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MERS Concerns Extend to Commercial Real Estate

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When we’ve discussed the woes afflicting residential mortgage securitizations, in particular, the deep seated problems arising from the frequent if not widespread failure of the original parties to the deal to take the steps stipulated in their own agreements needed to convey the notes (the borrower’s promissory note) to the securitization legal vehicle, a trust. Although we’ve touched on the problems posed by MERS, if you’ve screwed up on conveying the note in a RMBS, you are very badly stuck. MERS related problems are rounding error. But that isn’t to minimize the problems MERS has created separately, particularly with the integrity of local records, and the way MERS has been abused in court proceedings. Specifically, and bizarrely, foreclosures are often made in the name of MERS. In 45 states, the note is the critical document, and the lien, which is what is registered at MERS, has no independent status. It is the noteholder that has to foreclose, not a mere computer registry for the mortgage. Increasingly, state courts are taking a very dim view of MERS foreclosures.

Housing Wire points out that MERS has also been a party foreclosing in some commercial real estate transactions, again presumably in securitized deals. However, HW assures readers this won’t be a big problem, since relatively few commercial deals actually wind up in foreclosure (I assume because most have cash flow, and perhaps due to differences in servicer fee structures, that most commercial RE loans gone sour are restructured).

From Housing Wire:

Possible foreclosure issues with loans processed through the Mortgage Electronic Recording System, or MERS, may be spreading to commercial real estate, but the effect on securitizations could be minimal, according to Barclays Capital analysts…

According to BarCap, these lawsuits are spreading outside the residential space, challenging foreclosures on loans backing commercial mortgage-backed securities.

But analysts believe there are legal remedies available to limit any negative effect for investors.

“As such, there could be a scenario where MERS originated loans could see a possible extension in liquidation timelines by a few months, but this should not affect CMBS valuations on a fundamental level,” according to BarCap.

Foreclosures still remain low on CMBS loans, standing at about 2.2% of outstanding balance through September, according to analysts.

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16 comments

  1. David

    Yves,
    I recall you predicting not so long ago that that
    a lot more retail outlets are going to go bust within
    a few years. With this in mind, could there be a big foreclosure mess in commercial real estate in that time frame ?

    1. Yves Smith Post author

      That was a Jim Quinn post, but yes, it pointed to planned retail store expansion in the face of flagging consumer demand and existing high retail square footage per capita. And your implied point is correct: while office buildings might suffer from a high rate of vacancies and falling renewal rental rates, shopping centers can become white elephants in a surprisingly short period of time if they lose anchor tenants.

  2. vlade

    On the other hand, would not commercial RE people have more incentives to challenge the payments (on basis of making sure they pay the right person) even when they can afford to pay?

    If nothing else, it should give them stronger hand in any negotiations with their bank.

    1. kezza

      I suppose this question is directed towards Lehman Bros? They were the big player in CRE. Valukas didn’t look into that AFAICT.

  4. beesymph

    To avoid tax issues and NY trust law issues the note had to be conveyed to the REMIC trust within a specified time. Once the time period passed you could not retroactively convey the note. Does the same problem exist in the commercial area if they followed a parallel structure. Thus, it would create an IRS problem and perhaps a securities law problem. Following the reasoning through wouldn’t this give CMBS holders the same rights to put back the notes to the sponsoring investor, i.e. the banks? This is way beyond may area of expertise, but I am trying to apply the logic from the residential side.

  5. Divorced Justice

    Can’t the FBI go to their data centers (MERS) and seize their equipment? (This would be symbolic of course, keep in mind the original DARPA design and intent of *the network*) At this point in time, it is amazing that the traditional goons and stormtroopers haven’t moved in to bust people. I guess more boilerplate and reams of legal documents must fly. (The “goons” do appear to be helping some borrowers move out, but that’s an entirely different topic)

    1. Externality

      During these difficult times, the (In)Justice department cannot waste scare resources on problems like prosecuting corrupt bankers. It has priorities:

      1. Arresting Californians who possess one ounce of marijuana. The AG himself has made it clear that, if Prop 19 passes, that he “vigorously enforce” federal laws criminalizing the possession, sale, or growing of marijuana. http://www.mercurynews.com/ci_16349224?nclick_check=1 The Obama administration even arranged for the Russian Drug Czar, a former KGB officer, to come to California and threaten us that bad things will happen if it passes. http://www.foreignpolicy.com/articles/2010/10/22/interview_viktor_ivanov?page=0,0

      2. Convincing an federal appeals court to reinstate “Don’t Ast, Don’t Tell” http://jurist.org/paperchase/2010/10/ninth-circuit-temporarily-blocks-suspension-of-dont-ask-dont-tell.php While DADT was overturned, discharges for homosexuality were banned and LGBTs allowed to openly enlist (or reenlist).

      3. Convincing a federal appeals court to reinstate the ban on federal and interstate recognition of gay marriages. http://www.politico.com/blogs/joshgerstein/1010/Obama_admin_appeals_DOMA_ruling.html

      4. Suing states that want to require employers and police to verify employees’ and arrestees’ immigration status.

    2. kezza

      Does the FBI have the manpower to do that? I believe they are overwhelmed by investigating cases of Mortgage Bankers Association’s definion of mortgage fraud.

  6. Fred Smith

    Nobody has brought up the distinct possibility that the loan servicers may well have bundled and sold each of these loans MORE THAN ONCE to differernt investors via the securitization process. THIS COULD BE THE REAL REASON THAT THERE IS NO DOCUMENTATION / PAPER TRAIL. The non-existent documentation and accounting is entirely consistent with this scenario. This means that the entire plan was a true Ponzi scheme in the worst sense. In other words, rather than selling the loan once to investors, as we have all naively been assuming, there is no reason to believe that they did not double-dip or quintuple-dip and sell the exact same loan to completely new buyers. THIS IS A LEVEL OF FRAUD THAT THE AMERICAN PUBLIC HAS NOT YET CONTEMPLATED.

    There are no new laws that are necessary. All that is necessary is for the states to FOLLOW THE EXISITING LAWS which have been around much longer than any of us, or any of the banks themselves. These laws were devised to deal with all property frauds, including the current foreclosure frauds. No more bailouts. Let the chips fall where they may.

  8. Smells Like Chapter 11

    Without doubt, some securitizer sold the same note twice. Sounds like the movie the producers where Zero Mostel sold the same play 20 times.

    That is why you have to get the ORIGINAL copy of the note.

    Whoever has the ORIGINAL can enforce it. UCC 3-301 (a “person entitled to enforce” means the holder of the instrument).

    If you don’t have the right endorsements, the holder might not be a “holder in due course” and the borrower can set up some defenses like mistake or fraud. UCC 3-302 and 3-305. Given the predatory lending issues in the residential market this would be a more of problem in RMBS, than CMBS.

    1. Yves Smith Post author

      I don’t see any reason to believe this happened on CMBS. I don’t see any evidence that they had the problems with the failure to convey notes that you saw with RMBS. With RMBS, you had a huge incentive, that there were literally thousands of notes to convey, it was a huge pain. You had vastly fewer properties in a CMBS deal.

      And the pipeline wasn’t screaming for more product that than the infrastructure could handle.

      1. skippy

        Funny thing, once you get a palate taste for some things…it can become a habit…yield seeking crack addicts live in the now…

        Skippy…just sayin…

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