| Type | Privately held company |
|---|---|
| Founded | 1995 |
| Headquarters | Reston, Virginia, USA |
| Products | MERS System, MERS eRegistry, MERS Commercial |
| Website | www.mersinc.org |
Mortgage Electronic Registration Systems, Inc. (MERS) is a privately held company that operates an electronic registry designed to track servicing rights and ownership of mortgage loans in the United States.[1] MERS in turn is owned by a holding company called MERSCORP, Inc.
The real estate law and real estate transactions in the US are subject to state regulations and county level recordation requirements, since the time of the establishment of the US as an independent country. That made it quite cumbersome for financial companies to develop a smooth operation of a market based on US mortgages in the early 1980s. Indeed, since every time a financial instrument containing mortgages is sold, every mortgage (deed of trust) and note (obligation to pay the debt) presumably has to be re-recorded in US County courts and recordation fees have to be paid. So, the financial industry eager to trade in Mortgage-backed security needed to find a way around these recordation requirements, and this is how MERS was born to replace public recordation with a private one.
MERS asserts to be the owner (or the owner's nominee) of the security interest indicated by the mortgages transferred by lenders, investors and their loan servicers in the county land records. MERS maintains that its process eliminates the need to file assignments in the county land records which lowers costs for lenders and consumers by reducing county recording fee expenses resulting from real estate transfers[2] and provides a central source of information and tracking for mortgage loans.[3] MERS' role in facilitating mortgage trading was relatively uncontroversial in its early days a decade ago but continued fallout from the subprime mortgage crisis has put MERS at the center of several legal challenges disputing the company's right to initiate foreclosures. Should these challenges succeed, the US banking industry could face a renewed need for capitalization.[4]
Information contained in the MERS System can help to identify possible mortgage fraud involving the identity of a prospective buyer and owner-occupancy issues. The centralized database of MERS can also help detect property flipping schemes and purchases.
Originated by MERS, the Mortgage Identification Number (MIN) is a unique 18-digit number used to track a mortgage loan throughout its life, from origination to securitization to payoff or foreclosure.[5]
Through MERS ServicerID, homeowners can search for their mortgage servicer, regardless of whether the mortgage has changed hands since the loan was originated. By identifying the loan servicer, homeowners may seek to identify their lender to initiate negotiations for revised mortgage terms and take actions that can avoid foreclosure.[6]
The MERS eRegistry is a system of record that identifies the owner (Controller) and custodian (Location) for registered eNotes.[7] Built by MERS with the endorsement of the Mortgage Bankers Association and launched in 2004, the MERS eRegistry satisfies the "safe harbor" requirements of E-SIGN and UETA legislation.[8] Both Fannie Mae[9] and Freddie Mac[10] require the registration of eNotes on the MERS eRegistry before they are eligible for purchase.
In February 2009, MERS was selected to manage the day-to-day operations of the Mortgage Industry Standards Maintenance Organization (MISMO), although the Mortgage Bankers Association will continue its full control over MISMO. MBA President and CEO John A. Courson said the selection of MERS as a management partner, “will result in the continued enhancement of data standards and transparency, which are critical to the return of investor confidence and liquidity in our marketplace.”[11]
On December 4, 2009, Judge Dawson found that "MERS provided no evidence that it was the agent or nominee for the current owner of the beneficial interest in the note, it has failed to meet its burden of establishing that it is a real party in interest with standing." He issued his decision in 5 of the 18 cases (In re Chong, In re Pilatich, In re Cortes, In Re Medina and In re O’Dell) on appeal but declined to hold that "MERS would not be able to establish itself as a real party in interest had it identified the holder of the note or provided sufficient evidence of the source of its authority."[12]
On September 24, 2009, the U.S. District Court for the District of Arizona, in Cervantes v. Countrywide Home Loans, Inc., et al, dismissed all federal and state law claims made by three borrowers in a complaint filed against a group of defendants that included MERS. The court discussed whether MERS was a proper beneficiary but only in the context of whether its involvement constituted the tort of fraud on the borrowers. The court found the mere use of MERS was not common law fraud on the borrowers, finding that "Plaintiffs have failed to allege what effect, if any, listing the MERS system as a 'sham' beneficiary on the deed of trust had upon their obligations as borrowers." [1]
Both the 3rd District Court of Appeals in Miami and the 2nd District Court of Appeals in Lakeland held that MERS can foreclose. Senior Judge Alan R. Schwartz noted the decision was based in part in the changes in finance and technology over time. "The problem arises from the difficulty of attempting to shoehorn a modern innovative instrument of commerce into nomenclature and legal categories which stem essentially from the medieval English land law," Schwartz wrote. [2]
On August 14, 2009, the Minnesota Supreme Court ruled that MERS can foreclose under state law as the mortgagee of record.[3]
A class-action lawsuit has been filed by homeowners in Delaware to hold MERS responsible for fraudulent fees on foreclosures filed by MERS. [13]
Homeowners have argued in court that their homes could not be foreclosed because MERS deeds of trust were unlawful.[4] In other cases, state appellate courts have held that MERS is permitted to foreclose mortgage liens when it is the holder of the note and mortgage.
