naked capitalism

It has become so common for members of the securitization industry to play fast and loose with the truth that nothing should surprise me any more. Nevertheless, I am taken aback by a rough transcript of the remarks by William Hultman, the general counsel of MERS (formally “senior vice president and corporate division manager“), before members of the Virginia House of Representatives last week. The overwhelming majority of statements he made about matters that can be verified are either untrue or at best disingenuous.

Here is the transcript.

Transcript of VA House Presentation HB 1506 by MERS General Counsel William Hultman

We’ll parse the troubling bits more or less in order, starting here:

We’re the beneficiary, but we’re an agent of the lender. So instead of having two — one party be both the payee on the note and the beneficiary in deed of trust, we’re the beneficiary as their agent. In other words, we’re holding title to the mortgage lien on their behalf.

Law professor Chris Peterson in his legal analysis of MERS said “it is axiomatic that a company cannot be both an agent and a principal with respect to the same right”. Being a beneficiary is tantamount to being a principal. The necessity under the law of playing one role or the other renders Hultman’s statement, which reflects ongoing MERS’s contention that it really can have its cake and eat it too, incorrect.

Corroboration of Peterson’s view comes via court rulings in multiple states, including some state supreme court rulings, that have effectively found that MERS can only play one role. For instance, the Supreme Court of Arkansas in Mortgage Electronic Systems, Inc. vs. Southwest Homes of Arkansas and the Supreme Court of Kansas in Landmark National Bank v. Kessler found that MERS was only an agent. Similarly, per Mitchell, a Nevada bankruptcy court case that has been cited in other cases in that state as a precedent:

MERS does not have standing merely because it is the alleged beneficiary under the deed of trust. It is not a beneficiary and, in any event, the mere fact that an entity is a named beneficiary of a deed of trust is insufficient to enforce the obligation.

Note that the idea that MERS really can legitimately play multiple roles comes up repeatedly in Hultman’s discussion.

Here is the next questionable claim by Hultman:

….prior to MERS all these assignments were not getting recorded or they were being done improperly, they would get rejected, and there would be breaks in the chain of title.

It is ironic that MERS officers continue to brandish the canard that the US was rife with bad mortgage records prior to the widespread use of the data service. Prior to MERS, the mortgage securitization industry was not very happy with how long recording took, but there is no evidence that it caused a breaks in title. It simply took time and created hassles.

If a recording was rejected, before and after MERS, it could be cured by the filing party. In a securitization, that would be the servicer’s job. A break would not occur unless someone else came in and recorded an intervening assignment. But if there was a backlog, the odds of this would be pretty remote.

And there is a good reason why, contrary to Hultman’s claim, there is no evidence of pre-MERS widespread problems with the integrity of local records. Real property transactions are usually significant to the parties involved, and mortgage recording is required for the lender to have a priority claim. The “first” mortgage is “first” because it was RECORDED first. If someone puts another lien on a house and rushes to the courhouse and files it before the earlier lien is recorded, it becomes the senior lien. That gives lenders a very big incentive to make sure their lien is recorded promptly and accurately.

But Hultman later makes further false claims about the accuracy of the local recording system:

If history shows anything, adding additional requirements to record documents with a county or clerk will result in more problems, not less problems. It adds costs. People will forget to do it, because people are human, and then there’s a question about what happens if we don’t file it, what impact does it have on the process other than just trying to foreclose.

The implication is that MERS is superior to the local courthouse system. The evidence is the reverse. Chris Peterson has described the utterly unorthodox corporate governance system of MERS, where employees of other firms put on a MERS hat for a short period as a “MERS certifying officer” and execute documents. MERS does not supervise these individuals. Indeed, it specifically disavows any responsibility for the accuracy of MERS’s records:

MERS makes no representations or warranties regarding the accuracy or reliability of the information provided. MERS disclaims responsibility or liability for errors, omissions, and the accuracy of any information provided. MERS does not input any of the information found on the MERS® System, but rather the MERS Members have that responsibility regarding mortgage loans in which they hold an interest.

So if MERS makes no assurances as to accuracy, and only the MERS members are in a position to know the accuracy of their inputs, how can Hultman make any claim as to the performance of its system compared to traditional mortgage recording? In depositions, MERS CEO R.K. Arnold and Hultman have consistently given evasive responses in depositions to questions about audit trails and quality control processes.

And there are widespread indications of member non-compliance with MERS processes, such as making assignments without having proper corporate authorization (including out of bankrupt entities). Moreover, the updating of records by MERS members is strictly voluntary.

