake

awayfromthefactthatMERSisthemortgagee.21

Ironically,trusteesofresidentialmortgagebackedsecuritizationtrustsalsoclaimtoownlegaltitleto

thesamemortgagesthatMERSclaimstoown.22AngloAmericanlawincludesnotraditionthatsupposes

twodifferentsimultaneouslegaltitlesforthesameinterestinland.Moreover,ifthemortgageandthe

noteareinseparable23MERScannotbethemortgageeunlessitisalsotheoriginalpayeeonthenote.

ThisiswhytheMaineSupremeCourtrecentlyheld:MERSisnotamortgageebecauseithasno

enforceablerightinthedebtobligationsecuringthemortgage.24SimilarlytheKansasSupremeCourt

astutelyrecognizedthatMERSlegalpositionisincoherentwhenaunanimouscourtwrote:

WhatmeaningisthiscourttoattachtoMERS'sdesignationasnomineefor[the

lender]?Thepartiesappeartohavedefinedthewordinmuchthesameway

thattheblindmenofIndianlegenddescribedanelephanttheirdescription

dependedonwhichparttheyweretouchingatanygiventime.25

III. MERSisaDeceptiveandAntiDemocraticInstitution

Asapracticalmatter,theincoherenceofMERSlegalpositionisexacerbatedbyacorporate

structurethatissounorthodoxastoarguablybeconsideredfraudulent.BecauseMERSCORPisa

companyofrelativelymodestsize,itdoesnothavethepersonneltodealwithlegalproblemscreatedby

itspurportedownershipofmillionsofhomemortgages.Toaccommodatethemassiveamountof

paperworkandlitigationinvolvedwithitsbusinessmodel,MERSCORPsimplyfarmsouttheMERS,Inc.

identitytoemployeesofmortgageservicers,originators,debtcollectors,andforeclosurelawfirms.26

MERSinvitesfinancialcompaniestoenternamesoftheirownemployeesintoaMERSwebpagewhich

20Carpenterv.Longan,83U.S.271,274,(1872)(emphasisadded).

21.PostingofSharonHorstkamp,MERSGeneralCounsel, http://www.mersinc.org/forum/viewreplies.aspx?id=13&tid=73(Apr.8,2004,12:42PM)(emphasisadded).22

Forexample,securitizationpoolingandservicingagreementswilltypicalincludelanguagewhereasecuritizationdepositor

warrantsthattheMortgageLoan,includingtheMortgageNoteandtheMortgage,...[are]notsubjecttoanassignmentor

pledge,andtheDepositorhadgoodandmarketabletitletoand...[is]thesoleownerthereof.CHASEMORTGAGEFINANCE

CORPORATION,DEPOSITOR,JPMORGANCHASEBANK,N.A.,SERVICERANDWACHOVIABANK,N.A.,TRUSTEEPOOLINGAND

SERVICINGAGREEMENT,DatedasofNovember1,2005,$1,900,007,729.12,MultiClassMortgagePassThroughCertificates

Series2005A1,at3.01(l).23

Carpenter,83U.S.at274.24

Id.at15.25

Id.at16566.26

ArnoldDepositionat19698;MortgageElectronicRegistrationSystem,Inc.,MERSLawSeminarforUSFNConference,1516

(April21,2002)(documentonfilewithauthor)(providingasamplecertifyingofficerresolution).


8/18

thenautomaticallyregurgitatesboilerplatecorporateresolutionsthatpurporttonametheemployees

ofothercompaniesascertifyingofficersofMERS.27Thesecertifyingofficersalsotakejobtitlesfrom

MERSstylizingthemselvesaseitherassistantsecretariesorvicepresidentsoftheMERS,ratherthanthe

companythatactuallyemploysthem.Theseemployeesoftheservicers,debtcollectors,andlawfirms

signdocumentspretendingtobevicepresidentsorassistantsecretariesofMERS,Inc.eventhough

neitherMERSCORP,Inc.norMERS,Inc.paysanycompensationorprovidesbenefitstothem.

Astonishingly,MERSvicepresidentsaresimplyparalegals,customerservicerepresentatives,and

foreclosureattorneysemployedbyothercompanies.MERSevensellsitscorporatesealtonon

employeesonitsinternetwebpagefor$25.00each.28Ironically,MERS,Inc.acompanythatpretends

toownabout60%ofthenationsresidentialmortgagesdoesnothaveanyofitsownemployeesbut

stillpurportstohaveabouttwentythousandassistantsecretariesandvicepresidents.Thiscorporate

structureleadstoinconsistentpositions,conflictsofinterest,andconfusion.29

Furthermore,itisimportanttotakeastepbackforamomenttolookattheserelationships

fromtheperspectiveofaconfused,frightenedhomeownerteeteringonthebrinkofforeclosureand

possiblyevenhomelessness.30

Howisahomeownertounderstandwithwhomtheycannegotiatea

settlement,orfromwhomtoobtainadditionalinformation,orhowtodistinguishalegitimateemployee

ofalegitimatecompanyfromthethousandsofmortgagerelatedconartistsandcharlatanscurrently

swirlingaroundAmericanfamilies?31 CongressConsumerCreditProtectionActingeneral,andtheFair

