LOSING OUR HOMES, LOSING OUR WAYProfessor Peterson

7/28/2019 LOSING OUR HOMES, LOSING OUR WAYProfessor Peterson

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LOSING OUR HOMES, LOSING OUR WAY, OR BOTH?

FORECLOSURE, COUNTY PROPERTY RECORDS, ANDTHE MORTGAGE ELECTRONIC REGISTRATION

SYSTEMCHRISTOPHERL.PETERSON*

I would like to begin by echoing some thank yous, the first to

Professor Myron Grauer for his fine hospitality. He has taken such good

care of Steven and I while we have been in town. I would also like to

thank Dean Simpson for his kind hospitality, and I would also like to thank

Capital University Law Review, as they have been great to work with,

particularly Rachel Gagnon, the Editor in Chief. As we were chatting this

morning, I learned that she does not have a job yet and she has been aconsummate professional, so I would like to place a sort of help wanted

brokerage kind of thing hereif any of you are looking for an associate I

think you could do significantly worse. With that, thank you for the honor

of appearing today. It is a real pleasure to be here.

Goldman Sachs is projecting twelve million foreclosures on all types

of loans over the next five years.1 That is twelve million foreclosures. The

number comes out easily, but lets think about what that number actually

means. If we just assume for a moment that there is one person living in

each of those houses (obviously average families are about 2.5 people and

keep in mind some of these homes are investment propertiesso well

Copyright 2012, Christopher L. Peterson.* Associate Dean for Academic Affairs and Professor of Law, University of Utah, S.J.

Quinney College of Law. This article is based on a transcript of Dean Petersons speech

delivered on October 28, 2011 at the Capital University Law Schools Symposium entitled

The Foreclosure Crisis: New Strategies for Addressing the National and Local Calamity.

The Capital University Law Review has included light citations and editorial revisions to

the transcript for purposes of documentation and clarity. The subject matter of this

presentation draws, in part, upon: Christopher L. Peterson, Two Faces: Demystifying the

Mortgage Electronic Registration Systems Land Title Theory, 53 WM. & MARY L. REV.

111 (2011) and Christopher L. Peterson,Foreclosure, Subprime Mortgage Lending, and the

Mortgage Electronic Registration System, 78 U.CIN.L.REV. 1359 (2010). The views and

opinions expressed herein are solely Dean Petersons.1 Jan Hatzius & Michael A. Marschoun, Home Prices and Credit Losses: Projections

and Policy Options 16 (Goldman Sachs, Global Economics Paper No. 177, 2009)

(predicting 13 million defaults beginning in 2008Q4 until the end of 2014 . . . .).


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822 CAPITAL UNIVERSITY LAW REVIEW [40:821

take the conservative assumption of one person per home), the

demographic group of individuals facing the loss of their homes exceedsthe total combined populations of twelve states: Wyoming, Vermont,

North Dakota, Alaska, South Dakota, Delaware, Montana, Rhode Island,

Hawaii, Maine, New Hampshire, and Idaho.2 Imagine for a moment that

you tried to ask everyone in Vermont to get up and move to New

Hampshire, and everyone in New Hampshire to get up and move to

Vermont. This is the kind of forced dislocation that one would expect with

a small civil war or a catastrophic natural disaster. It is probably the

largest forced dislocation of Americans since the Civil War, or maybe the

Great Depression.3 It is a huge impact.