This part from Hultman takes a bit more unpacking but is also demonstrably inaccurate:

MERS (inaudible) the title to the mortgage lien in MERS so that from the beginning to the end, the loan, period, is never going to be a break of title because the assignments were recorded.

First, there are already breaks in title. MERS effectively separates the note (the borrower IOU) from the lien (confusingly called a mortgage or in some states, a deed of trust, but the property rights of a deed of trust are stronger than those of a mortgage). In so-called lien theory states, the mortgage and the note must travel together; the lien by itself is a “mere accessory”. No one has directly challenged the implicit MERS view in court, that it’s fine to separate the note and lien by having the note travel through multiple parties in a securitization chain while the lien sits at MERS, and then be reunited if needed for the purpose of foreclosure, but this is an area where the MERS process is at risk. Consider this discussion by securitization industry expert and law professor Linda Beale:

MERS claims that it serves to provide a consistent database that reduces errors caused by frequent assignments and reassignments of mortgage loans. See MERS fact sheet (pdf available at home page). But it seems to do the opposite–eliminate the actual assignment even though securitization has moved the mortgage loan from originator to bank sponsor to servicer or whatever, and avoid the ability of anyone to know who actually owns the mortgage loan from looking at county property records….Further, the idea of letting anyone represent themselves as an employee of MERS when they actually are an employee of a party that might have a reason for committing fraud by inappropriately claiming to own a mortgage seems at least a questionable practice and one that should not be tolerated when it compromises the integrity of the mortgage system. If I were a judge dealing with one of these foreclosure cases, I would have serious qualms about accepting such a document as “proof” that a particular bank had a right to foreclose.

Moreover, title insurers are on a widespread basis refusing to provide insurance on policies written on homes acquired out of foreclosure unless the bank owning the property eats the liability. Why is that? The title insurer sends someone to the local courthouse, sees a lien recorded in the name of the originator, say Countrywide, and then discharged by a trust or a trustee, say Wells Fargo. Folks that is a break in the chain of title. That is the direct result of MERS. And this is not simply our view. Consider this statement by AFX Title:

As the number of real estate foreclosures skyrockets, the odds are higher that a home you live in today, or at some point in the future may have had a foreclosure in its history. Even if the foreclosure has long since passed, a loophole in the way mortgages are recorded can create a serious title defect for future owners. Title analysis performed this month by AFX Title has detected this error to be common in random samples of properties it reviewed. “This could affect the property ownership of millions of homes nationwide” said David Pelligrinelli, of AFX Title. “The mortgage recording method which created this title flaw did not exist until recently. As title abstractors are just seeing this problem emerge now but a wave of title claims is coming over the next year or so.”….

The problem is created through a break in the chain of mortgage ownership….The company who originally appeared to make the loan was normally a retail lending company such as Countrywide or Lending Tree, who typically acted as a sales company, and sometimes remained contracted to service the loan.

In the event that the loan goes into foreclosure at a later date, the then-current owner of the loan files the foreclosure and sells the property to a new owner, often at auction. The land records would show a deed of transfer from the investment bank to the new owner. This creates a break in the chain of ownership of the mortgage rights. In many cases, the transfer of ownership of the mortgage loan has gone from the original lender, through several owners, and then to the foreclosing bank, none of which is recorded on the property title history. Technically, the foreclosing bank has no recorded title rights to foreclose in the first place…

There are reports that some title insurers are indicating that they will not insure for this title defect.

The next troubling bit from the MERS general counsel:

You go to our website, and maybe our website is not the most user-friendly website, but we’re a very transparent company.

This is misleading at best. The idea that you can find out who owns the note via MERS is simply not true.

As a borrower, you can go to MERS’s website, enter your property address, from that obtain the so-called MIN (MERS identification number) and then find out who MERS has listed as the holder. But guess what? In the vast majority of cases, it’s wrong.

MERS will list the investor (which ought to be a trust for a securitized first mortgage) as, say, “Countrywide” which is anything but Countrywide and should instead be the name of a specific trust, likeCWALT-2005-6J. As a result, MERS information does not match that of the parties in the foreclosure

MERS never admits to this major deficiency, as you can piece together from their discussion. Their position boils down to that the borrower can find out who is servicer is from MERS if he needs to, and by implication can find out who holds the note by making a so-called qualified written request under RESPA.

