I’m just catching up on a swarm of recent cases filed against Mortgage Electronic Registration Systems, Inc. (MERS), the privately owned mortgage registry that has, for some time now, been used by the mortgage industry in lieu of municipal recording systems (which were generally voluntary anyway). Gretchen Morgenson described the rationale for MERS in 2009:
For centuries, when a property changed hands, the transaction was submitted to county clerks who recorded it and filed it away. These records ensured that the history of a property’s ownership was complete and that the priority of multiple liens placed on the property — a mortgage and a home equity loan, for example — was accurate.
During the mortgage lending spree, however, home loans changed hands constantly. Those that ended up packaged inside of mortgage pools, for instance, were often involved in a dizzying series of transactions.
To avoid the costs and complexity of tracking all these exchanges, Fannie Mae, Freddie Mac and the mortgage industry set up MERS to record loan assignments electronically. This company didn’t own the mortgages it registered, but it was listed in public records either as a nominee for the actual owner of the note or as the original mortgage holder.
MERS has been accused, as Mortgenson noted, of keeping sloppy records about mortgage assignments, especially in cases when it tried to assert the rights of a foreclosing mortgagee without a record of an assignment of those rights.
Apparently, there has been a number of recent legal actions against the company, and these lawsuits fall into two categories. First, cities and counties are suing MERS alleging it was unjustly enriched because, by skipping public registration, it did not pay local recording fees. MERS has successfully defended itself against these challenges in at least five state so far, and Illinois may be next. The other lawsuits have been filed by foreclosed homeowners, alleging fraud and title claims, and MERS has been winning those cases as well.
A few years ago, in 2011, things did not look quite so rosy for MERS. At that time, Morgenson and Michael Powell wrote in the New York Times that MERS had been losing its court battles:
The Arkansas Supreme Court ruled last year that MERS could no longer file foreclosure proceedings there, because it does not actually make or service any loans. Last month in Utah, a local judge made the no-less-striking decision to let a homeowner rip up his mortgage and walk away debt-free. MERS had claimed ownership of the mortgage, but the judge did not recognize its legal standing.
And, on Long Island, a federal bankruptcy judge ruled in February that MERS could no longer act as an “agent” for the owners of mortgage notes. He acknowledged that his decision could erode the foundation of the mortgage business.
I plan to cover these cases more in depth later, but as a final note, I’d like to remind readers that MERS is not only in the mortgage registration game; it also has a system for registering vacant properties. I’ve warned before on this blog that municipalities might want to be cautious about partnering with an entity so closely linked to the mortgage industry, particularly when the municipality is seeking to hold mortgage companies responsible for maintaining vacant properties. I also made this warning in an article published in the Real Estate Law Journal, which retraces the history of MERS involvement with vacant property registration. I conclude with that discussion:
The mortgage services industry argues against VPR ordinances that require a higher maintenance burden than industry standards, arguing that such provisions are too expensive. In the spring of 2008, Chicago attempted to enact an ordinance, prohibiting plywood on doors and windows and requiring overnight lighting and security, that the mortgage industry felt was burdensome. The Chicago ordinance propelled Safeguard Properties and the Mortgage Bankers Association (MBA) into a more unified position of organized advocacy on behalf of the mortgage industry against VPR regulations. These two groups have formed the Vacant Property Registration Committee to lobby local governments to enact more lender-friendly ordinances.
One of the industry’s primary objections is that local registration is “cost prohibitive.” Local counties charge an estimated $10 to 20 to record the registration documents. Another objection to local registration is that diversity in registration procedures between local governments causes an unnecessarily high administrative burden for national lenders. Electronic registration could lower the cost of registration and produce more standardized registration, but local governments may be unable to create an efficient electronic registration system from scratch.
The mortgage industry, pushing these objections, has been successful in lobbying local governments to make MERS registration an alternative to local registration. Due to the rise in local VPR ordinances, MBA has worked with MERS to allow for storage of “property-preservation contact information.” As part of the “MERS Initiative” promoted at the U.S. Conference of Mayors in both 2008 and 2009, MERS grants local government access to its database of contact information in order to track parties responsible for vacant properties, if the party chose to register with MERS instead of the local government.
Starting in five pilot cities in fall 2008, including Chula Vista, the MERS Initiative officially launched nationwide in spring 2009. Local governments agree to allow MERS registration because it is convenient for them to access an existing electronic database, especially one that allows access to information about lenders registered with the system, often the responsible party for vacant properties. Additionally, MERS access is offered for free to local government entities after they fill out an application to subscribe to MERS. Typically, MERS charges a fee to private lenders and servicers, based on the size of the organization, to become a MERS member with full access to MERS’s system. As of October 2009, according to Safeguard Properties database, over 16% of the cities enacting VPR ordinances, approximately forty-one cities, allow compliance with their VPR ordinance by registration with MERS. A manager at MERS estimates that close to 250 cities have access to the database.