Fitch ratings estimates that about 50% of sub-prime mortgages

originated since 2006 are going to end in foreclosure.4 Half of sub-prime

mortgages are going to result in foreclosure. Sixty-one percent of 2006sub-prime loans also went to people who could not qualify for prime loans

with better terms.5 It is not just that there were risky borrowers making

2 SeePopulation Estimates; Annual Population Estimates, U.S.CENSUS BUREAU, http://

www.census.gov/popest/data/state/totals/2009/tables/NST-EST2009-01.xls (last visited

Mar. 19, 2012).3 More than 2.75 million soldiers fought during the civil war. SeeSoldiers and Camp

Life, LIBRARY OF VA., http://www.lva.virginia.gov/public/guides/Civil-War/Soldiers.htm

(last visited Mar. 19, 2012). Estimates of the number of confederate civilians displaced by

the war exceed 400,000. See Unhappiness Abroad-Civil War Refugees, CITY OF

ALEXANDRIA VA. (Mar. 29, 2011, 11:00 PM), http://alexandriava.gov/historic/fortward/

default.aspx?id=40306. The Dust Bowl condition that coincided with the economic

disruptions during the Great Depression era resulted in a mass migration of millions of

people from the Great Plains to the Western U.S. in search of jobs and better living

conditions. North American Drought: A Paleo Perspective, NATL OCEANIC AND

ATMOSPHERIC ADMIN. (Nov. 12, 2003), http://www.ncdc.noaa.gov/paleo/drought/

drght_home.html. Ironically, California, which was the destination for many Dust Bowl

famers in the 1930s, is now experiencing its own wave of displacement. See Anne J.

Martin, After Foreclosure: The Displacement Crisis and the Social and Spatial

Reproduction of Inequality 1 (Inst. for the Study of Soc. Change, Working Paper No. 2009-

2010.48, 2009).4 Grant Bailey, Vincent Barberio & Glenn Costello,Revised Loss Expectations for 2006

and 2007 Subprime Vintage Collateral(Fitch Ratings, 2006) ([L]oss severity expectations

are 58% for 2006 loans and 64% for 2007.).5 Rick Brooks and Ruth Simon, Subprime Debacle Traps Even Very Credit-Worthy,

WALL STREET J.,Dec. 3, 2007, at A1.


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2012] LOSING OUR HOMES, LOSING OUR WAY 823

loans, there were risky loans that were being sold to borrowers who

qualified for better loans.Add to these twelve million familiesI want to point out the real and

meaningful human impact on individualsindividuals such as Vincenza

Garcia who owned her home since 1996.6 She lived in Milford,

Connecticut.7 She won the Freedom Lawn Contest for her yard

landscaping.8 She agreed to a hybrid ARM loan, and when the price was

re-cast, she could not afford the interest rates and she could not afford her

payments.9 The night before the police came to evict her, she wrote an

eleven-page note to her family, locked her cats in the bathroom, and shot

herself in the head.10 Addie Polk was from Ohio.11 She was a ninety-one

year old widow in Akron and a Deaconess at her church.12 Addie could

not make her payments on her loan that she probably never should have

taken out, and when they came to foreclose, she shot herself in the chest.13Betty Lipply was a seventy-two year old woman from East Palestine, Ohio,

who hung herself when the police came to take her house.14 Greg Bellows

was from Philadelphiahe shot himself.15 Carlene Balderrama was a

mom in Taunton, Massachusettsshe shot herself ninety minutes before

6 Frank Juliano,Foreclosure Notice Leads to Suicide of Nice Lady,CTPOST.COM (Jan.

3, 2010, 12:57 AM), http://www.ctpost.com/local/article/Foreclosure-notice-leads-to-

suicide-of-nice-lady-307253.php.7Id.8Id.9See id.10 Id.11 Craig Johnson, Homeowner Who Shot Herself Amid Eviction Dies, CNN (Mar. 31,

2009), http://articles.cnn.com/2009-03-31/us/eviction.suicide.death_1_eviction-notices-

fannie-mae-joyce-smith?_s=PM:US.12Id.13Id.14Family Says Suicide Caused by Foreclosure Action, VINDY.COM (Feb. 12, 2009),

http://www.vindy.com/news/2009/feb/12/family-files-suit-after-suicide/.15Foreclosure Threat Drives Some to Suicide, CBSNEWS (Mar. 24, 2010, 4:57 PM),

http://www.cbsnews.com/stories/2010/03/24/national/main6329383.shtml ([O]wner

Gregory Bellows shot and killed himself shortly before deputies arrived to evict him from

his Roxborough home.).


