Homeownership is fraught with many problems, especially during a recessionary period. A major problem can arise when the property is still encumbered with a fixed-rate mortgage (FRM), an adjustable-rate mortgage (ARM), or any other mortgage variation under FRM or ARM, including balloon mortgages and mortgage loans guaranteed by, for example, the Federal Housing Administration.
What is not public knowledge is that a title or a deed to a property, which should de facto decree full ownership, may not in fact do so, thus requiring costly litigation.
A title to a house should be fraught with the least problems, because one hires a local title company—which is generally a requirement when applying for a loan—and the title company provides a clear title. Then, one also procures title insurance that protects against challenges against one’s ownership.
For proof of ownership, counties throughout the United States, for a reasonable fee, record all those involved when properties change hands, including lenders.
“County real property records are the oldest and hitherto most stable metric tracking the ‘American dream’ of family homeownership,” testified Christopher L. Peterson, professor at the University of Utah, before the U.S. House of Representatives Committee of the Judiciary.
Circumventing Time-Honored Property Recording
“To avoid paying county recording fees, mortgage bankers formed a plan to create one shell company that would pretend to own all the mortgages in the country—that way, the mortgage bankers would never have to record assignments, since the same company would always ‘own’ all the mortgages,” testified Peterson.
Mortgage lenders formed the Mortgage Electronic Registration Systems Inc. (MERS), maintained by MERSCORP Inc. MERS is a computerized system established to hold and track mortgages. It holds around 60 percent of home mortgages in the United States.
The majority of firms in the mortgage industry are members of and investors in MERS. The fee paid to MERS is a smidgen compared to what they would have to pay in property fees. Therefore, MERS allows bankers to bypass county government fees and reduces administrative burden of collecting monthly loan payments.
Peterson testified that lenders are not required to provide information about ownership or transfer of mortgage packages to MERS, as “they believe there are no legal penalties for neglecting to make this information available.”
As a result, records of landownership are diluted, and one may or may not own the property clear of any encumbrance.
“For the first time in the nation’s history, there is no longer an authoritative, public record of who owns land in each county,” testified Peterson.
Next ... conundrum for courts
Legal Quagmire
“MERS’ rights vis-à-vis mortgages registered on the MERSCORP database have created a conundrum for courts, borrowers, and foreclosure attorneys,” said Peterson.
The legal challenge is that MERS is the nominee or agent on behalf of the lender and is assigned as the mortgagee of record, according to boilerplate language in the loan agreement signed by the borrower of the loan.
By having MERS assume the role of the mortgagee of record, lenders eliminated the need to register each mortgage transfer to a new holder, thus saving thousands of dollars in government registration fees.
Existing legal rulings are silent on a company being both the agent and, at the same time, the holder of a title on behalf of all owners.
The state land title laws, which are generally written in clear language, came into being long before MERS was formed. Thus, the legislative branch could not foresee that U.S. mortgage lenders would set up a shell company that would be the mortgagee of record.
“If the mortgage and the note are ‘inseparable,’ MERS cannot be the mortgagee unless it is also the original payee on the note,” said Peterson in his testimony.
In reality, MERS does not have the resources to administer all mortgages under its umbrella. However, it provides its name to individuals already employed by lenders, foreclosure law firms, and so on, and certifies them as officers of MERS. In their capacity as de facto employees of MERS—needless to say, they are not paid by MERS—they can sign MERS documents as vice presidents, secretaries, or in any other role.
“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,” stated Peterson.
Court Rulings Setting Precedence
“Counsel for MERS will no doubt continue to point to the occasional case from our history where one court or another has allowed some form of recording with some unusual agency relationship involved. They will say that these occasional cases prove their concept is ‘legal,’” said Peterson in his testimony.
In Harris v. America’s Wholesale Lender, Judge John C. Foster at the Macomb County Circuit Court ruled in mid-August that MERS was the mortgagee of record and had all legal rights associated with such arrangement.
“The ruling also upholds MERS’ business model, confirming that when a borrower signs the mortgage naming MERS as mortgagee, the borrower legally gives MERS the right to assign the mortgage or to act on behalf of the owner of the loan,” said Janis L. Smith, vice president at MERSCORP Inc., in the Aug. 15 press release.
In the Aug. 11 press release, MERS pointed to other recent litigation—Larota-Florez v. Goldman Sach Mortgage (ruling on July 28), Pazmino v. La Salle Bank (ruling on July 29), and Tapia v. U.S. Bank (ruling on Aug. 1)—in which its business model was confirmed by the U.S. Fourth Circuit Court of Appeals.
MERS is being investigated by Martha Coakley, attorney general of the Commonwealth of Massachusetts, for illegal activities regarding foreclosure activities and the filing of deceptive and fabricated documents.
In its response, MERS has pointed to the legality of its business model being upheld by several Massachusetts courts, including in the June 29 In re Marron ruling by Judge Melvin Hoffman of the Massachusetts U.S. Bankruptcy Court and the March 11 Kiah v. Aurora Loan Services and MERS ruling by Judge Denis Saylor of the U.S. District Court of Massachusetts.
“Is there really a case that proves that their concept is legal? No. The concept was totally new in the history of the country, so there will be no facts that could have given rise to binding case law,” said Peterson in his testimony.
On the other hand, there are cases, including U.S. Bank National Association v. Ibanez and In re Agard, in which the courts told the banks that they didn’t have a right to foreclose, as they did not hold the deed nor was the property any longer collateral for the loan.
A 2011 Harbinger Analytics Group white paper quoted the judge in the In re Agard lawsuit as saying, “This court does not accept the argument that because MERS may be involved with 50 percent 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.”
MERS a Menace to Title Holders
“The MERS system has created an environment in which tens of thousands of titles have been lost or diluted in a sea of other MERS transactions and may take a hundred years to fix, while forcing innocent homeowners to litigate in order to reclaim their property rights,” states the Harbinger white paper.
MERS has single-handedly destroyed the hundreds-of-years-old U.S. recorded property rights system. Therefore, it will be very difficult to resolve property boundary issues and thus hold a free and unencumbered title to a home.
Besides being the mortgagee, MERS also relies on its internal system to transfer titles, without legally recording it in the public domain.
The MERS system does not keep track of senior or junior property rights, nor does it record any problems or property right disputes.
The problem of property rights is not limited only to those who had their mortgages assigned to MERS, but also to those who had not been bumped into the MERS system and those who already paid off their loans.
“If the chain of title is lost for a given property, any property that shares a common property boundary line may have lost its superior rights, and that owner will be required to litigate if the property’s boundary is questioned,” notes the Harbinger white paper.
In short, if a property has no clear title, it cannot be sold, as the buyer is unable to buy title insurance and without a clear title, the buyer will be denied financing.
While MERS saved mortgage lenders time in reducing administrative functions and the cost of having the deed recorded legitimately at a county recorder’s office, it deprived the counties of fees, which in the past had paid for operations.
When it comes to foreclosed properties under the MERS system, the lender may never be able to sell the property in case of a land boundary dispute because it does not hold a clear title or deed to the property.
“MERS was set up without considering how it would destroy or seriously dilute accurate and recorded chain of title records in the event of mass foreclosures, thereby taking away property rights, legal theories, and defenses available to all property owning Americans—including Americans who never went into foreclosure,” states the Harbinger white paper.