On August 28, 2009, the Kansas Supreme Court in Landmark National Bank v. Kesler, 2009 Kan. LEXIS 834 (Aug 28, 2009), issued a decision involving MERS that focused on finality of judgments. MERS' involvement with this case arose from the fact that the company did not receive notice of a foreclosure action even though MERS was the mortgagee of record on a junior lien. In the opinion, the court noted that “Even if MERS was technically entitled to notice and service in the initial foreclosure action--an issue that we do not decide at this time--we are not compelled to conclude that the trial court abused its discretion in denying the motions to vacate default judgment and require joinder of MERS….” The case did not affect MERS’ standing to foreclose and the company is entitled to receive notice of legal actions when MERS is the mortgagee.[5]
On April 30, 2010, a Kansas appellate court in MERS, Inc. v. Graham, 44 Kan. App. 2d 547, 2010 WL 1873567, at **4-**5, interpreted Kesler to mean that MERS in fact does not have standing to foreclose on a mortgage in Kansas where there is no mention of MERS in the promissory note, MERS acts solely as a "nominee" for the lender, and there is no evidence that the promissory note has been assigned to MERS or that MERS otherwise possesses an interest in the promissory note.
In 2008, the United States Court of Appeals for the Fifth Circuit dismissed a multi-district class action lawsuit against MERS. The Plaintiffs alleged that a small fee charged by mortgage lenders, which was then paid to MERS, violated provisions in the Real Estate Settlement Procedures Act (RESPA). The Plaintiffs also argued that MERS unfairly received business referrals from the mortgage lenders. However, the Circuit Judges held that “In exchange for the fee, MERS performed the service of being the permanent record mortgagee in the public land records...” Plaintiffs’ complaint was dismissed by the appellate court for failure to state a claim under RESPA.[14]
On October 27, 2010, DC Attorney General Peter Nickels issued a statement which concludes that "a foreclosuring may not be commenced against a D.C. homeowner unless the security interest of the current noteholder is properly supported by public filings with the District's Recorder of Deeds."[15] So in Nickels' view, subsequent transfers of the mortgage on MERS' records will not count unless they were also recorded in D.C.
On February 18, 2011, the California Court of Appeal for the Fourth Appellate District affirmed the sustaining of a demurrer without leave to amend. In an opinion by Justice Joan Irion, the court ruled in favor of MERS in two ways: (1) California's nonjudicial foreclosure statutes did not expressly or impliedly allow a lawsuit simply to determine whether the party initiating a foreclosure was authorized to do so; and (2) even if they did, the plaintiff consented to the use of MERS to initiate the foreclosure when he signed the deed of trust.[16] Gomes expressly cited to and relied upon the state supreme court's 2010 decision in Lu v. Hawaiian Gardens Casino, Inc.,[17] which clarified that a certain conservative method of statutory analysis (first articulated by Associate Justice Frank K. Richardson in 1979 and adopted by a majority of the court in a 1988 opinion by Chief Justice Malcolm M. Lucas) applies to all California statutes, not just the California Insurance Code. Thus, if the California Legislature has not expressly written a cause of action into a statute, it simply does not exist. The Supreme Court of California denied Gomes's petition for review on May 18, 2011, and the U.S. Supreme Court denied his petition for writ of certiorari on October 11, 2011.
