Tuesday, October 26, 2010

MERS eat notes

Mairzy doats and dozy doats and liddle lamzy divey
A kiddley divey too, wooden chew?

If the words sound queer and funny to your ear, a little bit jumbled and jivey
Sing "Mares eat oats and does eat oats and little lambs eat ivy"

Mairzy Doats


There's a guest/ghost author on Barry Ritholtz' blog today, who knows his oats from his ivy league.

What Is MERS and What Role Does It Have in the Foreclosure Mess? (Hint: It Holds 60% of All Mortgages, But Has ZERO Employees)
You’ve heard the name Mortgage Electronic Registration Systems or “MERS” mentioned in relation to the foreclosure problems in the residential real estate market.

But what is MERS?

It is the company created and owned by all of the big banks to process title to property in the U.S. Approximately 60% of the nation’s residential mortgages are recorded in the name of MERS.

MERS, the banks and the mainstream financial press all say that it was simply to save fees by digitizing mortgage electronic.

But as Ellen Brown notes, there is in reality a very different reason that the big banks created MERS:
The rating agencies required that the conduit be “bankruptcy remote,” which meant it could hold title to nothing ….

Indeed, the secretary and treasurer of MERS admitted this in a deposition

MERS is a shell corporation with no employees, but thousands of officers.

Astonishingly, MERS “vice presidents” are simply paralegals, customer service representatives, and foreclosure attorneys employed by other companies. MERS even sells its corporate seal to non-employees on its internet web page for $25.00 each. Ironically, MERS, Inc.—a company that pretends to own 60% of the nation’s residential mortgages—does not have any of its own employees but still purports to have “thousands” of assistant secretaries and vice presidents.

As the treasurer and secretary of MERS admitted in a deposition:

Q Does MERS have any salaried employees?
A No.
Q Does MERS have any employees?
A Did they ever have any? I couldn’t hear you.
Q Does MERS have any employees currently?
A No.
Q In the last five years has MERS had any
employees?
A No.
Q To whom do the officers of MERS report?
A The Board of Directors.
How many assistant secretaries have you
appointed pursuant to the April 9, 1998 resolution; how
many assistant secretaries of MERS have you appointed?
A I don’t know that number.
Q Approximately?
A I wouldn’t even begin to be able to tell you
right now.
Q Is it in the thousands?
A Yes.
Q Have you been doing this all around the
country in every state in the country?
A Yes.
Q And all these officers I understand are unpaid
officers of MERS?
A Yes.

In another deposition, a legal assistant at a law firm initiating 4000 to 7000 foreclosures per month in Florida held herself out as “vice president” and “assistant secretary” of MERS. She testified:
Q: The question was you have no job duties as an assistant secretary of MERS, correct?
A: I do not have any job duties other than signing the assignments and mortgage. Does that help?
Q: Yes. Here, I’ll try to rephrase this. Do you attend any board meetings at MERS?
A: No, sir.
Q: Do you attend any meetings at all at MERS?
A: No, sir.
Q: Do you report to the secretary of MERS?
A: No, sir.
Q: Who is the secretary of MERS?
A: I have no idea.

***

Q: Where are the MERS offices located?
A: I can’t remember.
Q: How many offices do they have?
A: I have no idea.
Q: Do you know where their headquarters are?
A: Nope.
Q: Have you ever been there?
A: No.
Q: How many employees do they have?
A: I have no idea.

The “vice president” and “assistant secretary” MERS signing sworn statements under penalty perjury was simply making it up and doing what she was told.

And as a a forthcoming article in the Real Property, Trust and Estate Law Journal notes, saving fees was another motivation for the giant banks in running mortgages through MERS, but in a way which is shadier than routine cost-cutting efforts.
In the mid-1990s mortgage bankers decided they did not want to pay recording fees for assigning mortgages anymore. This decision was driven by securitization—a process of pooling many mortgages into a trust and selling income from the trust to investors on Wall Street. Securitization, also sometimes called structured finance, usually required several successive mortgage assignments to different companies. 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.

Even though not a single state legislature or appellate court had authorized this change in the real property recording, investors interested in subprime and exotic mortgage backed securities were still willing to buy mortgages recorded through this new proxy system.

Worse, MERS may have literally “split the baby” and rendered millions of mortgages unsecured:
Typically, the same person holds both the note and the deed of trust. In the event that the note and the deed of trust are split, the note, as a practical matter becomes unsecured. Restatement (Third) of Property (Mortgages) § 5.4. Comment. The practical effect of splitting the deed of trust from the promissory note is to make it impossible for the holder of the note to foreclose, unless the holder of the deed of trust is the agent of the holder of the note. Id. Without the agency relationship, the person holding only the note lacks the power to foreclose in the event of default. The person holding only the deed of trust will never experience default because only the holder of the note is entitled to payment of the underlying obligation. Id. The mortgage loan became ineffectual when the note holder did not also hold the deed of trust.

The mortgage industry has premised its proxy recording strategy on this separation despite the U.S. Supreme Court’s holding that “the note and the mortgage are inseparable.” If today’s courts take the Carpenter decision at its word, then what do we make of a document purporting to create a mortgage entirely independent of an obligation to pay? If the Supreme court is right that a “mortgage can have no separate existence” from a promissory note, then a security agreement that purports to grant a mortgage independent of the promissory note attempts to convey something that cannot exist.

While this argument will surely strike a discordant note with the mortgage bankers that invested billions of dollars in loans originated with this simple flaw, the position is consistent with a long and hitherto uncontroversial line of cases. Many courts have held that a document attempting to convey an interest in realty fails to convey that interest when an eligible grantee is not named. Courts all around the country have long held: “there must be, in every grant, a grantor, a grantee and a thing granted, and a deed wanting in either essential is absolutely void.”

The article itself is full of citations and quotes from various sources, and Guambat has made a hash of identifying what is from where. Much like MERS itself.

You will have to read the article directly to be better educated that this hack cut and paste job has done. You won't regret it.

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