DebtCollectionPracticestitleofthatActinparticular,oncetookthepositionthatevenmisleading(as

opposedtofalse)representationshadnoplaceinthedebtcollectionindustrybecauseofthegreat

potentialforconsumerabuseandthethreattotheAmericaneconomyfromunderminingourcollective

faithinfinancialmarketsandinstitutions.32 Toeffectuatethispolicyoftransparencyandhonesty,

misrepresentationsandmisleadingstatementsareevaluatedfromtheperspectiveoftheleast

sophisticatedconsumerstandard.33 Unsophisticatedconsumersthatreceivecommunicationsfroma

MERSvicepresidentorassistantsecretaryarelikelytobelievethatthisindividualservesadifferent

roleintheforeclosureprocessthantheindividualactuallydoes. Havingforeclosurecommunications

27MERS,CorporateResolutionRequestForm,www.mersinc.org/MersProducts/forms/crrf/crrf.aspx(lastviewed:April6,2009).

28Id.

29CompareMERSForum,FAQwithSharonHorstkamp,MERSVicePresidentandCorporateCounsel,

www.mersinc.org/forum/viewreplies.aspx?id=13&tid=73lastviewedJune9,2004(MortgageElectronicRegistrationsystems,

Inc.(MERS)getsitsauthoritytoassignand/ordischargeamortgagebecauseMERSisthemortgagee,andassuchholdslegal

titletothemortgage.ThenomineelanguagedoesnottakeawayfromthefactthatMERSisthemortgagee.)(emphasis

added);withBriefinSupportofDefendantsMotiontoDismissat3,Kingv.Ocwen,CivilActionNo.0711359,2008WL

2063553 (E.D.Mich,April14,2008)(arguingthatMERScouldnotbeliableforFairDebtCollectionPracticesActviolations

becauseHSBCwasthemortgageefortheproperty.Ocwenistheservicerfortheproperty.[And,]MERSactedsolelyasthe

nomineefortheoriginalmortgageeoftheproperty)(emphasisadded).

30.Clomon,988F.2dat1318 (Thebasicpurposeof the leastsophisticatedconsumerstandard is toensure that theFDCPAprotects all consumers, the gullible aswell as the shrewd. This standard is consistentwith the norms that courts havetraditionallyappliedinconsumerprotectionlaw.).

31.SeeJohnLeland,SwindlersFindGrowingMarketinForeclosures,N.Y.TIMES,Jan.15,2009,atA1;VivianS.Toy,PenetratingtheMazeofMortgageRelief,N.Y.TIMES, June14,2009,atRE1;RivaRichmond,OnlineScammersTargettheJobless,N.Y.TIMES,Aug.6,2009,atB6.

32.15U.S.C.1692(a)(There isabundantevidenceoftheuseofabusive,deceptive,andunfairdebtcollectionpracticesbymany debt collectors. Abusive debt collection practices contribute to the number of personal bankruptcies, to maritalinstability,tothe lossofjobs,andto invasionsof individualprivacy.); id.1692(c)(Meansotherthanmisrepresentationorotherabusivedebtcollectionpracticesareavailablefortheeffectivecollectionofdebts.).

33.SeeClomon,988F.2d1314;Gammonv.GCServs.Ltd.Pship,27F.3d1254(7thCir.1994).
http://www.mersinc.org/forum/viewreplies.aspx?id=13&tid=73http://www.mersinc.org/forum/viewreplies.aspx?id=13&tid=73


9/18

conductedinMERSsnamemayleadconsumerstobelievethattheservicerhasturnedthecaseoverto

aquasiofficialentitythatlackstheauthoritytonegotiateloanmodifications,shortsales,or

settlements. Theeffectcouldbetopacifytheconsumeratthepointtheyaremostlikelytoresist

throughactivelylitigating(ofteninaprosecapacity)theiralltoooftenlegitimatecounterclaimsand

defenses. Indeed,thisispreciselythesortofdeceptiontargetedbyCongressstatutepromotingfair

debtcollection.

AfaircritiqueofMERSmustincluderecognitionofthedated,expensive,andsometimes

cumbersomenatureofcountyrealpropertyrecordssystems. Unliketherelativelyhomogenous

personalpropertylienrecordingsystemsgovernedbyArticle9oftheUCC,theNationalConferenceof

CommissionersonUniformStateLawsandtheAmericanLawInstitutehavenotbeenabletoprevailon

statelegislaturestostandardizerealpropertymortgageandrecordinglaws.Moreover,unlikepersonal

propertylienrecords,whichareusuallymaintainedbyasecretaryofstate,realpropertyrecordsare

generallymaintainedbyeachcounty. Thisfurtherdiversifiesrecordkeepingstandardsandoperating

procedures. Evenwiththeuseoftitleinsurerplantcopies,recordingandsearchingincountyproperty

recordsistimeconsuming,expensive,andoftennotespeciallyreliable.34

Incontrast,MERSgiveseach

loanauniqueidentifier,isaccessiblethroughtheInternet,andisorganizedinonenationwidesystem.35

Thatbeingsaid,manycountyrecordershaverapidlyimprovedtheirprocessesrecentlyincludingover

480jurisdictionsthatarenowofferingfullyelectronicrecordingofmortgagesandmortgage

assignments.