On February 10, 2011, the U.S. Bankruptcy Court for the Eastern District of New York considered a motion for relief from the bankruptcy stay brought by U.S. Bank as the trustee of a securitization trust. U.S. Bank claimed the right to foreclose on the debtor's mortgage in part because of purported assignment of the mortgage from MERS. The court found itself constrained by the Rooker-Feldman doctrine to give effect to a prior state-court judgment of foreclosure, but went on to consider several arguments MERS advanced about its legal status and authority, noting that it had held off on deciding dozens of additional cases until those matters were clarified. The court found that MERS had no power as an agent to assign the mortgage under its rules, its membership agreement, or the terms of the mortgage itself. The court also found that MERS had no power as the mortgagee of record to assign the mortgage: "MERS's position that that it can be both the mortgagee and an agent of the mortgagee is absurd, at best."
The court observed, "MERS and its partners made the decision to create and operate under a business model that was designed large part to avoid the requirements of the traditional mortgage recording process. The Court does not accept the argument that because MERS may be involved with 50% of all residential mortgages in the country, that is reason enough for this Court to turn a blind eye to the fact that this process does not comply with the law." .[18]
In April 2011, in Residential Funding v. Saurman, the Michigan Court of Appeals decided two consolidated cases holding that MERS did not have standing to foreclose non-judicially pursuant to MCL 600.3204(1)(d) because it didn’t actually own any interest in the debt. [19] The Michigan Supreme Court reversed the decision in an order November 16, 2011, finding that MERS is the owner of an interest in the mortgage because "[MERS'] contractual obligations as mortgagee were dependent upon whether the mortgagor met the obligation to pay the indebtedness which the mortgage secured." However, the court clarified that MERS' status as an "owner of an interest in the indebtedness" does not equate to an ownership interest in the note."
On November 16, 2011, the Michigan Supreme Court, understanding the urgency and potential fallout of this matter, issued a peremptory order, in lieu of granting the appeal, and reversed the Court of Appeals judgment. (Residential Funding Co, LLC v Saurman, 2011 WL 5588929 (Mich, November 1, 2011). The Court agreed with the dissenting Court of Appeals opinion, “pursuant to MCL 600.3204(1)(d), Mortgage Electronic Registration System (MERS) is the ‘owner . . . of an interest in the indebtedness secured by the mortgage at issue in each of these consolidated cases’ because ‘[MERS] contractual obligations as the mortgagee were dependent upon whether the mortgagor met the obligation to pay the indebtedness which the mortgage secured.’” The Court clarified that “MERS status as an ‘owner of an interest in the indebtedness’ does not equate to an ownership interest in the note. Rather, as a record-holder of the mortgage, MERS owned a security lien on the property, the continued existence of which was contingent upon the satisfaction of the indebtedness.” This interest in the indebtedness . . . authorized MERS to foreclosure by advertisement under MCL 600.3204(1)(d).” (emphasis added).
The Court’s interpreted MCL 600.3204(1) as inclusive rather than exclusive. The Court held those with an “interest in the indebtedness” includes mortgagees of record (such as MERS) and constitutes a category of parties entitled to foreclose by advertisement, along with those who “own the indebtedness” and those who “act as the servicing agent of the mortgage.”
On September 12, 2011 the California Court of Appeal for the Second District said the complaint (an alleged violation of Section 2932.5 of the California Code which requires the assignee of a mortgagee to record an assignment before exercising a power to sell real property) was irrelevant as it applied only to mortgages, not to deeds of trust. [20]
On September 12, the Fourth District Court citing its own May decision in Gomes v. Countrywide, stated that "the statutory scheme...does not provide for a preemptive suit challenging standing. Consequently, plaintiffs' claims for damages for wrongful initiation of foreclosure and for declaratory relief based on plaintiffs' interpretation of section 2924, subdivision (a), do not state a cause of action as a matter of law."[21]
Because the MERS system is electronic, it depends on the electronic storage and transmission of legal documents. On the question of notarization of electronic signatures and the honoring of notarized signatures across state lines, the United States House of Representative had passed bills to legalize these steps, and in 2010 the United States Senate passed the legislation without debate. However, President Barack Obama publicly opposed the legislation on October 7, 2010. As a result, the bill died, and state laws govern whether electronic signatures can be notarized or whether a notarized signature in one state must be accepted in another.[22]