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the police showed up to do the foreclosure and evict her from her home. 16

Carlene left a note for her family, telling them to take the life insuranceproceeds and use that to pay off the house so that they could continue to

live there.17 Of course, in addition to not understanding her loan, she also

did not understand her insurance policy, which had an exemption that

allowed the insurance company not to pay out on the life insurance because

she had killed herself.18 When they were taking the body out, investors

that were looking to buy the home in the foreclosure sale showed up and

tried to go through the house while her family was taking her body to the

morgue.19 Those stories have been told by a lot of peoplea lot of chilling

statistics. I try to be funny, but this is not funny. I want us to remember

these kinds of families.

Here is one more statistic that has received much less coverage,

although increasingly there has been more debate about it in the press andWashington: About 60% of American residential mortgages are now

nominally owned by a company called the Mortgage Electronic

Registration System, Inc. (MERS).20 Many of you are familiar with

MERS; however, some of you may have never heard of MERS before.

What is interesting about this company is that this company has affected or

has been involved in more mortgage loans than any other institution in our

country, including Fannie Mae or Freddie Mac.21 In terms of the absolute

number of contracts, it is the most involved company in the entire

16 Michael Levenson, Facing Foreclosure, Taunton Woman Commits Suicide,

BOSTON.COM (July 23, 2008, 12:17 PM), http://www.boston.com/news/local/breaking_

news/2008/07/facing_foreclos.html.16Id. (Police say that Balderrama shot herself Tuesday afternoon 90 minutes before

her foreclosed home on Duffy Drive was scheduled to be sold at auction . . . . She left a

note for her family saying they should take the [life] insurance money and pay for the

house . . . .).17Id.18 Cf. id. (discussing the note she left instructing her family to use her life insurance

money to pay for the home).19 Charles Winokoor, Husband Reflects on Wifes Suicide and the Threat of

Foreclosure, THE METROWEST DAILY NEWS (Aug. 29, 2008, 7:59 AM),

http://www.metrowestdailynews.com/state/x1311852231/Husband-reflects-on-wife-s-

suicide-and-the-threat-of-foreclosure?zc_p=1.20 Kate Berry,Foreclosures Turn Up Heat on MERS,AM.BANKER, July 10, 2007, at 1.21 Christopher L. Peterson, Foreclosure, Subprime Mortgage Lending, and the

Mortgage Electronic Registration System, 78 U.CIN.L.REV. 1359, 1361 (2010).


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securitization debacle.22 Yet, it is hardly talked about. This is very

puzzling, and it presents the following questions: What was MERSs rolein the American foreclosure crisis? Does MERS have anything to do with

all this? How does it affect things? What are its underlying legal

implications?

First, I will discuss the legal and political backgrounds of our land title

recording systems. Second, I will discuss the business practices and what I

believe is a problematic legal foundation for this new MERS system that

has replaced the older traditional system. Finally, I will offer a bit of

analysis at the end about what I think MERS tells us about the financial

crisis, our public information infrastructure that supports commerce in our

society, and some thoughts about democratic governance of commerce.

First is a little background about the state land title recording systems.

The other lecturer, Professor Schwarcz, pointed out how it is difficult inour society, and all societies, to know who owns some things. For

example, some things are easiermy necktie. Everyone feels pretty

comfortable with the knowledge that I own my necktie. We dont need to

have a system that records who owns neckties. It is around my neck, it is

not worth that much; everyone is willing to guess that yes, that is

probably his necktie. We do not need to spend too much time on that.

