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Why Congress Should Examine H.R. 2425 and MERS Together

Marcy Kaptur (D-OH), a Congresswoman from Toledo, Ohio, has introduced H.R. 2425 a bill

known as the “Transparency and Security Mortgage Registration Act of 2011”. The bill is the

second such bill introduced by Representative Kaptur in the past two years to address the

growing problems associated with the Mortgage Electronic Registration Systems, Inc. (MERS)

recording registry. The last bill was H.R. 6460 and her latest version mirrors the first.

The bill is designed to prohibit Fannie Mae, Freddie Mac, and Ginnie Mae – otherwise referred

to collectively as government sponsored entities or GSEs -- from owning or guaranteeing any

mortgage that is assigned to the Mortgage Electronic Registration Systems (MERS) or for which

MERS is the mortgagee of record.

H.R. 2425, which is not currently co-sponsored, has been introduced into the Republican-

controlled House Financial Services Committee and has little chance of being reported for a

general floor vote. However, while the bill is not perfect for various reasons spelled out below, it

could represent the beginning of a much-needed national conversation on the subject of MERS

and the damage MERS has brought to local county recorders, the land title records they maintain

and the public at large.

What is MERS?

MERS is a creation of some of the most powerfully consolidated forces in the real estate and

mortgage banking industries. In the mid-1990’s mortgage bankers decided they no longer

wanted to pay recording fees for assigning mortgages between institutions. The mortgage

banking industry viewed the traditional requirements of mortgage recording laws in the fifty

states as too slow and cumbersome for the new forms of risky mortgage investments they wanted

to create so they determined a way in which they could circumvent the process entirely.

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 is the same process

under so much scrutiny as one of the causes of the Great Recession of 2008. Rather than learn

and abide by the local county recording customs for mortgage recording and assignments or pay

the associated cost of doing so, the mortgage banking industry needed to devise a plan to hasten

the assignment process and avoid the cost of paying for assigning each individual mortgage – all

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to the detriment of the public and the local county recorders who depend upon recording income

to support their offices and the integrity of the records they maintain.

To avoid paying county recording fees each time the mortgages were assigned, mortgage bankers

and the title insurance industry formed a plan to create one shell company that would pretend to

own all the mortgages in the country. By doing so, the mortgage bankers and their investment

partners would never have to record assignments since the same company would always “own”

all the mortgages.

The company they created is now known as Mortgage Electronic Registration Systems, Inc. or

MERS. 60% of the nation’s mortgages are now held by MERS, whether as a nominee or as the

actual mortgagee. At present, the number of mortgages “tracked” in the MERS system is

roughly 31 million. Prior to the mortgage meltdown in 2008, the number of mortgages in the

MERS system was nearly twice that number, or approximately 61 million mortgages. The

registry fees paid by member banks to participate in the MERS system has generated millions of

dollars in revenue for MERS owners and given the mortgage banking industry unfettered access

to the securitization market where billions of dollars have changed hands since 1997.

Who is MERS?

MERS is a wholly-owned subsidiary of a Delaware corporation that is owned by a broad base of

organizations in the mortgage, banking and title industries known as MERSCORP, Inc.

Shareholders in MERS include: the American Land Title Association, First American Title

Insurance Corporation (First American), Stewart Title Guaranty Company (Stewart Title),

Bank of America, CitiMortgage, Inc., Merrill Lynch, AIG United Guaranty Corporation,

Wells Fargo Bank, Washington Mutual Bank, HSBC, Chase Home Mortgage Corporation,

the Mortgage Bankers Association, Fannie Mae and Freddie Mac.

The CEO of the American Land Title Association, Kurt Pfotenhauer, is the Chairman of the

Board for MERS. Investment in the MERS venture has reaped huge rewards for the closely

consolidated owners of the registry. Thus, the effort to protect MERS from opponents of the

registry has been vigorous.

Where Does MERS Go Wrong?

In the typical MERS scenario, Bank A lends money to a borrower via a promissory note secured

by a mortgage. Bank A, as a participant in the MERS system, permits MERS to appear on the

mortgage or deed of trust for the perceived purpose of holding title to the mortgage or deed of

trust as nominee for Bank A, whether as the mortgagee or as an assignee. From there, the

promissory note travels the secondary market through various assignments and holders until,

upon default or thereafter, the foreclosing entity requires proof in court that it is the holder of the

note and mortgage in order to foreclose. Because the manner by which MERS tracks the

assignments in its registry, often times the assignments are lost, the information contained in the

registry is erroneous or, worse, the individual with purported authority to assign the MERS note

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and/or mortgage has no tangible relationship to MERS or the underlying financial institution

participating in the registry (i.e. a robo-signer).

