MERS; What Is It and Why Do We Care?

This post somehow seems too elementary, but I need to start somewhere.  If this is exceedingly basic, please bear with me because I hope to build from here.

Back in the days before computers, when a bank lent money a mortgage would be recorded at the local county recorders office.  The lending institution usually kept the loan in their own portfolio.  Then, if the mortgage holder wanted to sell, or transfer the rights to the mortgage, they would record a transfer, also at the recorders office.

But somewhere along the line mortgage lending became so big that the local banks simply did not have the necessary assets to cover many loans.  FNMA, FHLMC and others grew out of this vacuum.  Then the banks would package (or bundle) a group of loans which would then be sold to FNMA, etc.

Then, along came securitization.  Wall Street got involved in the process.  Lenders would package and sell the loans.  FNMA was the usuall, but not the only buyer. It became even more complicated with securitization.  Investors would buy only portions of any given mortgage. They might buy only the payment stream.  They might buy only the principal. Do you remember zero coupon bonds.  Or, they might buy a portion of the payments. This is essentially what we called “derivatives”.

Now, as you might imagine, this created a huge problem in keeping track of who owned what, and where all the assets and liabilities were, and could be found.  Out of this, MERS (Mortgage Electronic Registration System, Inc.) was created by a consortium of many of the major lenders.  Reportedly MERS has saved the lenders in excess of $1 Billion Dollars in smoothing out their record keeping.  MERS also assumed the function of owner in foreclosure proceedings, thus relieving the lenders of the necessity and burden of handling the foreclosure.

The borrowers did not have access to any of this information.  They frequently could not learn who owned the note nor could they learn what was owed in the case of the homeowner desiring to pay off the loan, or bring current.  And every transfer of assets, no matter which form it may take, became merely a bookkeeping entry in the MERS system.  It was good for the lenders.  But the borrower was still kept in the dark.

Now, here comes the rub.  MERS only made the bookkeeping entries within it’s own system and neglected to make a corresponding entry in the public record.  Along came the current economic decline.  One after another foreclosures have appeared on the scene.  MERS is behaving as though it is the injured party in all of these transactions and the courts have been ruling left and right that since MERS has no interest in the title to the property nor the debt, they consequently have no standing in the case.  The cases have been dismissed and MERS has had their hands slapped in state after state.  The courts have also ruled that the recording of the necessary documents cannot be allowed after-the-fact.  The fact in this case means when foreclosure porceedings begins.

Because of these obstacles, MERS and the banking industry has adjusted their tactics.  MERS is now named on trust deeds as the beneficiary of the note.  Taken from the MERS website.

In mortgage foreclosure cases, the plaintiff has standing as the holder of the note and the mortgage. When MERS forecloses, MERS is the mortgagee and it is the holder of the note because a MERS officer will be in possession of the original note endorsed in blank, which makes MERS a holder of the bearer paper. MERS will not foreclose unless the note is endorsed in blank and held by MERS.

It appears that judges are not always in agreement with MERS because I have noted numerous cases where they have ruled against MERS and in favor of the homeowner.

More on this later.