Although we do have an Article 9 personal property system where we

could, I suppose, record security interests in neckties. Often it is not done

because it is just not worth it.23

On the other hand, land is much more important, it is much more

expensive, and there is no intimate personal connection between land

ownership and the physical body of people. You can be on a piece of land

all the timeyou might be a tenantbut that doesnt mean you actually

have any fee simple ownership interest. You can own land and never even

see that land. You may live on a different continent, but nonetheless, you

still want your property rights associated with that land to be clear. Trying

to deal with the opacity of who owns land, societies began developing land

title recordings systems early on to try and create some recognizable public

connection between the owner of the land and the land itself.24 This was

22Id. at 137374.23See, e.g., Linda J. Rusch, The Article 9 Filing System: Why a Race-Recording Model

Is Unworkable, 79 MINN L.REV. 565, 56970 (1995) (examining the relative costs of filing

for personalty with the costs of recording for real property).24 JESSE DUKEMINIER,JAMES E.KRIER,GREGORY S.ALEXANDER&MICHAEL H.SCHILL,

PROPERTY 645 (7th ed. 2010).


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very common in the early United States, much more so than Europe.25 In

Europe, the connection between who owns the land and the land itself wasoften as simple as looking at the highest hillit was the rich white guy in

the castle up there who owns the land.26 They had less of a need for

recording systems. Here in the United States, when European colonists

came over, our vision was of a different society.27 Here, there was going to

be more middle class ownership of land interests,28 more farmers that

owned their own land. Early on it became clear that we had to have some

public records of who owned what.29

The first American recording statute was adopted in 1636 in the

Plymouth Bay Colony.30 It said that all mortgages had to be committed to

the public record.31 Three years later, Connecticut required that all

mortgages shall be accounted of no value until they be recorded.32 It

was not just Yankeesdown in Virginia they also adopted a recordingstatute that same year.33 In fact, by the American Revolution, all thirteen

colonies had adopted recording statutes.34 For example, the Pennsylvania

recording statute, which was adopted in 1717 (long before the United

States Constitution) is still enforced today with essentially the same terms

that it had back then.35 These old and venerable statutes empowered

county recorderswho are usually elected officials in each county in the

United States36to be the repository of information that identifies who

25Id. at 64546.

26See WILLIAM B.STOEBUCK&DALE A.WHITMAN,THE LAW OF PROPERTY 16 (3d ed.

2000) (discussing the feudal system following the Norman conquest).27Id. at 21.28Cf. id. (Throughout the . . . United States, it seems clear that tenure never existed.).29Id. at 869.30 RICHARD R.POWELL &PATRICKJ.ROHAN,POWELL ON REAL PROPERTY 1046(1968).31Id.32 JOYCE PALOMAR,PATTON AND PALOMAR ON LAND TITLES 10 (3d ed. 2003).33Id. at 11 n.7.34Id. at 10.35Id. at 11 n.7.36 See 76 C.J.S. Registers of Deeds 3 (2007) (describing the office as either

appointive or elective). AccordNatl Assn of Cnty. Recorders, Election Officials and

Clerks, Welcome, NACRC, http://www.nacrc.org/ (last visited Mar. 20, 2012) (noting that

NACRC is a professional organization of elected and appointed county administrative

officials . . . .).


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owns land.37 Sometimes they are called registers of deed in other states.38

How does that old public system of ownership recording link up with thesecuritization structure discussed in Professor Schwarczs earlier lecture

and article?

This schematic represents how we traditionally recorded mortgages in

a structured finance conduit of sub-prime mortgages. There is an

originatora mortgage lending company that makes the loan to a

homeowner. This originator places a copy of the mortgage with the county

recording office. Then of course, the originator can sell that loan to

probably one intervening company or entity between the trust and the

originator. The reality is that, particularly in private label securitizations,

on late vintage private label securitizations there could be six

37 POWELL &ROHAN,supra note 30, at 1047.38 76 C.J.S.Registers of Deeds 1 (2007).


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transactionsor conceivably even morelinking the originator to the

trust. In the traditional view, however, the expectation would be that thenext person that purchases this mortgage records a document (an