This is also not as hunky dory as MERS would like you to believe. First, many borrowers lack the sophistication to know their rights under RESPA. Second, the responses under RESPA are often inaccurate. The borrower is supposed to be able to find out who owns his note, which for a securitization would be a specific trust, but instead he is often given the name of the trustee, so he still does not know who owns his note. By contrast, with a mortgage recorded in a county office, anyone can go to the office and see who the current holder is. MERS claims that it updates for transfers of servicing, but that isn’t the issue. The issue is who will be foreclosing, and that’s the trust, not the servicer.

The net result is that a system that was open and easy to access by the public has now become difficult and time-consuming for non-insiders to navigate and does not always provide reliable answers.

The next dubious bit from the transcript:

The fact that the instrument and the borrower agrees in the deed of trust that if the investor or servicer so desires, MERS may actually conduct the foreclosure process in the states. And there is no state that has said that we’re doing anything in contravention to state law in any of the 50 states so far.

As indicated earlier, there are state Supreme Court decisions ruling against MERS’s contention that it can be the real party of interest and is instead a mere agent. That means in those states it CANNOT conduct a foreclosure in the name of MERS. Similarly, there are Federal bankruptcy court decisions in multiple states against MERS acting as the plaintiff in foreclosure cases (as in filing for relief from stay) which are significant precedents in those states., such as Sheridan v. MERS in Idaho. The widely-cited Supreme Court ruling in Kansas, Kessler, found the relationship of MERS to that of mortgage purchasers to be “akin to that of a straw man”.

In additiion, see this 2006 (!) Federal bankruptcy court case in New York, Lamy:

However, this court and others have repeatedly said that a nominee of the of owner of the note and mortgage, such Mortgage Electronic Registry System (MERS), may not prosecute a mortgage foreclosure action in its own name as nominee because it lacks ownership of the note and mortgage at the time of prosecution of the action.

Another proof comes in this section of MERS v. Chong, a Federal bankruptcy court case in Nevada. This court consolidated 27 similar cases in this ruling. Consider:

In the majority of the cases, including the present case [Chong], Appellant [MERS] attempted to withdraw the Motion but was procedurally unable to do so because the Trustee would not consent. Particularly in this case, MERS was unable to show that a MERS Certifying Officer was in physical possession of the Note at the time the Motion was filed.

Since MERS has per admission made foreclosures in their own name (and there are tons of court cases to confirm that) and some states have said they are a mere agent, they can’t legally “conduct” a foreclosure, as in make filings in their own name. Yet Hulzman makes this assertion:

And you’ve heard about cases where they say MERS got kicked out of court. Well, that may be true, but it’s not because MERS is not legal or MERS is not within compliance with state law. It’s because there was a defect in the process, and the party who is bringing the prosecution had not done all of the paperwork that they needed to be done, and those cases are usually dismissed without prejudice and they can go back and remedy those positions. But a lot of times that gets recorded as MERS got kicked out of court or MERS loses a case.

An attorney familiar with some of the decisions against MERS commented:

Pure BULLSHIT on the highest degree – we get kicked out of court is a misrepresentation, it really is because who ever was prosecuting the case got the paperwork wrong, and we get dismissed with prejudice so we just come back and refile?

“They get kicked out of court pursuant to Federal Rules 17 and 19 of Civil Procedure, which in short says, fine to be an agent, but you must bring the action in the name of the REAL PARTY IN INTEREST, not MERS. And you must JOIN the real party in interest, which is not MERS. In short, you fucked up the pleadings (I guess you could call that the paperwork) and didn’t name the real party in interest. So then they have to go back and plead the case in the name of the real party in interest, and say we are “XYZ trust”‘s agent. Of course, you know what problems that brings – they can’t, so the case never gets filed again, because XYZ trust never perfected with regards to the PSA.

This last inaccuracy is comparatively minor but telling:

Those loan files are with the servicers who are collecting the payments every day. So they’re really the only party who is into the land record — or, excuse me, in position to actually understand what the loan is and how — and what’s the payments that the borrower could make given their current circumstances. They know how to judge credit.

Anyone who understands banking knows servicers know bupkis re credit. And the loan files on private label deals are generally incomplete and/or thin as to be useless to someone who did understand credit.

So here we have the MERS’s general counsel offering testimony to elected officials that is a tissue of readily verifiable falsehoods and distortions. Why should we continue to allow a company so lacking in integrity and per our related post today, basic operational competence, continue to act as an important keeper of records of the single most important asset to the vast majority of American households?