Still,theproblemwithMERSisnotjustaboutwhatMERSdoeswrong,butalsowhattheprocess

ofcreatingMERSprevented. Bytakingthereformationofthecountyrecordingsystemscreatedby

statelawuponitself,MERSandthemortgagefinanceindustrycircumventedthestateandnational

debatethatnormallyprecedessignificantlegislativechange. TheMERSsystem,whiledigitaland

nationwide

in

scope,

is

not

equally

available

to

all.

It

has

given

a

single

corporation

the

opportunity

to

grantspecialvicepresidentstatustoitsfavoredsideinforeclosuredisputes. Ithasbeenmanipulated

intoadevicetomakeforeclosureeasierandmoreanonymousforfinanciers.Thefinancialindustry

couldhavechanneleditsdissatisfactionwithcountypropertyrecordsintoacampaignforlegalreform.

Thiswouldhavenecessitatedadebatewhereconsumers,countyofficials,researchers,poverty

advocates,andanyoneelsecouldhaveparticipated. Ifthefinanceindustryputitsformidablelegislative

musclebehindapublicreformationofcountyrecordingsystemsfifteenyearsago,perhapstodaywe

wouldhaveanationalsystemmaintainedbyafederalregulator,orstatewidesystemssupportedbya

newarticleoftheUCC. Insteadfinancierschosetoactalone,creatinganentirelynewsystemthat

competesfinanciallywithpublicrecords,underminestheaccuracyofpublicrecords,andwasnever

authorizedbytheelectedleadersthatguidearepublicansystemoflaw.

Inamomentofrefreshingcandor,notlongagoMERSPresidentconcludedanextollingpublic

relationspiecewiththeacknowledgmentthatMERSisownedandoperatedbyandforthemortgage

34.14POWELLONREALPROPERTY82.03[2].

35.R.K.Arnold,Yes,ThereisLifeonMERS,11Prob.&Prop.,July/Aug.1997,at32,35.


10/18

industry.36 Itisironic,andperhapsnotcoincidental,thatthesyntacticalformofthesentencebears

suchcloseresemblancetoPresidentLincolnsGettysburgaddress. Onewillnodoubtrecallthat

Americanshavegenerallyaspiredtogovernmentofthepeople,bythepeople,forthepeople,rather

thanof,by,andforthemortgagebankers.37MERSsattempttocaptureeverymortgageloaninthe

country38isanefforttosupplantthepubliclandtitlerecordingsystemslienrecords,manyofwhich

predatetheConstitutionitself,withapurelyprivatesystem. Thiseffortiswithoutquestionasurrender

ofthemessycompromisesinherentinrepresentativedemocracytotheseductivelyeasylureof

mercantileoligarchy. PerhapsthoseofuswithromanticattachmentstoourRepublicandtheruleof

lawwillbeexcusedforsupposingthatifthemortgagebankerswantedanewer,moreefficient,national

landtitlerecordingsystem,theyshouldhaveaskedCongressorthelegislaturesfirst.

IV. MERSisUnderminingMortgageLoanandLandTitleRecordKeeping

MERSdescribesitselfasaninnovativeprocessthat...eliminatestheneedtoprepareand

recordassignmentswhentradingresidentialandcommercialmortgageloans.39Thephrase,whichthe

companyusesbothinlegalbriefsandpublicrelationsmaterial,hintsthatrecordingassignmentswas

merelysomeuseless,archaicformality.Itisfarfromclearthatstateappellatecourtswillagreethat

MERSdoeseliminatetheneedtorecordassignments.ButevenifMERSdoeseliminatetheneedto

record,itmostcertainlydoesnoteliminatetheneedforrecords.Thepolicyjustificationsbehind

recordingstatutesareasgermanetodayastheywerehundredsofyearsagowhenthefirstAmerican

coloniesbeganadoptingthestatutes.Whilesomeoftheprocessesofkeepingrecordsmayhave

becomedated,thelawitselfhasnot.Societyneedsanauthoritative,transparentsourceofinformation

onwhoownslandinordertoprotectpropertyrights,encouragecommerce,exposefraud,andavoid

disputes.Recentcaselawisbeginningtoshowgatheringjudicialskepticismregardingtheprivatized

record

keeping

system

that

is

displacing

public

county

systems.

ApologistsforMERSarguethatsolongasMERSnameisrecordedincountyrecordsasalien

holder,prospectivepurchaserswillbeonnoticethattheymustinquirefurtherbeforelendingagainstor

buyingtheland.Butwhoexactlyarethesepurchaserstoconsult?MERShasmaintainedatollfree

phonenumberwherehomeownersareallowedtoinquirewhoholdstheservicingrightstotheir

mortgage.40But,astherecentrobosignerstoriesandexamplesofwrongfulforeclosuresinthepress

haveshown,servicersthemselvesdonotalwayshaveaccuraterecordsoftheirown.Andevenifthey

did,talkingtomortgageservicingcompanycustomerservicerepresentatives,whosebusinessincentives

focusoncuttingcosts,isoftenunproductive,slow,andunreliable.41Moreover,inrecentyears

mortgageservicingandoriginationcompanieshavefrequentlybecomeinsolvent.Evenfederallyinsured

36.Id.at36.

37.GARRYWILLS,LINCOLNATGETTYSBURG:THEWORDSTHATREMADEAMERICA145(1992).