Procedurally speaking, MERS participates in the plan to hold mortgages in two ways: as

assignee and/or as nominee.

1. MERS as Assignee.

The originating lender, Bank A makes a traditional loan by listing itself as the payee on the

promissory note and as the mortgagee on the mortgage. The loan is then assigned to a seller for

repackaging through securitization for investors. However, instead of recording the assignment

to the seller or the trust that will ultimately own the loan; the originator pays MERS a fee to

record an assignment to MERS in the county records. Although MERS records an assignment in

the real property records, the promissory note which creates the legal obligation to repay the debt

is not negotiated to MERS.

The promissory note is not assigned to MERS because no interests are transferred on the MERS

system, only tracked. Thus, Bank A continues to hold the note in its own name. While the

mortgage itself may be assigned by Bank A to another bank or servicer, it is only at the moment

that foreclosure is required on that mortgage that MERS then either attempts to assign the

mortgage to the bank or attempts to foreclose on the mortgage in its own name. Again, the note

is not actually assigned, if at all, until the need for foreclosure arises. Often times, the note is

several holders back in the chain of transfers within the MERS system or worse yet, lost.

2. MERS as Mortgagee.

Start with the same facts as above. Bank A is the payee on the note and the mortgagee. The

mortgage contains the following language:

“MERS is a separate corporation that is acting solely as nominee

for Lender and Lender’s successors and assigns. MERS is the

mortgagee under this Security Instrument.”

Upon default, Bank A allows MERS to act as the real party in interest filing the foreclosure on

behalf of MERS, not Bank A. Thus, not only is MERS a “nominee” or agent, but in the same

document MERS also makes the statement that it is the “mortgagee” or principal. However, one

cannot be both agent and principal of the same instrument.

The MERS system is predicated upon the belief that it can act as both an agent and a principal

with regard to the ownership of mortgages, but not actually own or hold the promissory note. In

other words, MERS is never really there. The MERS system is a tracking system. However, if

MERS is a mortgagee, as it sometimes presents itself to be in order to foreclose, it cannot sever

the promissory note from the mortgage and foreclose. Since the 19th

century a long and still

precedential line of cases has held that mortgages and deeds of trust may not be separated from

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the promissory notes that create the underlying obligation triggering foreclosure rights.1 If those

interests are severed, as they are in the MERS system, a lender lacks the ability to enforce the

mortgage.

If MERS is just an agent or nominee, there are state land title recording acts that prevent shell

companies, nominees or other forms of agents from holding title to real estate. Thus, however

MERS “holds” a mortgage, the construction is, at best, problematic. Again, if it cannot hold title

as a nominee, MERS and its lender assignees cannot enforce the mortgage.

3. MERS as a Microcosm for What’s Wrong with the Entire Real Estate

Settlement Industry.

The idea of improving the process of land title recordation is a noble pursuit. The desire to

create a land title recording system and the importance of maintaining the integrity of those

records has roots as far back as the Plymouth Bay Colony in the 17th

century. Unfortunately, the

idea of the MERS registry fails in one key area: it was created to benefit the players at the

expense of the game.

The MERS shareholders are all closely-related entities in the mortgage finance and title

industries who have abandoned the benefits of maintaining the land record system in order to

create a vehicle for short-term profiteering. Rather than simplify local county land titles, MERS

has created more clouds on title and made it more difficult to accurately track “who owns” the

title to the real estate. Rather than supporting the unique and often complex differences between

states regarding their respective recording statutes, MERS has unraveled the spool and confused

courtrooms across the United States by negating jurisdictional standing in foreclosure cases.

MERS has allowed for fraudulent actors, and their supporters, to access the land recording

system by permitting robo-signed mortgage assignments to permeate land title records,

jeopardized the sanctity of the mortgage foreclosure process and inserted uncertainty into the

mortgage finance process. All of this has hastened mortgage securitization and MERS profits,

which in turn, helped to facilitate the current housing crisis.

At the heart of MERS and its shareholders is the fact that there are too many divergent interests

involved in a process that requires consistency and accuracy. For instance, mortgage finance,

lending and title insurance do not always converge on the same level. What may be perfectly

acceptable for a mortgage company or lender to underwrite on a particular mortgage loan may

conflict with the underwriting decisions of the title insurance underwriter and vice versa. To

allow parties with necessary checks and balances the ability to control the land title records

through the MERS registry pits sometime underwriting adversaries in the position of trying to

1 In re Bird, 2007 WL 2684265, at ¶¶2-4 (Bkrtcy.D.MD.2007); In re Leisure Time Sports, Inc., 194 B.R. 859, 861

(9th

Cir.1996); In re BNT Terminals, Inc., 125 B.R. 963 (Bankr.N.D. Ill. 1990); Yoi-Lee Realty Corp. v. 177th

Street

Realty Associates, 208 A.D.2d 185, 626 N.Y.S.2d 61, 64 (N.Y.A.D. 1 Dept., 1995); In re AMSCO, Inc., 26 B.R.

