Saturday, November 19, 2011

MERS, The Train Wreck

From naked capitalism this discussion of the dreadful illegalities perpetrated by the bankers' automated title transfer system called the Mortgage Electronic Registration System. MERS was created to avoid lengthy delays in mortgage transfers traditionally, and legally, registered in county assessors offices. Unfortunately MERS was illegal and failed to register transfers or pay taxes on them. The mess keeps getting worse.

We’ve tended to think the securitization industry is in for a world of hurt even before you get to the legal and practical mess created by MERS. A national registry done correctly could have been a very useful, but “correct” was apparently too hard (as in costly) to be seen as attractive to the mortgage industrial complex. And the stripped down version is proving to be a disaster.

I’ve read a number of legal analyses of MERS, and this is one of the tidiest I’ve seen of what is so wrong headed about it. I try to avoid long extracts with limited commentary of my own, but I think you’ll see why I’m treating this selection as worthy of your consideration. The full paper, “The MERS Mortgage in Massachusetts” was sent by the author Robert Ludden to 4ClosureFraud, and you can download it there.

A “continuity” made of smoke and mirrors. In the MERS model, the mortgage doesn’t pass by assignment from one owner to the next by formal assignment; in fact, it really doesn’t pass at all, at least not in any ordinary sense that would involve time and a sequence of events. Rather, in the Mersian world there is a kind of simultaneity of time and event in which all ownerships of the mortgage exist ab initio by virtue of the MERS membership agreement and do not have to be independently established. It is very much a framework of interrelationships in the form of a venn diagram. Let’s say that a particular mortgage changes hands three times before it is foreclosed— which would mean a total of four owners. And let’s use a circle to represent each of the four owners. In the MERS model, these four circles are arranged symmetrically so that each one overlaps the other three in equal measure to form a common area at the center. That common area is MERS acting, as Arnold has said, as a “common agent” with respect to that mortgage. Because each owner is already tied conceptually to the mortgage, there is no need for an assignment and MERS, in its capacity as agent, may therefore simply remain the mortgagee of record at the local land office. Indeed, the MERS model is in many ways quite elegant. But the complex and recondite nature of the thing has served well to obscure its falsity under well-settled principles of agency and contract law.

There is a point about which we must be very clear from the outset, and it is one that has been overlooked in a number of foreclosure cases: what is “common” to MERS members is the use of MERS as their agent—not the ownership of the mortgage itself. Membership in MERS cannot and does not establish a joint ownership of the mortgage. Given the functional identity between principal and agent and the fact that MERS is acting in a representative capacity, ownership of the mortgage must still pass from Lender A to Owner B regardless of whether or not they happen to be using the same agent. The same principle would apply to any subsequent transfer, as, say, from Owner B to Owner C, all the way down to the foreclosing entity. There is no legal authority in Massachusetts that stands for the proposition that the mere use of a common agent serves to transfer ownership of the mortgage with regard to which the agency has been established.

Putting absurdity aside, let us nonetheless assume for argument’s sake that the opposite is true. There is yet a further problem: the MERS model, like our venn diagram, is spatial, but the twin realities of ownership and representation are both spatial and temporal; thus the MERS model is unavoidably static, while the transactional reality it seeks to control is dynamic.

Stated less abstractly, before MERS can represent Lender A with regard to the mortgage, Lender A must in fact own the mortgage. The point is elementary and applies in equal measure to all subsequent owners: the ownership of the mortgage by the principal must precede, in time, any authority the agent may have to act with regard to that mortgage. This follows from the well-settled principle that an agent cannot do what the principal herself cannot not do.33 However, the MERS model turns the reality on its head by asserting that ownership of the mortgage passes without the need for an assignment precisely because the agency relationship was established first in time via the MERS membership agreement.

A somewhat overlapping problem is this: In the MERS model, there is again no need for a written assignment anytime the mortgage changes hands—unless the mortgage is going to be foreclosed by someone other than Lender A or removed from the MERS system. An unavoidable side-effect of this is that Lender A remains the mortgagee of record at the local land office, albeit with MERS acting on its behalf. In other words, the clear implication is that Lender A’s status as mortgagee at the local land office somehow survives the multiple transfers of the note that take place along the road to securitization. But MERS cannot have it both ways: the MERS model is designed in its own way to tie ownership of the mortgage to ownership of the note—which means that once Lender A has sold the note it has no further interest in the mortgage and its continuing status as mortgagee in the land office records34 is at best a negligent misrepresentation and at worst an act of fraud. It is also in any event a breach of the complete transparency required under G.L. c. 244, § 14.35 This “personality disorder” has a further consequence as well.