assignment of that mortgage) with the county recorders office to maintain

and update the public records so that everyone knows who owns that

interest in the land. Then, the trustee, on behalf of the trust, would also be

expected to record a copy of the assignment from the depositorthe last

owner of the loanbefore it is placed into the trust on behalf of the

investors. With respect to each of these transactions, the county recorders

office collects a small fee every time you record somethingthey expect

you to pay a fee. It is not too much, the average or typical fee would be

about $35.39 A little bit more in say, New Jersey; a little bit less in a state

such as Utah where I live.40

That is how it was designed to work. If the mortgage owner needed toforeclose on the land because the family could not make the payments, it is

the trustee on behalf of the trust, or possibly a servicer acting as an agent of

the trustee, that goes and takes the house away from the family.

There are some problems with this system. I dont mean to eulogize

land recording systems as a utopia of the past. A lot of county recording

offices became out of date, particularly as commerce began moving faster

and faster.41 They had a hard time processing the paperwork, particularly

in smaller rural counties where there are not that many people in the

county. It is not cost effective to buy complicated and expensive computer

39 Andrew Lipton,Mortgage Electronic Registration Systems, Inc. (MERS): Its Impact

on the Credit Quality of First-Mortgage Jumbo MBS Transactions 2 (Moodys, 1999).40 See, e.g., Registration of Deeds & Mortgages, CAMDEN COUNTY N.J.,

http://www.camdencounty.com/government/county-services/registration-deeds-mortgages

(last visited Mar. 18, 2012) (showing a fee of $30 for the first page and $10 for each page

thereafter); Recording Requirements and Fees, SALT LAKE COUNTY RECORDER, http://

slcorecorder.siredocs.com/RecHome/OfficeFees.aspx#Requirements (last visited Mar. 18,

2012) (showing a fee of $10 for the first page and $2 for each page thereafter).41 Cf. John L. McCormack, Torrens and Recording: Land Title Assurance in the

Computer Age, 18WM.MITCHELL L.REV. 62, 6465 (1992) (discussing how inadequately

funded recording systems undercut attempts at Torrens-type legislative reforms to the

recording process);Charles Szypszak,Public Registries and Private Solutions: An Evolving

American Real Estate Conveyance Regime, 24 WHITTIER L. REV. 663, 66567 (2003)

(noting that attempts to introduce more regulation into the recording system would be

difficult to reconcile with the fast-paced American economy, of which real estate

conveyances play a major part).


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systems to record and publish everything on the Internet, because they do

not have that many records coming through the door. In some larger urbanareas, recorders have become overwhelmed with the problems of urban

decay and have had a hard time maintaining effective recording systems.42

On the other hand, there are about 500 to 600 counties around the country

that now have their process completely slick. It is all on the Internet, all

digital, and all very effective. Where Im from, you can search everything

online.43 It is all very convenient. Some county recorders were doing a

good job, others were not. That was part of the incentive for creating the

new system, that is, the innovation of MERS.

In 1993, a mortgage finance company white paper was released at the

annual convention of the Mortgage Bankers Association.44 They came up

with a business plan in 1995, and in 1996 recruited a group of servicers,

investors, originators, and Fannie Mae and Freddie Mac to form anagreement to create MERS.45

MERS incorporated in Delaware46 and began recording loan

assignments, not in the name of the party that actually had a financial

interest in the loan, but instead in the name of MERS.47 The big turning

point in the acceptance of MERS was an opinion that Moodys issued

endorsing MERS in 1999.48 This opinion reads like a legal opinion. It

reads like a case that an appellate court would write saying that MERS

system for interfacing with the public system is legally acceptable. The

problemlooking at it from the perspective of a law professoris that it

does not cite any law.49 It is a legal opinion, but there are no footnotes,

42 For a classic discussion of factors influencing the decline of many American cities in

the later twentieth century seeKATHARINE L.BRADBURY,ANTHONY DOWNS &KENNETH A.