38.Arnold,supranote34,at1.39

WelcometoMERS,www.mersinc.org(lastvisitedSept.17,2010).40

WelcometoMERSforHomeowners,http://www.mersinc.org/homeowners/index.aspx#3(lastvisitedSept.17,2010)(the

currentphonenumberis8886796377).41

SeeKathreineM.Porter,MisbehaviorandMistakeinBankruptcyMortgageClaims,87TEX.L.REV.121(2008).
http://www.mersinc.org/http://www.mersinc.org/homeowners/index.aspx#3http://www.mersinc.org/homeowners/index.aspx#3http://www.mersinc.org/


11/18

bankshavebeencollapsingbythehundreds.42Afterseeingloanafterloaninhercourtroomwith

incompletedocumentationandincoherenttransactionalrecords,JudgeJenniferBailey,aCircuitCourt

JudgeinMiamirecentlystated:

[T]hereare60,000foreclosuresfiledlastyear.Everysingleoneofthem ...almostevery

singleoneofthemrepresentsasituationwherethebankspositionisconstantlyshifting

andchangingbecausetheydontknowwhattheSamHillisgoingonintheirfiles.43

ThatMERSmaintainsadatabaseofservicingrightssimplydoesnotprovideacommerciallyreliable,

authoritativesourceoflieninformationbecauseservicers,whoareinbusinesstomakeprofitthrough

providingfinancialservices,donothaveanincentivetomaintainpermanent,transparent,publically

availablerecordsofmortgageownership.

MERSalsodoesnotreliablytrackbeneficialownershiprightsofthemortgagesregisteredonits

system.RecallthatMERSonlymaintainsadatabasewhichitsmemberscanenterinformationuponif

theywantto.44Whenthebeneficialownershipinterestinaloanchangeshands,suchasthrough

negotiationofapromissorynoteandawrittenassignmentofthemortgage,thepartiestothat

transactioncansendanelectronicmessagetoMERSupdatingafieldofinformationinthedatabase.

MERScallsthisprocessanelectronichandshake.45But,unlikemostcountyrealpropertyrecorders,

MERSdoesnotkeepdigitalorhardcopiesofdocumentsthatembodytheagreementmakingitmuch

moredifficulttotrackfraudanderrorsthroughtherecordkeepingsystem.Evenmoretroubling,MERS

membersarenotlegallyboundtoupdatethisinformationonthedatabase.InthewordsoftheMERS

CEO,thesystemiscapableofbeingusedtotrack[beneficialownershipinterests]ifthemembersutilize

itforthatreason.46 But,iftheMERSmemberschoosenottousethedatabasetorevealthemselves,

MERSdoesnotinvestigatefurtherorotherwiseinsistthatmembersactuallyusethisfeatureofthe

database.Instead,MERSleavesthistothebusinessmodelofthefinancialinstitution.47Whenasked

whetherMERSexpectsfinancialinstitutionstoupdatetheMERSdatabaseregardingchangesinloan

ownership,thecompanysCEOreplied,notsomuch....48Moreover,MERSdoesnotkeeptrackof

whatentityisinphysicalpossessionofthepromissorynote.Becausethemortgagefollowsthenote,the

MERSsystemdoesnotrevealwhotruecurrentownerofthemortgageis.

42Over250bankshavefailedsince2008.FederalDepositInsuranceCorporation,FailedBanksList,availableat:

http://www.fdic.gov/bank/individual/failed/banklist.html(Sept.17,2010).43

HSBCBankUSA,NAasTrusteeforMonuraAssetAcceptanceCorporation,MortgagePassThroughCertificatesSeries2006

ARIvEslava,HearingTranscriptonOrdertoShowCause,No.12008CA055313,at5(Fl11th

Cir.Ct.,MiamiDadeCounty,May

6,2010).44

DepositionofR.K.Arnold,Hendersonv.MERSCORP,INC.,etal.,CV08900805.00,CircuitCourtforMontgomeryCounty

Alabama,September25,2009,at176(hereinafter:ArnoldDeposition).45

Id.46

DepositionofR.K.Arnold,Hendersonv.MERSCORP,INC.,etal.,CV08900805.00,CircuitCourtforMontgomeryCounty

Alabama,September25,2009,at176(hereinafter:ArnoldDeposition)(onfilewithauthor).47

Id.48

Thedepositiontranscriptonthispointreads:

[NicholasWooten]Q:Sowheneveratransferoccursofanyinterest,beitabeneficialinterestinthe

promissorynoteorbeitservicinginterest,thoseyouexpecttobeenteredontheMERSsystem?

[R.K.Arnold]A:Itsnotsomuchthatweexpectit.Weoperateasystemthatoffersthatcapability.

