The MERS Database: Another Piece of the Mortgage Mess

The lending industry has created a nifty way for themselves to get out of properly recording the chain of assignment on your mortgage note. It’s called the Mortgage Electronic Registration Systems database (“MERS”).

MERS’ website says “MERS is an innovative process that simplifies the way mortgage ownership and servicing rights are originated, sold and tracked. Created by the real estate finance industry, MERS eliminates the need to prepare and record assignments when trading residential and commercial mortgage loans.”

So what’s wrong with this system? A couple of things, but the most disturbing thing about the MERS database is that the entire system is set up so that you, the homeowner, have very little information about the ownership of the Note to your property.

The MERS system completely lacks transparency. Because the database was created by the lenders, they are the only entities who have access to it. You can find out who the servicer of your mortgage is, but that’s all the information that is available to you as a homeowner.

The database is also problematic from a legal standpoint, because it completely circumvents the proper legal process that was already in place.

Ownership of the Note to your property should always be recorded at the recorder’s office in the county in which the property is located. However, when lenders began packaging mortgage loans into mortgage-backed securities, it was too much work and expense to properly record the transfer of ownership at the local county recorders offices, which is why the lending industry came up with this database. They could buy and sell mortgages and track the ever changing ownership of Notes and servicing rights within their own industry and without prying eyes to point out that what they were doing was really improper and illegal.

This is why the “produce the note” issue is so compelling: there is a very real possibility that the true owner of your Note cannot properly document or prove that they own the Note, because the chain of assignment was never properly recorded, or the original Note was lost or destroyed in the rush to package it up with other mortgages and sell them off.

When I audit a loan, I usually see that the Note and Deed of Trust are properly recorded at the county recorder’s office at closing, and there are typically no other documents that show any transfer of the Note.

Many times, the original owner of the Note is no longer in business. If the original lender doesn’t exist, who is receiving the payments on the loan? This usually points to a mortgage that has been pooled and placed into a mortgage-backed security. These were sold on the stock market and had many investors who owned a piece of these securities.

Another interesting issue I’ve seen with MERS relates to the issue of standing.

Typically, when a Note is initially recorded, it lists MERS as the beneficiary on the Deed of Trust. MERS’ alleged status as a “beneficiary” under the Deeds of Trusts is false, as demonstrated by its own website. 

MERS’ website also notes that “MERS remains the nominal mortgagee no matter how many times servicing is traded,” and that it is nothing more than a computer system designed by the mortgage industry (and capitalized by investors from the mortgage industry) to protect them from having to pay recording fees so that the entity that owns any mortgage loan is available. 

MERS’ entire business operation is premised on the wholesale and ever changing sale or transfer of “servicing rights.” MERS does not own the loans; rather they are acting as a “nominee” for whomever might or might not say that it owns the note at any given time.  Further, since MERS never obtains possession of the Promissory Note which secures the Deed of Trust, it cannot ever have the right to enforce the terms of the Deed of Trust, since that right is reserved to the owner and holder of the secured instrument, the Promissory Note. 

MERS’ also purports to appoint unidentified and unspecified persons as “officers” of MERS for the purpose of executing documents to effect transfers.

A corporation cannot create corporate officers for the purpose of foreclosing on your property. Under this premise, MERS is contending that anyone who works for a mortgage lender, servicing company, foreclosing trustee, title company, etc. can become an officer of MERS without providing it with notification, without getting its approval or taking actions in its name that affect the property rights and security interests of others.

There have recently been quite a few challenges to MERS’ standing and its right to foreclose, and many courts are finding that MERS cannot foreclose because they lack standing, because they don’t actually own the Note.

The big problem for homeowners comes back to who actually owns the Note on your property. Let’s say you are in foreclosure, but somehow manage to “self correct” and bring the arrearage current. You scrape for a couple of months and manage to catch up on your mortgage payments, and you think you’re safe because you’ve paid the past due amounts.

Then, a few months later, you find out that your property is in foreclosure again, because the party who collected your money a few months ago didn’t actually own the Note, and the true owner was never properly paid. What a nightmare! This could happen to you.

So what’s a homeowner to do? If you are in foreclosure, and you live in a judicial foreclosure state (meaning they have to actually file a lawsuit to take your home), you can file a motion to request that the foreclosing party produce the original note to prove they have standing. You’ll want to do some research on how to do this in the state where you live, because local court rules vary.

If you live in a non-judicial foreclosure state (meaning they can just take your home through a trustee’s sale), such as Arizona, it’s much harder to challenge the foreclosure because you have to sue the lender or file a temporary restraining order and make these legal challenges within the framework of that lawsuit. Many times, if the homeowner is losing their home, they don’t have the money to fight a lender, and finding a sympathetic attorney to help you is difficult.

Josh and I are still working on finding attorneys who will work with homeowners for a reasonable fee; e-mail us for more information.

Judges in Arizona are not particularly sympathetic to homeowners who are waiting until the last minute to ask them to stall a foreclosure, so you need to be more proactive. If you decide to sue the lender, you need to do it around the time you receive the Notice of Default or a few months before the actual foreclosure date. Otherwise, it just looks like you’re retaliating against the lender because they are foreclosing. Also, the judges in Arizona don’t get that the federal laws really do tie their hands. TILA says that you only need to find $35 in undisclosed finance charges if you’re in foreclosure, and the judges aren’t buying it.

I wish I had some better answers for the homeowners in non-judicial foreclosure states, but at this point, your best option is to get a loan audit and consider hiring an attorney who “gets it” to force the lender to modify your loan in exchange for your waiver of rights under TILA.

As always, I encourage you to contact your elected officials and let them know you’re mad as hell about what’s happening with the lending industry. Demand that they represent your interests as the taxpayers. Together, we can change the way things are done in this country.

Got questions about MERS, loan audits or anything else related to foreclosure? Send me an e-mail at Christine@desertedgelegal.com or post a question in our forum.

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