SMALL,URBAN DECLINE AND THE FUTURE OF AMERICAN CITIES 28 (1982).43Document Search, SALT LAKE COUNTY RECORDER, http://slcorecorder.siredocs.com/

RecHome2/RecLogin.aspx?ReturnUrl=%2fRecHome2%2fDocSearch.aspx (last visited

Mar. 20, 2012).44 See Phyllis K. Slesinger & Daniel McLaughlin, Mortgage Electronic Registration

System,31IDAHO L. REV. 805, 81011 (1995) (describing the purpose, process, and goals

set forth in the whitepaper).45See id.; Howard Schneider, MERS Aids Electronic Mortgage Program,MORTGAGE

BANKING, Jan. 1, 1997, at 43.46 R. K. Arnold, Yes, There Is Life on MERS, PROBATE &PROP., JulyAug. 1997, at 33.47Id. at 34.48 Lipton,supra note 39.49Id.


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there are no cases cited, there are no statutes that say this is acceptable.50

Nonetheless, even though there were no statutes that any legislatureadopted endorsing this idea, millions of loans started getting plowed into

this MERS system.

How did it start out? The originator makes the loan to the lender,

recording the original mortgage in the name of MERS with the county

recorders office; but as the seller purchases it, instead of having an

assignment of the mortgage recorded along with the transfer of the note,

the financial institution will simply record an assignment of the mortgage

or the deed of trust to MERS.51 Perhaps the ownership of the note is

transferred as an Article 3 transfer, an indorsement of the note; or, it could

be an Article 9 transfer where they just say they are buying it instead of

physically transferring the note. The county real property records

increasingly show the name of MERS repeated over and over and over.Instead of the actual companies involved, MERS is a placeholderit

pretends to own the loan in the county real property recording system.52

The advantage is that assignments do not have to be recorded any more as

the loan goes down the line. If you are going to see it sold four, five, or six

times, you only have to pay that one assignment fee. It saves you $200, or

so, in recordings fees on that particular mortgage. In the grand scheme of

things, that $200 is not very much with respect to that particular loan. On

the other hand, if you are going to make a million loans over the next three

years, and you can save $200 per loan, thats $200,000,000 in clearly

unattributed funds that can go nicely into an executives bonus or

commissions.

Eventually, the mortgage finance industry figured out how to make it

even simpler than that. They decided, Why pay that initial assignment

fee? Instead, they began recording the initial mortgage in the name of

MERS. The originators name is never listed in the county real property

records as the owner of the right to foreclose. Instead, the mortgagee, or in

a deed of trust state, the beneficiary of the deed of trust, is listed as MERS

from the very beginning. Then parties in real chain of loan ownership

never have to pay a single assignment recording fee, ever.53 All that

50Id.51 Arnold,supra note 46, at 32, 34.52Id.53SeeFrequently Asked Questions, MERS, http://mersinc.org/why_mers/faq.aspx (last

visited Mar. 18, 2012) ([Y]oull save $30 or more per loan when you specify MERS as the

Original Mortgagee (MOM) of Record in the mortgage or deed of trust.).


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money can be preserved for the company and for the profits of the people

who are managing it.Of course, if the loan doesnt pay out, who is going to bring the

foreclosure action? Typically, judges would expect that it is the mortgagee

(the person who is the owner of the mortgage) that would bring the

foreclosure action. In the county real property records, the mortgagee is

MERS. So the expectationthe way the system was designedis that

there would be a new national foreclosure plaintiff. That is how it has

worked for quite a few years. MERS brings the foreclosure action because

MERS is the mortgagee, as listed in the public recording system.54 That is

a big change. In the past, we had actual lenders or actual servicers that

would foreclose on people.55 In this new system, we have one national

foreclosure plaintiff that always has the standing to foreclose on everyone.