ArnoldDepositionat178.
http://www.fdic.gov/bank/individual/failed/banklist.htmlhttp://www.fdic.gov/bank/individual/failed/banklist.html


12/18

Inalaudable,butultimatelyanemicefforttorespondtomountingcriticismofthesystemslack

oftransparency,MERSrecentlyannouncedanewfeatureofitsinternetwebpageserviceridentification

systemthatallowsborrowerstoinquireastotheidentityofaloansinvestor.49However,the

companyspressreleaseissomewhatmisleadinginthatforsecuritizedmortgages,MERSappearsto

onlyrevealthenameofthesecuritizationtrustee,ratherthanthetrustthatisthetruebeneficialowner

ofmostsecuritizedloans.PrivatecorrespondencefromMERScommunicationsmanagerexplainsthat

theMERSSystemonlyhasthenameofthetrusteeintheInvestorfieldanddoesnotcapture

informationaboutthetrust.50Learningthenameofaborrowerssecuritizationtrusteedoesnotallow

theborrowertoresearchthepoolingandservicingagreementthatcontrolsaservicersortrustees

authoritytonegotiateloanmodifications.Italsodoesnotidentifythenameofthetrustthatcouldbe

heldliableforpurchasingloansthatviolatetheHomeOwnershipandEquityProtectionActorother

statepredatorylendinglaws.51Evenwhenthenameofasecuritizationtrusteeisprovided,unlikea

searchofthepublicrecordingsystemaMERSsearchresultisnotalegallyauthoritativesearchupon

whichasearcherisentitledtorelyinrulingoutthepossibilityofotherpotentialpurchasersthatcould

achievepriorityinanownershipdisputeunderthestateslandtitlestatute.Ratheritissimplyaqueryto

seewhetheranycompanieshappenedtohaveusedanessentiallyoptionalelectronichandshaketo

enterassignmentinformationonaprivatedatabase.

Furthermore,theMERSserviceridentificationsystemoftendoesnotproduceanyinformation

onbeneficialownershipofloansatall,insteadgivingthemessage: Investor:Thisinvestorhaschosen

nottodisplaytheirinformation.Forassistance,pleasecontacttheservicer.52Notethatthissentenceis

ambiguousastowhetherMERSdoesnotknowwhoownstheloanortheowneroftheloanactually

refusestobeidentified.Theformerisdisturbinginthatitillustratesthatweasasocietynolongerhave

arecordkeepingsystemthatactuallytrackslegallyrecognizedownershipinterestinlandbacktoaroot

oftitle.ThelatterisdisturbingbecauseitrevealshowtheMERSsystemhasabatedanimportantlegal

incentivetoprovidepublicnoticeoflandownershipinterests.

BothupdatingtheMERSdatabaseandpublicallyrecordingamortgageassignmentare

permissivechoicesforfinancialinstitutions.But,akeydifferenceisthatthepublicsystemwasbacked

bystronglegalincentivestoencouragefinancierstoprovidenoticeofassignments. Incontrast,the

MERSsystemdesignedbyandoperatedfortheexclusivebenefitofmortgagefinancecompanies

deliberatelyunderminesandaltogetherlacksthatincentive.Underthestillcurrent(butpresently

circumvented)lawofallfiftystates,theownerofaninterestinlandmayintentionallyconcealherself,

butdoessoattheriskoflosingthatownershipinterest.Inbothnoticeandracenoticejurisdictions,ifa

mortgageassigneefailstorecord,andtheassignoreitherintentionallyorunintentionallyassignsthe

samemortgagetoasecond,subsequentassigneewhodoesrecord,thenfirstassigneewilllose

49PressRelease,MERSExpandsWebsiteToDiscloseLoanInvestorInformation,

http://www.mersinc.org/newsroom/press_details.aspx?id=241(July16,2010).50

ElectronicMailofKarmelLejarde,MERSCORP,Inc.CommunicationsManager,Sept.3,3010,(copyonfilewithauthor).51

SeeChristopherL.Peterson,PredatoryStructuredFinance,28CARDOZOL.REV.2185,23346(2007)(summarizingmortgage

loanassigneeliabilitylaw).52

MERSServicerIdentificationSystemSearchforServicerInformationSearchResults,September6,2010(resultsavailableon

filewithauthor).
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13/18

priority.53WherebothassigneesareusingtheMERSsystem,theonlyofficialrecordednoticewouldbe

theoriginalmortgageinthenameofMERS.TheMERSdatabasemaysimplyhavenoinformationon

whetheranyassignmentshavetakenplaceleavingprospectiveinvestors(andcourtsadjudicatingthe

conflictsthatwilldevelop)tospeculateonwhoactuallyownedrightsintheproperty.Thereiscurrently

nolegalpenaltyforfailingtoupdatetheMERSdatabaseonchangesinloanownershipthatwould

incentivizefinancierstoavoidthissituation.Becausemanymortgagecompaniesintheboomyears

plannedtoselltheirloanstoinvestors,theyfocusedontheshorttermcommissionsandprofitsfrom

originatingloans.They,quitefrankly,didnotbotherwithdocumentationthatwouldpreserveour

nationallegacyofcertaintyinpropertyrights.Asaresult,theMERSdatabasedoesnotprovidereliable,

authoritativeinformationonlegallycognizablebeneficialownershipofloansregisteredinitssystem.

CountyrealpropertyrecordsthatholdonlyareferencetotheMERSsystemnowhaveasystemicbreak

inchainsoftitle.PerhapsthisiswhatMERSmeansbyitscorporateslogan:ProcessLoans,Not

Paperwork.54

Thefullriskofconfusionandlitigationfromthissystemwillnotbeknownforyearstocome.