Because Lender A remains the mortgagee of record, any subsequent assignment of the mortgage must name Lender A as the grantor in order not to memorialize a discontinuity in the chain of ownership and thus cast a cloud on the title; if Lender A (with MERS as it agent) is the mortgagee of record there cannot be an assignment from the true present owner of the mortgage, say, Owner C. And here we meet the same conundrum: if we accept the validity of the “common agent” device by which MERS avoids the need for assignments, Lender A no longer owns the mortgage and has nothing left to assign; thus an assignment directly from Lender A is also at best a negligent misrepresentation and at worse an act of fraud. Its failure to name the true grantor would be contrary to existing law.36 If the assignee happened to be a part of the mischief, it would further diminish her authority to foreclose the mortgage.37 Again, the assignment would violate the statutory requirement of transparency. It is upon this bedrock of sober fact that the mortgage industry and registry officials must weigh the integrity—and indeed the legality—of every recorded assignment directly from MERS as nominee for the originating lender to the foreclosing entity in a case where there have been interim owners.

There is yet another wrench in spokes of the MERS model. Even if the “common agency” mechanism could somehow allow Lender A’s role as mortgagee to survive multiple transfers of the note on the secondary market, and if, as Arnold has said, the mortgage follows the note, the agency relationship vis-à-vis the mortgage ends when the note is transferred; like Lender A’s status as mortgagee, it cannot survive the transfer. This owes itself to a few basic principles of agency law. Without an interest to assign, the agency relationship between MERS and Lender A that was established in order to act with regard to that mortgage interest necessarily ends; Lender A’s circle is in effect removed from the Venn diagram previously mentioned.

What has happened is that the purpose for which the agency relationship was created no longer exists with regard to that particular mortgage; there has been “an occurrence” the effect of which is to terminate the agent’s authority.38 Once the originating lender, Lender A, has divested herself of her interest in the mortgage, she can no longer be the mortgagee and therefore MERS can no longer act as mortgagee on her behalf vis-à-vis that mortgage. Notice of the termination need not be expressly given to MERS;39 rather its actual authority “may terminate upon the occurrence of circumstances under which the agent should reasonably conclude the principal would no longer assent to the agent’s taking action on the principal’s behalf. If the principal has engaged the agent for a particular task, its completion is such a circumstance.”40 Surely, MERS, with its sophisticated tracking system, is presumptively aware of any termination…

The persistence of MERS as Lender A’s agent in the public record in effect accomplished with smoke and mirrors—and it conjures a host of evils. Yes, every MERS member establishes its own agency relationship with MERS. But immediately upon transfer of the mortgage from Lender A the agency relationship between MERS Lender A ends. The agency between MERS and Owner B is in fact a new and distinct agency relationship—and, given the functional identity between principal and agent, a new and distinct “MERS” as well. Again, in the absence of a valid assignment, the status of MERS as the mortgagee in the public records becomes a misrepresentation of material fact at the very instant the mortgage is assigned by Lender A, and from that point on the mortgage industry is, in effect, using a ghost to do its bidding—and one of dubious character at that. Only the name “MERS” remains; the “continuity” is a chimera, an illusion, the purpose of which is to make an end run around the need for a formal assignment. It has also served as a red herring, distracting courts from the sober fact that the role of MERS as a “common agent,” for all of its theoretical elegance and self-proclaimed validity, simply cannot in its present form be fit into the framework of existing law without inflicting collateral damage upon the very principles of fairness and transparency on which that framework has been built over many years and through many efforts and sacrifices. What this all boils down to it this: in order for MERS to remain the mortgagee of record at the local land office without fraudulently misrepresenting itself as such three things must occur.

First, since an assignment of mortgage is a conveyance of an interest in land that requires a writing signed by the grantor,41 there must in fact be an assignment of the mortgage from Lender A to Owner B. If the public record indicates that the mortgage is being held by MERS on behalf of Lender A, the assignment must be from MERS on behalf of Lender A. Second, the assignment must make clear that the mortgage will be held by MERS in its capacity as agent for Owner B; that is, it must say something to the effect that “MERS, solely as nominee for Lender A, hereby transfers its interest in the mortgage to MERS, solely as nominee for Owner B.” This distinction is not an easy one to draw, but it is essential to knowing the substance of the transaction. And third, to avoid discontinuity in the land office records and allow for proof of ownership in the event of foreclosure, the assignment must be recorded. The same would apply to a subsequent transfer from Owner B, and so forth all along the chain of ownership.

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