Why Mers Litigation Is Not Working in California
| Publication year | 2014 |
| Author | By Kristy Hernandez and Kelly Resnick |
By Kristy Hernandez and Kelly Resnick
©2014 All Rights Reserved.
Many homeowners who have suffered from foreclosure, or who are currently facing foreclosure, want their banks and other financial institutions to take greater responsibility for the financial crisis our country continues to face in the aftermath of the Great Recession of 2008 and the related crash in real estate prices. A common, and highly visible, villain has been Mortgage Electronic Registration Systems, Inc., commonly known as "MERS."1 Desperate homeowners have brought a glut of cases against MERS across the country with varying degrees of success. This article aims to discuss the recent history of MERS litigation in California, and outline alternative causes of action to the largely unsuccessful MERS claims.
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.2 Almost all major mortgage servicers in the United States participate in the MERS system. The MERS system was essentially created to bypass county recording offices to streamline the mortgage process by implementing an electronic system to expedite the flow of mortgage processing and securitization.3 The idea of a centralized, electronic database emerged in the 1990s from Fannie Mae, Freddie Mac, Ginnie Mae, and the Mortgage Bankers Association, after the savings and loan crisis passed and the real estate market was heating up again.4 County recorder offices were having trouble keeping up with the demand since many were not automated at that time.5 Banks praised the introduction of a new electronic system bypassing the county recorders as a benefit to borrowers since transactions would be handled more efficiently and quickly; however, the banks did not hold back in also admitting their main goal of this system, which was more profits.6 Banks reported that an electronic system would save them at least $210 million dollars per year.7 In addition, the banks were aware that the only thing holding back wider securitization of home loans on the secondary market was the time-consuming and costly chore of recording and re-recording ownership of each individual mortgage with its respective county recorder office.8 The MERS system became the only nationwide electronic registry supporting securitization and, by 2007, the MERS system had more than sixty million mortgages on file reportedly saving the banking industry over one billion dollars in recording fees and costs while staying in compliance with all fifty states' recording statutes.9
From its inception in the 1970s until the end of 2007, the popularity of securitization as a financing method ballooned in the United States, with issuances of asset-backed securities peaking at $3.7 trillion by the end of 2007, and home mortgages being the most common asset, representing $2.2 trillion in issuances in 2007.10 The value of issuances of asset-backed securities had an annual growth rate of about twenty-eight percent from 1984 to 2007.11 Furthermore, between 1998 and 2007, securitization increased from thirty-two percent of all new credit issuance to forty-nine percent.12 The growth of the MERS system and securitization went hand in hand.
When a loan is securitized through the MERS system, MERS appears in the county land records and in the MERS system as both the mortgagee and servicer of each mortgage, but another mortgage servicing company typically acts as the actual servicer and handles the day-to-day tasks associated with managing the loan. To understand how the MERS system works, it is important to understand the basic elements of a mortgage loan, typically consisting of two documents: a promissory note and a security instrument. A promissory note is a written promise to pay a debt by a specific date and on specific terms.13 A security instrument, referred to as a "mortgage" or "deed of trust," evidences the pledge of collateral or security for the loan.14 At a real estate purchase closing, both lender and borrower agree to standard, Freddie Mac- and Fannie Mae-approved language in the security instrument naming MERS (a wholly owned subsidiary of parent company MERSCORP Holdings Inc.) as the original mortgagee or beneficiary.15 After closing, the lender records the security instrument in public land records and registers the loan on MERS Residential, or the "MERS system," the national electronic database operated by MERSCORP Holdings that tracks changes in mortgage servicing rights and beneficial ownership interests in loans.16 Each participating loan is assigned a unique eighteen-digit number so that it can be tracked from origination, to securitization, to pay-off or foreclosure.17 Through the MERS system ServicerID, homeowners have the ability to search for the identity and contact information of their actual mortgage servicer, regardless of whether their mortgage has changed hands since origination.18 Because of the MERS system, MERS remains the mortgagee of record with the local county no matter how many times servicing is traded.
In California and other deed of trust states, the operative document defining MERS's rights and functions is the deed of trust. Typically, a deed of trust has four parties: the borrower, the lender, the trustee, and the beneficiary. MERS and the successors and assigns of MERS are designated as the beneficiary under the security instrument. MERS is described within the deed of trust as a separate corporation that is acting "solely as nominee for lender, and lender's successors and assigns."19 By authorizing this language in the deed of trust, the borrower grants and conveys to the trustee, in trust, with power of sale, the property described therein. Also, the deed of trust includes an acknowledgement from the borrower that MERS holds only legal title to the interests granted by the borrower, but if necessary to comply with law or custom, MERS (as nominee for lender and lender's successors and assigns) has the right to exercise any or all of those interests, including, but not limited to, the rights to foreclose and sell the property, and to take any action required of the lender, including releasing and canceling the deed of trust. Therefore, the express language of the deed of trust authorizes MERS to act on behalf of the lender in serving as the legal titleholder and exercising any of the rights granted to the lender under the deed of trust.20
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Alternatively, in mortgage (or non-deed of trust states), the operative document defining MERS's rights and functions is the mortgage. In these states, MERS is not a party to, nor is MERS named in, the promissory note; however, representative language in a typical form of mortgage names MERS as the original mortgagee while identifying three parties: the borrower, the lender, and MERS.21 Under the mortgage, the borrower mortgages, grants and conveys to MERS solely as nominee for lender and lender's successors and assigns the property described therein. Additionally, the mortgage includes an acknowledgement from the borrower that MERS holds only legal title to the interests granted by the borrower, but if necessary to comply with law or custom, MERS has the right to exercise any or all of those interests, including the rights to foreclose and sell the mortgaged property.22 Therefore, just as in the deed of trust scenario, the express language of the mortgage instrument authorizes MERS to act on behalf of the lender in serving as the legal titleholder and exercising any of the rights granted to the lender thereunder.
Historically, there are technical and remedial distinctions between deeds of trust and mortgages. Regarding deeds of trust, title vests in the trustee, and regarding mortgages, title remains with the mortgagors. However, the terms are often used interchangeably and as long as a security instrument grants the property "with the power of sale" the use of a particular title does not matter.23
Generally, the note is transferred within days or months of origination to a securitized loan trust through a channel where MERS aggregates all loans.24 The notes are gathered by a custodian of documents who has all the notes endorsed from the originating lender to the securitized loan trustee.25 The notes are then bundled and sold to investors all within the MERS system. Therefore, MERS, on paper, continues to hold each note no matter how many times it is transferred within the MERS system.
Even though the sales and transfers of the deeds of trust occur, the MERS system eliminates the requirement for such transfers to be recorded in the county recorder's office where the real property is situated since MERS remains as beneficiary and the transfers happen within the MERS system itself. This means that MERS loans can be transferred and sold many times without any requirement to record the new assignments of the deeds of trust with the respective county recorder office, adding capital and liquidity to the mortgage market.26 On the other hand, critics of the MERS system argue that, by bypassing county recording rules, the MERS system effectively diverts millions of dollars from local governments in uncollected county recording fees. MERS claims to hold title to roughly half of all home mortgages in the nation—an astonishing sixty million loans.27 Alternatively, if a loan is not securitized, the sales and transfers of the deeds of trust are recorded in the respective real property's county recorder office, and thus the beneficiary is readily obtainable. When the number of securitized loans is multiplied by the typical recording fee of $30 payable each time a loan is assigned in the county records,28 one can understand why counties would look to MERS for this lost revenue. Although counties were losing potential revenue since the 1990s, the impact of this lost revenue became acute during the Great...
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