But,theappellatecourtsthathavebeencriticaloftheMERSsystemforetellfurtherlongterm

uncertaintysurroundingpropertyrightsconnectedtoMERSclaimsofownership.Forexample,

recognizingtheimplicationsoftheirowndecisioninLandmarkNationalBankv.Kesler,theKansas

Supremecourtpointedoutthat[i]nattemptingtocircumventthestatutoryregistrationrequirement

fornotice,MERScreatesasysteminwhichthepublichasnonoticeofwhoholdstheobligationona

mortgage.55TheArkansasSupremecourtwentevenfurtherstatingthat[p]ermitinganagentsuchas

MERSpurportstobetostepinandactwithoutarecordedlenderdirectingitsactionwouldwreak

havoconnoticeinthisstate.56Andyet,thatispreciselywhattheMERSsystemisdesignedtodo.In

theprototypicalMERSasoriginalmortgageetransactionstherearenorecordedlenders.57MERSis

designedtobethecradletogravenoticeproxyforallthehalfdozenorsofinancialinstitutionsand

shellcompaniesthatholdtitletotheloanatdifferenttimesyetremainundocumentedbothinthe

publicrecordandoftenonMERSowndatabase.Wemustrecognizethatourheritageoflegalcertainty

inpropertyrightscreatedbytheinteractionofpublicrecordingsystemsandlandtitlestatutesisan

importantnationaleconomicresourcethathasbeendepletedbytheMERSsystem.

V. MERSwasaContributingFactorintheForeclosureCrisisandhasMadeResolving

ForeclosuresMoreDifficult

53See66Am.Jur.2dRecordsandRecordingLaws162(2010). See,e.g.,SecondNat.BankofNewHavenv.Dyer,184A.386,

38889(Conn.1936)(Thatanassignmentofamortgagefallswithinthepurviewoftherecordingstatutefollowsfromthe

natureofsuchaninstrument....indeedtoholdotherwisewouldmakeaseriousinroaduponthepolicyofthisstatethat

purchasersofinterestsinrealestateareentitledtorelyuponthelandrecordsasdisclosingthetruetitle....).54

SeeWelcometoMERS,www.mersinc.org(lastvisitedSept.17,2010).55

LandmarkNat.Bankv.Kesler,216P.3d158,168(Kan.2009).56

MortgageElec.RegistrationSystem,Inc.v.SouthwestHomesof Arkansas,2009Ark.152,301S.W.3d1(Ark.2009)(emphasis

added).57

SomecountyrecorderstracktheoriginatinglendersnameinadditiontoMERSnamewhenamortgageisfirstrecorded.But,

oncethemortgageisassigned,thenameoftheoriginallenderisnolongerusefulandleadstoadeadendinsearchingfor

actualownershipinterestintheland.
http://www.mersinc.org/http://www.mersinc.org/


14/18

Whilethereisplentyofblametogoaround,theMERSrecordingandforeclosuresystemwasan

additionalcontributingcauseoftheAmericanmortgageforeclosurecrisis.MERSfacilitatespredatory

structuredfinance58bydecreasingtheexitcostsoforiginators. Asinvestmentbanks,hedgefunds,

institutionalinvestors,andthecreditratingagenciesweighedtherisksofdumpingbillionsuponbillions

ofdollarsintomortgagesecuritiesdrawnoutofthebalancesheetsofthinlycapitalized,bankruptcy

pronemortgagelenders,MERSprovidedanimportantadditionalinducement. Inpreviousresearch,I

havearguedthatintherunuptotheforeclosurecrisis,mortgageoriginationcompanieswereusedas

disposableliabilityfilters.59 Whenthinlycapitalizedoriginatorschurnedoutmoreandmoresecuritized

loans,claimsagainstthoselendersaccumulated,whiletheirassetsdidnot.60 Oncetheprojectedcosts

ofdisgruntledinvestorrecoursedemandsandborrowerpredatorylendinglawsuitsexceededthe

projectedcostsofbankruptcyandreformationunderanewcorporateguise,originatormanagement

wouldpredictablydiscardtheircorporateidentity.61MERSmadethiseasierbyofferingasupergeneric

placeholderthattranscendedtheabortedlifeoflenders. MERSreassuredinvestorsthatevenwhenan

originatorgoesbankrupt,countypropertyrecordswouldremainunaffectedandforeclosurecould

proceedapace. Byservingasthetruemortgageesproxyinrecordingandforeclosure,MERSabetteda

flybynight,pumpanddump,noaccountabilitymodelofstructuredmortgagefinance.

Moreover,theuseofMERSscorporateidentityfacilitatesseparationofforeclosureactionsand

litigationofpredatorylendingandservicingclaims. WhenMERS(ormoreaccuratelyservicersor

foreclosurespecialistsactinginMERSsname)bringsforeclosureactions,itjustifiesthisentitlement

basedonaclaimoflegalownershipofmortgageliens. Butwhenborrowersattempttoassert

counterclaimschallengingthelegalityofmortgagebrokers,lenders,trusts,orservicers,MERShides

behinditsclaimofnomineestatus. Oneformermortgagelenderhasestimatedthatinthemid2000s

approximately70%ofbrokeredloanapplicationssubmittedtomortgagelendersinvolvedsomeformof

brokerencouragedfraud.62 Similarly,ProfessorPortersstudyofmortgageloansinChapter13

bankruptcyfoundthatresidentialmortgagecreditorsdidnotsupplyapromissorynotein41.1%ofcases

involvingahomemortgage.63 Becausepromissorynotesarenotsupplied,norwhereMERSisinvolved,

istheactualidentityofthenoteholderrevealed,consumersandtheircounselcanverifyneitherthe

identityofthepartiesinvolved,noreventheamountofthedebtinquestion. Inanordinaryforeclosure,

usingMERSsnameerectsatacticalbarriertojudicialresolutionofthesetypesofproblems. MERS

confusesandpacifiesborrowers(andsometimescourts)atpreciselythecrucialmoment:ontheeveof

foreclosure. Onceafamilyloosestheirhome,theirleverageandappetiteforlitigationdissipate. The

separationofpredatorylendinglitigationfromforeclosurelitigationfacilitatedbybringingforeclosurein

