Two faces: demystifying the Mortgage Electronic Registration System's land title theory.

• Author: Peterson, Christopher L.

ABSTRACT

In the mid-1990s, mortgage bankers created Mortgage Electronic Registration Systems, Inc. (MERS) to escape the costs associated with recording mortgage transfers. To accomplish this, lenders permanently list MERS as the mortgagee of record instead of themselves to avoid the expense of recording any subsequent transfers. MERS's claim that it is both an agent of the lender and the mortgagee, and the huge gaps left in the public record, give rise to a range of legal issues. This Article addresses whether security agreements naming MERS as a mortgagee meet traditional conveyance requirements and discusses the rights of counties to recover unpaid recording fees. The author explores the challenges facing judges, legislators, county recorders, and investors who must resolve these issues to rebuild confidence in real property recording systems.

TABLE OF CONTENTS INTRODUCTION I. THE EVOLVING LEGAL FOUNDATION OF MERS II. GATHERING STORM CLOUDS OF TITLE III. MERS AND THE PROBLEM OF CONVEYANCE IV. WHAT ABOUT THE MONEY?. THE RIGHT OF COUNTIES TO RECOVER UNPAID RECORDING FEES V. REBUILDING A TRUSTWORTHY REAL PROPERTY RECORDING SYSTEM CONCLUSION INTRODUCTION

In Roman mythology, the god Janus, for whom each year's first month is named, was the deity of beginnings and endings. (1) According to legend, the titan Saturn gave the two-faced god the power to see both the future and the past. (2) Romans carved both of Janus' two faces on gates and doorways to solemnize momentous transitions. (3) Most notably, in the Roman Forum, the Senate erected the ritual gates called the Janus Geminus, which the Romans opened in times of conflict. (4) At war's outset, priests made sacrifices here to curry favor from the gods and forecast the prospects of success. (5)

No deity better symbolizes what financiers hoped to create when they founded the Mortgage Electronic Registration System (MERS). MERS sits as a dichotomous, enigmatic gatekeeper on the vestibule of our nation's complex and turbulent mortgage finance industry. Financiers invoked MERS's name at the beginning of millions of subprime and exotic mortgage loan transactions and again invoke its name as they attempt to terminate so many of these loans through foreclosure. Like Janus, MERS is two-faced: impenetrably claiming to both own mortgages and act as an agent for others who also claim ownership.

This Article examines recent case law developments in an update to an earlier article on the legal problems associated with MERS. (6) In particular, this Article looks at several of the most fundamental unanswered legal issues regarding MERS's role in mortgage lending. First, given recent cases questioning MERS's ownership interests in loans registered in its database, do security agreements naming MERS as a mortgagee or deed of trust beneficiary actually succeed in conveying a property interest? Second, because financial institutions used MERS to avoid paying billions of dollars in recording fees to county and state governments, should these governments--many of which are facing dire financial crises--be entitled to recoup unpaid recording fees? Third, and perhaps most importantly, does the fact that such fundamental issues remain live controversies tell us something more about the commercial norms our country needs in order to rebuild a trustworthy financial system?

This Article begins with a short introduction to MERS's role in residential mortgage finance, including the still evolving legal foundation of the company's business model. Part II ponders the long-term effects of MERS on land title. Part III explores whether security agreements naming MERS as a mortgagee or deed of trust beneficiary meet traditional common law title conveyance requirements. Part IV explores the financial industry's exposure to county and state government lawsuits seeking to recoup unpaid recording fees. This Article concludes by reflecting on the difficult position facing appellate judges and legislators who will be responsible for resolving these controversies, and that of investors contemplating the purchase of MERS-recorded mortgages.

