Heath's Blog


More Foreclosure stuff. MERS Mystery

(This is a draft of what I have been asked to send to my congressman.)  The Mortgage Electronic Registration System (MERS) was organized in 1993.  MERS was started by member banks and lending institutions to provide an electronic "warehouse" repository for loans.  The goal appears to have been to simplify the transfer of mortgage paper between lending institution of all kinds.  But, there were some unforeseen developments in the mortgage industry that MERS was not prepared for.  These unforeseen developing issues have begun to further complicate the existing problems in the housing markets.

MERS was set up as a sort of warehouse/filing cabinet/registry of deeds for mortgages.  As a loan is issued/closed/funded, the loan papers are given a MERS identification number.  Then the loan is tracked inside the MERS system, and the papers are filed somewhere.  In many cases,  no one seems to know exactly where the papers are filed.   Once inside the MERS system, the transaction details (the terms/benefits/control of the mortgage) are transferred within an electronic database accessible only by MERS members, and they are hidden from public access.

Once a MERS number is assigned, the electronic trail for a particular note is hidden from non-members of MERS and there is no further public recording of information about it.  Transactions subsequent to being placed in the MERS system are not available to non-members, nor are those transactions recorded in title company records, or a registry of deeds, or at the local court house, or any other available recordation facility.  The MERS trail is only tracked electronically within MERS, and access is blocked to all non-members.

If all notes inside the MERS system were paid on time and paid in full, there would not be any problems.  But, as in the current market, when many notes are delinquent, consistent irregularities are easier to see.  As more and more MERS notes become delinquent and the probability of foreclosure becomes greater, issues arise as to the correct recording of ownership (who has the valid right to foreclose) for any note on a property secured by an electronic MERS number.
When most loans were being paid on time and/or being paid off, MERS operated in the background.  Typically, borrowers send their payments to a third party servicer who is a member of MERS - sort of a property manager for mortgages/the bill collector for the entity entitled to the funds paid.  The third party servicer then sends the payments, less a managing fee, to the entity that the MERS system indicates should get the payments.  Borrowers, not knowing they send their payments to a third party, trust that their payments go to the correct place. They trust that their loan is being paid correctly because most borrowers think that the servicer they send the payment to is the actual owner of their note.  In many conversations, even the telephone representative at the loan servicers think the servicer is the true owner.  So unless a borrower is able to speak to a supervisor or a knowledgeable person above the level of the telephone agent, they are usually told that the third party servicer is the owner of the mortgage.  The owner is actually not MERS, but it is another entity that is not publicly identified.

As more MERS controlled foreclosures occur, some judges are asking for proof that the entity wanting to foreclose is actually entitled to do so.  But, the courts cannot tell what entity actually has the right to foreclose, because the only record of ownership is within MERS.  There is no public record of the owner of the note. 

When asked to provide the authority to foreclose in writing, foreclosing attorneys are filing a "lost note affidavit" saying they can't find the actual paperwork.  Many courts across the country are disallowing a lost note affidavit, because that means anyone could present a case to foreclose and just say, "Oops, I lost the paperwork; here's an affidavit; let's get on with the foreclosure, Your Honor."  Many courts are of the opinion  if the loan writing and servicing process that got us into this mess wasn't bad enough, the lost note affidavit excuse has opened the gate for unethical behavior within the same industry by allowing some of the same people to take advantage of borrowers with just a lost note affidavit!  Fortunately, many judges are hesitant and are resisting the use of lost note affidavits.

In addition to the lost note affidavit problem, if a borrower attempts to contact the note owner of a MERS cataloged loan to request a workout, they are firewalled and doomed to deal only with the third party servicer.  This contact is usually the first time a borrower learns what the extent of servicer's involvement and the cloud that MERS creates around their note. The servicer will often state that they have the authority to negotiate on behalf of the investor entity without providing any proof that they do, and the borrower is not permitted to speak to the work out department of the investor, or in some cases, not allowed to know the name of the investor/owner of their note.

The borrower is then a victim of further isolation from the mortgage owner to which he is entitled access and with whom an arrangement might be made. If servicers had flexible options that could be applied, an arrangement might be made through the servicer, but usually they have only a limited options which cause them to be inflexible. 

The servicer also has no incentive to identify the lender because it is to the servicer's advantage to continue servicing the loan upon which their fees are based.  Borrowers, unable to work out their payments with the limited options of the third party servicer, and with no opportunity to speak to the actual owner of the note, undoubtedly give up in frustration and allow a foreclosure to proceed - a foreclosure which might have been avoided.

If foreclosures had not become so widespread, borrowers and the courts would be none the wiser to this multiple firewalling. These problems have risen and become more critical because entities trying to foreclose may not be able to prove they are the entity with the legal right to do so.  (MERS has indicated that it doesn't have right to the note only the mortgage.  But this does not appear to be appropriate or enforceable.) Further, if the MERS system now tries to go and "back date" documents to be placed in the public record, who is to say that the back-dated documents are correct or not correct? What is the purpose of public recordings if not to record accurate and current ownership, indebtedness and other transaction information for public access?  MERS can create ownership for whomever it chooses. 

So, the investors/lenders/banks/entities that MERS was intending to help, may be in for some longer, larger and more costly problems than they ever thought possible.  The very heart of property rights, access to public information, and fair and equitable justice may be at stake here.  Further, at the extreme, MERS may offer an opportunity for hiding assets, laundering money and assets as it already circumvents public records of the transfer of assets.   The opportunity for abuse exists in MERS and it is occuring. If left unexposed and uncorrected, it may change property rights and real estate ownership negatively.  It seems entirely appropriate that the Justice Department and the Attorneys General of all the states take an interest in the mystery of the MERS system.

Other reading: See UNIFORM COMMERCIAL CODE - ARTICLE 3  NEGOTIABLE INSTRUMENTS  and ask can a note and a mortgage be separated?

Heath Coker, Associate Broker
Robert Paul Properties
www.CapeGroup.com / capegroup@capegroup.com
508-274-5613  Licensed in MA
Its a beautiful day on Cape Cod!
@CapeGroup  Skype: heath.coker

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