The new MERS enhancements require a servicer to provide contact information for a list of Property Preservation Companies (PPCs) that it plans to use to maintain the property. Local governments can find the contact information for the servicer and PPCs simply by searching the MERS database for the property address. They can also search using a mortgage identification number (MIN), the borrower’s name, or the borrower’s social security number. Yet lenders must voluntarily record PPCs and the local government must take initiative to contact the PPC and require their compliance with VPR maintenance standards.
MERS may be too closely associated with the mortgage industry. Some charge MERS has shown itself to be beneficial to the mortgage industry to the detriment of the American consumer. One commentator even called it a “corporate cloak” for the mortgage industry, because of the way the system often conceals the actual owner of mortgages. MERS has caused much of the confusion surrounding who owns mortgages in the first place. MERS permitted an entity to record a mortgage with MERS even if it did not own the mortgage, as long as it was a nominee of the actual owner. The actual note would trade hands, without the seller recording the deal with MERS. These developments alone should give rise to hesitation of the part of code enforcement officers considering the enactment of MERS alternative VPR ordinances.
As an even more troubling development, MERS executives sometimes actively engage in concealing the actual responsible party for mortgages. MERS acted as nominee for many lenders, becoming the mortgagee of record for many loans. As a result, MERS has begun to attempt foreclosures in its own name, though it does not hold the promissory note to the mortgage. This allows the lender to shield itself from the foreclosure process while still holding the note. While owners facing foreclosure have had some success in challenging this practice in states with judicial foreclosure processes, in states with non-judicial foreclosure, MERS can act as a buffer between the lender and the foreclosure process. Even judges have commented on how MERS allowed the industry to act sloppily with paperwork. In one often-cited New York case, an executive claimed in a loan assignment that she was Vice President of MERS, but later claimed to be an officer of Deutsche Bank, the assignee. Additionally, discovery uncovered that the original lender, MERS, and the assignee all shared office space at the same business address.
Though MERS may help local governments find responsible parties, voluntary self-reporting of PPCs is likely inadequate; especially at a time when mortgages are bought and sold frequently, bundled together in mortgage pools, and sold on the secondary market. The motivating factor for MERS enhancing its system was the convenience of servicers, not the needs of local governments. It may not be long before lenders are listing MERS as the responsible party for property maintenance, just as lenders have nominated MERS as an entity enabled to foreclose. Even if the abuse is not that blatant, MERS does not have a good record for keeping clear contact information for responsible parties. It may be telling that Doug Leeper, the code enforcement officer for Chula Vista, a pilot city for the MERS initiative, noted in his 2008 testimony before Congress that “[l]ocating the current beneficiary of the mortgage on a property that was in violation … remains one of the single largest obstacles in dealing with financially distressed properties.” He noted that the “time spent in research and phone calls attempting to track down the current beneficiary is crippling.”
MERS executives argue that the current crisis would be much worse without MERS, since lenders would have simply gone bankrupt and no one would have known their contact information. One could also argue that mortgage industry compliance is more likely if a local government plays by the industry’s rules. Accordingly, this article does not advocate that MERS officers stop doing all that they can to promote lender registration of vacant property and PPCs. Yet, as noted above, often it is the unregulated nature of MERS that permits lenders to easily name new beneficiaries without recording the transfer. Local governments should consider carefully whether to trust VPR initiatives to MERS.
While the MERS Initiative proved the benefit of a national electronic platform for VPR, a federally generated system would provide the same benefit while minimizing the dangers associated with the industry-run MERS. The federal government should develop a standard internet-based platform for registering and tracking vacant properties and then maintain a webspace where local governments can use the platform to create individualized webpages for their VPR officials to use while registering and tracking properties within their jurisdiction. The federal government would not keep a nationally available list of vacant properties, but merely establish a standard platform local governments can use to register properties within their jurisdiction. This type of standardized system would eliminate the mortgage industry’s objection to compliance with varied local procedures. This type of system would also allow local governments to retain control of the contents and enforcement mechanisms of VPR ordinances, since local governments have a better understanding of local markets and conditions. Additionally, a federal system would make it easier for the federal government to establish special programs utilizing the database. For example, Joseph Schilling suggests that the federal government “establish special phone lines between local government officials and lending institutions and perhaps set some standards about call-backs within twenty-four to forty-eight hours.” Of course, such a system would require political will since the public would view it as a federal endorsement of VPR. It would also require initial funding to establish the system and continuing funding to monitor that the system is working properly.
From Vacant Property Registration Ordinances, 39 Real Est. L. J. 6 (2010) (footnotes omitted).