358, 361 (Bkrtcy.Conn., 1982); Barton v. Perryman, 577 S.W.2d 596, 600 (Ark., 1979); Trane Co. v. Wortham, 428

S.W.2d 417, 419 (Tex. Civ.App. 1968); Kirby Lumber Corp. v. Williams, 230 F.2d 330, 333 (5th

Cir.1956); Kelley v.

Upshaw, 39 Cal.2d 179, 192, 246 P.2d 23 (1952); Hill v. Favour, 52 Ariz. 561, 84 P.2d 575 (Ariz. 1938); West v.

First Baptist Church of Taft, 123 Tex. 388, 71 S.W.2d 1090, 1098 (Tex. 1934); First Nat. Bank v. Vagg, 65

Mont.34, 212 P.509, 511 (Mont. 1922); Southerin v. Mendum, 5 N.H. 420, 1831 WL 1104, at ¶7 (N.H. 1831);

Carpenter v. Longan, 83 U.S. 271, 274, (1872).

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profit together on the same conflicted transaction. Conflicts of interest are likely to result.

Currently, there is nothing being done to resolve those conflicts. If anything, MERS and its

shareholders have allowed these conflicts to worsen. The integrity of land title records and the

consuming public now hang in the balance.

MERS is a microcosm for the main problems that exist in the real estate settlement industry,

which are consolidation and unfair market conduct. It cannot be underscored enough. When one

entity made up of lending, mortgage finance, realtors and title insurance actors converge to

create a product, it ultimately leads to bad results and millions of dollars in damage.

Can H.R. 2425 Help Fix MERS?

H.R. 2425 is by no means a finished product in the eyes of the National Association of

Independent Land Title Agents (NAILTA). Unlike other lobby groups, NAILTA has had

positive discussions with Representative Kaptur’s office concerning the current bill which

includes critiques of the proposal to create a federal land registration program. NAILTA remains

unconvinced that a Federal Torrens system is possible or even in the best interests of land title

professionals and the public.

However, NAILTA does believe that a conversation with Congress and HUD (or the Consumer

Financial Protection Bureau (CFPB)) concerning how to remedy the well-documented failings of

MERS is worth investigation and participation through the bill. Opponents of H.R. 2425,

including the American Land Title Association, fear the loss of revenue caused by the GSE’s

inability to participate in the MERS registry, even though those same opponents have contributed

to the problem by ignoring long standing state recording laws in the construction and use of

MERS. Arguing the loss of income related to the clouding of title is an untenable and

disingenuous position, especially when such an argument is made by members of the title

insurance industry. Those same opponents of the bill are the shareholders who, under the bill,

would not be able to double-dip from the MERS-generated revenue.

NAILTA believes there is a better way to improve the recording process. One way would be to

allow local county recorders, in accordance with their respective state recording statutes, to

employ the necessary technological advances to safely and efficiently quicken the pace of land

title recording while preserving the data for the public’s use. There needs to be an infrastructure

investment, like a highway or a bridge, in preserving the integrity and accuracy of land title

records. H.R. 2425, or its progeny, could be used as an appropriations vehicle to help local

county recorders modernize their records and maintain land title records across the United States

by taking the best of the MERS registry (i.e. the goal to speed up the process for consumers) and

eliminating the worst of the MERS registry (i.e. the profiteering and degradation of the land title

records by its participants).

New electronic data storage facilities and encryption technologies are being developed or

available now to make recording simpler, faster and safer. Keeping the revenues for accessing

those technologies with the county recorders who are entrusted with the gatekeeping function for

land titles removes the conflicted nature of the MERS model and destroys the market incentive

to compromise the records which currently infects the MERS registry.

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At the end of the debate on the merits of H.R. 2425, if MERS and its proponents cannot justify to

Congress or to the consuming public that it creates a system which aids the process of real estate

consumption for the public and preserves the integrity of land title records, there is no

justification for MERS to continue in its current form.

Opponents of H.R. 2425 have not made a convincing argument in favor of preserving the MERS

status quo and NAILTA invites a dialogue to continue on H.R. 2425 so that a final bill can

address the well-documented problems caused by MERS.

About NAILTA

The National Association of Independent Land Title Agents (NAILTA) is a non-profit trade

association that represents the interests of independent title insurance agents and independent

real estate settlement professionals from across the United States. It was created by independent

real estate settlement professionals to further the agenda of small business owners from within

the title insurance, abstracting, surveying, and real estate community who lack representation at

local, state and national levels.

To contact NAILTA, please visit our website at www.nailta.org.