MERSsnamedecreasesthecostsofforeclosureanddullsthedeterrentforceofconsumerprotection

law. MERSrepresentsthemortgagefinanceindustrysbestefforttocreateasingle,national

foreclosureplaintiffthatalwayshasforeclosurestanding,butneverhasforeclosureaccountability.

58ChristopherL.Peterson,PredatoryStructuredFinance,28CARDOZOL.REV.2185(availableat:

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=929118).

59.Id.,at2275.

60.Id.

61.Id.

62.RICHARDBITNER,CONFESSIONSOFASUBPRIMELENDER:ANINSIDERSTALEOFGREED,FRAUD,ANDIGNORANCE45(2008).

63.KatherinePorter,MisbehaviorandMistakeinBankruptcyMortgageClaims,87TEX.L.REV.121,147(2008).
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=929118http://papers.ssrn.com/sol3/papers.cfm?abstract_id=929118


15/18

ObviouslyMERSisnotresponsibleforfailingsinthemonetaryand/orregulatorypolicyofthe

FederalReserveBoard.64 ThePresidentandCongresscouldhaveintervenedinthetroublingtrends

towardunrealisticmortgageloans.65Mortgagebrokersandlenderssystematicallystroveforvolume

andcommissions,ratherthansustainablehomeownership.66 Federalbankingregulatorsobstructed

theeffortsofstatelegislatorsandattorneysgeneraltobringthemarkettoheel.67 Thecreditrating

agenciesrashlygavetheirsealofapprovaltotherisky,complex,packagedandrepackagedmortgage

loansecurities.68WhileMERSmayhavereassuredinvestorsoftheviabilityofchurnedresidential

mortgagebackedsecurities,ithadlittletodowiththeoverleveragingofhedgefunds,bondinsurers,or

thegovernmentsponsoredhousingenterprises.69 RecognizingMERSsroleinfacilitatingtheforeclosure

crisisisnottoignorenorexcusetheseothercausalfactors. Nevertheless,itisamistaketolistthe

contributingfactorsassociatedwiththecrisisandomitMERS.

VI. Solutions

A. CongressShouldBartheFederalHousingEntitiesFromPurchasingLoansRecordedinMERS

Name.

ByallowingFannieMae,FreddieMac,andGinnieMaetopurchaseMERSrecordedloansthe

federalgovernmenthasinadvertentlyunderminedsensiblestatelandtitlelawsandconsumer

protection.Moreover,irrespectiveofonesviewsofthebenefitsordisadvantagesofMERS,thesimple

factisthatthesystemstillfacessignificantcostlylegaluncertainty.GoingforwardCongressshouldbar

theGSEsfromdiggingtheholetheyareindeeper.NowthattherisksoftheMERSsystemareclear,itis

time

to

require

the

GSEs

to

simply

go

back

to

the

traditional

system

that

they

lived

with

since

the

Great

Depression. AbsentCongressionalaction,counselforfinancialinstitutions,federalandstatehousing

agencies,andtitleinsurancecompaniesneedtotakeacandid,reflectivelookattheimplicationsof

mortgagebankerseffortstousurpgovernmentcontrolofrealpropertyrecords.Eventhosewhoprefer

minimalistgovernmentmustrecognizethatinademocraticrepublicdivestmentofthisresponsibility

fromgovernmenttoindustryshouldhaveoccurredwiththeconsentofelectedrepresentativesofthe

people.Inthiscase,theearlyinvolvementofFannieMaeandFreddieMacfederallysponsored

corporationsthatdodeserverespectfortheireffortstofacilitateAmericanhomeownershipdidnot

dispensewiththesovereignrightofstategovernmentstocontroltheirownrealpropertyrecordinglaw.

Lawsforthestatesaremadebythestates,notbyGovernmentSponsoredEnterprises.FannieMaeand

64.PaulKrugman,HowDidEconomistsGetItSoWrong?,N.Y.TIMES,Sept.6,2009,atMM36.

65.JoBeckeretal.,WhiteHousePhilosophyStokedMortgageBonfire,N.Y.TIMES,Dec.21,2008,atA1.

66.BITNER,supranote62,at18182.

67.ChristopherL.Peterson,FederalismandPredatoryLending:UnmaskingtheDeregulatoryAgenda,78TEMPLEL.REV.1,9697

(2005);ChristopherL.Peterson,Preemption,AgencyCostTheory,andPredatoryLendingbyBankingAgents:AreFederal

RegulatorsBitingOffMoreThanTheyCanChew?,56AM.U.L.REV.515,549551(2007).

68.StevenL.Schwarcz,UnderstandingtheSubprimeFinancialCrisis,60S.C.L.REV.549,55052(2009).