1. THE EVOLVING LEGAL FOUNDATION OF MERS

   Since the founding of the American republic, each county in the United States has maintained records of who owns the land within that county. (7) Most states track changes in ownership of land, including mortgages and deeds of trust, by maintaining records indexed through the names of grantors and grantees. (8) These grantor-grantee indexes allow individuals and businesses contemplating the purchase or financing of land to investigate--or hire a title insurer to investigate--whether a seller or mortgagor actually owns the land being offered for sale or mortgage. (9) Communities traditionally have elected their county recorders or registers of deed; these elections provide an important democratic check and balance in the preservation of property rights. (10) A public, enduring, authoritative, and transparent record of all land ownership provides a vital information infrastructure that has proven indispensible in facilitating not only mortgage finance, but virtually all forms of commerce. (11) County real property records are the oldest and most stable metric tracking the "American dream" of family homeownership. (12)

   To facilitate their service, county recorders charge modest fees on documents they record. (13) Although the amount and the method of calculating these fees varies considerably, a charge of about thirty-five dollars for a mortgage is typical. (14) County recorders use these fees to fund their offices and to contribute to county and state revenue. (15) Some counties use real property recording fees to fund other county departments such as courts, legal aid offices, schools, and police. (16)

   For centuries, American mortgage lenders eagerly recorded their mortgages with county recorders because state land title laws created incentives for recording and disincentives for not recording. (17) For example, if a mortgagee fails to record its mortgage properly and then someone subsequently buys or lends against the home and records its interest, the subsequent purchaser or lender often can take priority over the first mortgagee. (18) Similarly, if a mortgagee assigns a mortgage to an investor, that investor eagerly would record documentation reflecting the assignment to protect against the possibility that the original mortgagee would assign the same mortgage to a different investor. (19)

   In the mid-1990s, some mortgage bankers decided they no longer wanted to pay recording fees for assigning mortgages. (20) Securitization--a process of pooling many mortgages into a trust and selling income from the trust to investors on Wall Street (21)--drove this decision. Securitization, also sometimes called "structured finance," usually required several successive mortgage assignments to different companies. (22) To avoid the hassle and expense of paying county recording fees, these mortgage bankers formed a plan to create a single shell company that would pretend to own all the mortgages in the country. (23) According to the plan, the mortgage bankers would never have to record assignments again because the same company would always "own" all the mortgages. (24) They incorporated the shell company in Delaware and called it Mortgage Electronic Registration Systems, Inc. (25)

   Even though not a single state legislature or appellate court had authorized this change in real property recording, investors interested in subprime and exotic mortgage-backed securities were still willing to buy mortgages recorded through this new proxy system. (26) Because the new system cut out payment of county recording fees, recording was significantly cheaper for intermediary mortgage companies and the investment banks that packaged mortgage securities. Acting on the impulse to maximize profits by avoiding payment of fees to county governments, much of the national residential mortgage market shifted to the new proxy recording system in only a few years. Now, about 60 percent of the nation's residential mortgages are recorded in the name of MERS Inc., rather than the bank, trust, or company that actually has a meaningful economic interest in the repayment of the debt. (27) For the first time in the nation's history, there is no longer an authoritative, public record of who owns land in each county.

   Instead, MERSCORP Inc., a company closely affiliated with MERS Inc., now maintains an electronic database that tracks mortgage servicing rights--in other words, the right of a company to collect monthly payments on behalf of the actual economic owner or owners of a loan. In lieu of paying county governments, financial institutions pay MERSCORP membership fees and per-transaction fees for access to the MERS database and to compensate MERS Inc. for pretending to own the mortgages these financial institutions register on the MERSCORP database. (28) Sometimes MERSCORP also tracks beneficial ownership rights--actual assignments--but only if investors willingly volunteer this information. (29) Financial institutions have been cavalier about informing MERSCORP of changes in servicing and ownership rights of mortgages, apparently because these institutions believe no legal penalties exist for neglecting to make this information available.

   MERS's rights vis-a-vis mortgages registered on the MERSCORP database have created a conundrum for courts, borrowers, and foreclosure attorneys. In boilerplate security agreements included in mortgages all around the country, lenders include the following clause:

   "MERS" is Mortgage Electronic Registration Systems, Inc. MERS is a separate corporation that is acting solely as a nominee for Lender and Lender's successors and assigns. MERS is the mortgagee under this Security Instrument. MERS is organized and existing under the laws of Delaware, and has an address and telephone number of P.O. Box 2026, Flint, MI 48501-2026...