naked capitalism

Plank after plank of the mortgage recording company MERS’ business model has come under attack. To date, the results do not look good for the embattled company.

MERS has repeatedly insisted that its operations are legal. It would be more accurate to say that insufficient attention was paid to legal issues when the firm was created and the permissibility of its operations were under the radar and hence in a legal grey area for many years. Now that they have been challenged in court, MERS has had to retreat from many positions it took in public. Despite its protestations that everything it did was kosher, the database firm has now retreated from one of its widespread practices, of allowing foreclosures to be made in the name of MERS, after a number of state supreme courts and Federal bankruptcy courts issued rulings to the contrary.

Not surprisingly, MERS has the look of a company in trouble. Not only did its president R.K. Arnold resign in early January, but its corporate secretary, Bill Hultman, who among other things supervised its legal department, was demoted a few days ago. Having read a few of Arnold’s and Hultman’s evasive and damaging depositions, I have to wonder where the board has been all these years. This move is long overdue.

The week before, MERS suffered a major blow in a bankruptcy (Federal) court ruling in New York state, (in Re Ferrel R. Agard). The judge effectively found the MERS system to be evidence of…..precisely nothing. We’ve noted before the numerous flaws, troubling signs of a lack of standard database/data entry/data integrity protocols. Updating the records is strictly voluntary, and accuracy of changes to the database is the members’ responsibility. Given that the people who have access to the system are low level staff who are trained minimally if at all and subject to high levels of turnover, this “system” is a prescription for a record keeping mess.

And as the judge noted, there is no reason to believe anything, from either a practical or legal standpoint, that anything contained in MERS’ records corresponds to reality:

By MERS’s own account, it took no part in the assignment of the Note in this case, but merely provided a database which allowed its members to electronically self-report transfers of the Note. MERS does not confirm that the Note was properly transferred or in fact whether anyone including agents of MERS had or have physical possession of the Note. What remains undisputed is that MERS did not have any rights with respect to the Note and other than as described above, MERS played no role in the transfer of the Note….

However, there is nothing in the record to prove that the Note in this case was transferred according to the processes described above other than MERS’s representation that its computer database reflects that the Note was transferred to U.S. Bank. The Court has no evidentiary basis to find that the Note was endorsed to U.S. Bank or that U.S. Bank has physical possession of the Note.

And the judge made clear he would have no truck with MERS’s “too big to fail” posture (emphasis ours):

The Court recognizes that an adverse ruling regarding MERS’s authority to assign mortgages or act on behalf of its member/lenders could have a significant impact on MERS and upon the lenders which do business with MERS throughout the United States. However, the Court must resolve the instant matter by applying the laws as they exist today. It is up to the legislative branch, if it chooses, to amend the current statutes to confer upon MERS the requisite authority to assign mortgages under its current business practices. MERS and its partners made the decision to create and operate under a business model that was designed in large part to avoid the requirements of the traditional mortgage recording process. This 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.

The latest bad news for MERS is a planned suit by a Massachusetts county, South Essex to be precise, which has Salem as its largest town. Its town clerk charges that MERS amounts to a scheme to avoid local recording fees (duh!) and it estimates that the county has lost at least $22 million in fees over the years. The text of its press release:

O’BRIEN CALLS ON MERS TO COME CLEAN AND PAY UP: SAYS ESSEX COUNTY OWED $22 MILLION DOLLARS

Essex South Register of Deeds John O’Brien announced today that he will be seeking over $22 million dollars from the Mortgage Electronic Registration System, “MERS” which represents several major banking conglomerates. O’Brien bases the $22M number on the fact that the Salem registry has recorded over 148,663 MERS mortgages since 1998. After a careful review of a number of these mortgages O’Brien said it became very clear to him that MERS had assigned mortgages to other entities at least twice without paying a recording fee. Based on this information the taxpayers have been defrauded out of $22,299,450 in Southern Essex County alone. It is quite possible that in some cases they may have assigned the notes more than twice resulting in even greater loss of revenue. O’Brien called MERS “one of the greediest schemes ever perpetrated on the American people. They have compromised the integrity of the public land recordation system and in doing so, have wreaked havoc on our economy”.

Last week MERS announced a major policy change conceding that assignments should be recorded in the various Registries across the country and “assignments out of MERS’s name should be recorded in the county land records, even if the state law does not require such a recording.” In addition MERS instructed its members to “not foreclose in MERS name”. O’Brien further states “MERS has now finally acknowledged that their business model was flawed, and they didn’t adhere to the legal requirement that all assignments of a mortgage must be recorded at the local Registry of Deeds.” “If they had followed the law the public would know who was buying and selling their mortgage, and it would have been an open, honest and transparent process. The fact that they deliberately chose to create a for-profit private cyber Registry of Deeds whose only purpose was to avoid paying the same fees as everyone else and keeping the public in the dark as to who was the rightful owner of the mortgage clearly demonstrates to me that this was a scheme of epic proportions.” “When Wall Street and these major lenders joined together in creating MERS, they plunged us into a housing nightmare with little or no regard for their actions. It’s obvious that their only motivation was to manufacture huge profits off the backs of homeowners and taxpayers. They should all be ashamed of themselves and step up to the plate and do the honorable thing and make the taxpayers’ whole,” O’Brien said.

The Essex South Registry of Deeds is one of 21 Registries in Massachusetts which have recorded MERS mortgages .O’Brien estimates that based on his conservative estimate of two assignments per mortgage the Commonwealth may be owed statewide upwards of $200 million dollars in lost recording fees. Nationwide, the amount of revenue lost could be in the billions. O’Brien is calling on MERS to come clean and inform the registers of deeds across the country as to the number of times they assigned mortgages to other entities. Only then will we get a true picture of the economic impact that this fraud has had on our country.

O’Brien, who in November, 2010, notified Massachusetts Attorney General Martha Coakley about MERS, will now be forwarding to her this additional information. “We need to act quickly to recover these funds,” O’Brien said.

Procedurally, I’m a bit surprised that the county hasn’t sued MERS on its own. Presumably, it hopes the state will act on behalf of it and other counties.

And MERS is the sort of place where a plaintiff ought to have a field day. Its past depositions have so compromised it that there is already plenty of damaging information in the public domain. It’s actually a teeny company with fewer that 50 employees. The real work is done by EDS and its 20,000 “MERS certifying officers”, who are really employees of servicers or foreclosure mills who weirdly get authorization to pretend to be MERS employees for a few nanoseconds. The fact that it is so small means it does not have the bucks to spend on serious law firms (and even if it did get some dough from its shareholder sugar daddies, it’s not the sort of regular client that would get the attention of the second team, much the less the first team. Who you are able to get to work on your case is very much a function of the size of your legal bills over time).

But the flip side is there is in theory not much blood to get from the MERS turnip. A 50 person company does not have much in the way of a balance sheet. But the MERS database is nevertheless a valuable asset because in addition to whatever value there is to its mortgage database (readers are encouraged to argue that point) it also has a database of servicing rights which is very important to the entire industry.

MERS looks to be going down for the count. A suit against the company that seeks damages for unpaid recording fees looks to be inevitable. A rash of cases from jurisdictions all over the US would kill the company based merely on litigation costs, irrespective of the outcome. So a bankruptcy and sale of the database looks inevitable. But watch the three card monte to make sure MERS’ assets aren’t transferred on the cheap as a way to shortchange creditors, particularly in the light of the tremendous damage done.