69.FrederickTung,TheGreatBailoutof200809,25EMORYBANKR.DEV.J.333,336(2009);BinyaminAppelbaum,etal.,How

WashingtonFailedtoReininFannie,Freddie,WASH.POST.,Sept.14,2008,atA1.


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affordtostayintheirhomestoturntheirpropertiesoverwithoutprotractedcourtbattles.Oneexciting

ideathatmeritsfurtherexplorationwouldinvolvegrantingatemporaryemergencyhomestead

exemptionapplicabletomortgageloansinfavorofowneroccupiedborrowers.

IncenturiespastwhenthetypicalAmericanfamilylivedassubsistencefarmerseachhousehold

maintainedasupplyofseedgrain.Livingfromharvesttoharvest,thefirstportionofeachcropwentto

replenishthesupplyofseedusedtoplantnextseason.Onereasonthefinancecrisishasbeensoterribly

destructiveisthatithaswipedoutthetwentyfirstcenturyequivalentofmiddleclassseedgrainfor

millionsoffamilies.

Today,thetypicalAmericanfamilygetsbylivingfrompaychecktopaycheck.Althoughwedo

notgenerallyuseourhomestogrowfood,theyareneverthelessoneofourmostproductiveresources.

Homesaretheindispensiblebasefromwhichweenterthelaborforce.Itisnearlyimpossibletobe

employedwithoutaplacetostayclean,feedourselves,andrest.Thisisanimportantreasonthatso

manyfamiliesarefightingforeclosurestoothandnailwiththeunintendedconsequencesofdelaying

theresetinhousingprices,castinglegaluncertaintyoverfinancialmarkets,andsuppressingdemandfor

housing.

Familiesfacingforeclosureneedseedgrain:cashtocovermovingexpenses,adepositandfirst

monthsrentonaresidentiallease,orevenadownpaymentonalessexpensivehomepurchasedwitha

newlow,fixedinterestratemortgage.StatelegislaturesorevenCongresscouldhelprestartthe

housingmarketwithasimplelegalchangethatwouldnotcosttaxpayersadime.Thegovernment

shouldpassemergencylegislationprovidingthatthefirst$15,000fromanowneroccupiedresidential

foreclosuresalemustgotothedepartingfamily.Ineffecttheproposalwouldactasafirstpriorityseed

lieninfavorofthefamily.

Whilethisconceptisnew,itisnotunprecedented.Environmentallawcreatessimilarliensto

coverthecostofcleaninguptoxicwaste.Andthehomesteadlawsofmanystatesalreadyexemptsome

ofthevalueofafamilyshomefromunsecuredcreditors,suchascreditcardcompanies.This

emergencyhomesteadexemptionwoulddothesamethingalbeitlikelyexemptinglessvalueinthe

caseofhomemortgagesloans.Plus,thelawwouldonlyexpandandsolidifyexpectationssurrounding

theinformalcashforkeyspolicesthesmartestlendershaveusedforgenerations.Theselenders

providedamodestamountofcashtothefamilyinexchangeforvoluntarilyturningoveraforeclosed

homeingoodcondition.Congreescouldmakethelawtemporarywithasunsetprovision

Theseemergencylawswoulddramaticallyimprovethehousingmarketinseveralways.First,cashfrom

the

proceeds

of

a

foreclosure

could

convince

many

defaulting

borrowers

to

turn

over

their

homes

withoutafight.Manyeconomistsbelievethattheeconomycannotturnarounduntiltheglutof

foreclosuresworktheirwaythroughthesystem.Leavingfifteenthousanddollarsforthefamilyatthe

finishlinewouldputfuelinjectorsonthisprocess.Sincesomanymortgagecompaniescannotseemto

findtherecordsneededtoforeclose,thevalueofcooperationfromborrowersincuttingthroughthe

redtapeshouldnotbeunderestimated.


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Second,anemergencyhomesteadexemptiononmortgageswouldcreateastrongerfinancialincentive

forthemortgageindustrytorefinancedelinquentloans.Iftheservicerknowsthatinvestorswouldbe

facingtheautomaticlossoffifteenthousanddollarsaftertheforeclosure,itmakesevenmoresenseto

covertherelativelymodestpriceofunderwritinganewmortgageupfront.

Whileitistruethatinvestorswillbearthecostofthisseedlien,theymaybefacingtheselosses

anyway.Asitstands,millionsoffamiliesarediggingtheirheelsinforcinglenderstospendthousandsof

dollarsonattorneysfeesanddredginguplostrecords.Wewouldallbebetteroffifthismoneywere

justturnedovertothefamiliesthatneeditinsteadofburnedonlawyersinscorchedearthlegalbattles.

Butperhapsmostimportantly,mandatingthateachowneroccupiedresidentownsatleast

fifteenthousanddollarsofliquidhomeequitywouldgivefamiliestheseedgraintheyneedtomakea

freshstart.Asasocietywesimplycannotallowmorefamiliestofallintohomelessnessanddespair.

Peoplethatinvestedtheirdreamsandlifesavingsinafamilyhomeneedtobeabletotakesomething

awayfromtheashesofforeclosure.

Inconclusion,thankyouforworkonbehalfofAmericancitizensinworkingtoresolvethese

complexandimportantnationalproblems.

Peterson Written Test to House of Rep

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Transcript of Peterson Written Test to House of Rep