However, as we will see, this new plaintiff was never going to acceptresponsibility for things such as violations of the Truth in Lending Act, or

a broker lying about whether a loan carries a fixed interest rate versus an

initial teaser interest rate that adjusted to a much more expensive rate six

months down the road. MERS was not going to take responsibility for

that.

All that being said, I still have not really answered what MERS is.

That is part of the problem. What follows is a boilerplate clause that

appears in security agreements or mortgages that were issued millions of

times all around the country. There is a similar clause in deeds and trusts

for deed of trust states, but lets focus on the mortgage, because its a little

easier to read. There are two sentences in this contract that we have to

look at carefully and think about to understand what has happened in our

society. The first sentence says, MERS is a separate corporation that is

acting solely as nominee for Lender and Lenders successors and

assigns.56

54 See, e.g., MERS Recommended Foreclosure Procedures for Alabama (Nov. 1999),

http://www.mersinc.org/foreclosures/details.aspx?state=AL (Foreclosing a loan in the

name of Mortgage Electronic Registration Systems, Inc. is something new in the

foreclosure arena. However . . . MERS stands in the same position to foreclose as the

servicer. MERS, like the servicer, will be the record mortgage holder.).55Id.56See Legal Documents, Instructions, EFANNIEMAE.COM,https://www.efanniemae.com/

sf/formsdocs/documents/secinstruments/doc/3045.doc (last visited Mar. 20, 2012)

[hereinafterLegal Documents].


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What is a nominee? A nominee is a form of special purpose agent.57 It

is an agent that acts on behalf of someone else. So when I read thatsentence, it seems to mean that the lender is the party that has the real

financial interestthe party that owns the mortgageand thus owns the

right to foreclose, but MERS will represent the lender as an agent. That

makes sense. However, the very next sentence in the documents says,

MERS is the mortgagee.58 When I read that for the first time, I really

scratched my head. These are legal terms. People throw stuff in contracts

all the time; it did not really bother me too much. However, it left me a

little unsettled, because I did not quite understand how those two sentences

went with each other. Is MERS the nominee of the mortgagee? Or, is

MERS the mortgagee itself? Because if anything, you cannot both own

and not own the mortgage at the same time. Someone is the owner of that

mortgage and somebody is not the owner of the mortgage. So which isMERS?

After thinking about this for about two years, and getting more and

more frustrated, never hearing anyone give me what seemed to me a

satisfactory answer that I could understand, I decided that MERS is not the

mortgagee. I know the contract says that, but MERS is not really the

mortgagee, and here is why. First, MERS is not entitled to receive the

proceeds of the foreclosure sale. Whoever it is that gets the money and is

entitled to that money at the end of the day when the foreclosure dust

settles is really the mortgagee. That person owns the lien. Second, MERS

is not entitled to receive any monthly payments on the note. Third, MERS

does not pay any value for its lien. Imagine that I went to Citibank and

said Citibank, I would like to purchase some of your valuable lien

foreclosure rights. Can I have them for free? I think that they probably

would not do that. In fact, in the inverse, financial institutions pay MERS

for the right to pretend that MERS is the owner of the lien. Normally, if

you are acquiring something, MERS would have to pay the financial

institutions for the right. Therefore, if you look at who is paying for what,

it does not make any sense to say that MERS has actually owned

something, since MERS is not buying anything. Finally, fourth, we have a

venerable tradition in our society of looking at economic substance to

57 BLACKS LAW DICTIONARY 1076 (8th ed. 2004).58Legal Documents,supra note 56.


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define contracts, particularly contracts that create liens.59 For example,

along the border of Article 2A of the U.C.C. on leases and Article 9 onSecurity Interests, courts use an underlying economic reality test to

distinguish between a security interest and a lease.60 Courts have always

looked past the ink on paper that says lease or security interest.61

Instead the law focuses on the underlying reality of whether there is an

economic reversionary interest that the purported lessor retains after the

end of the transaction.62 It seems that the underlying economic reality is

that MERS is not the mortgagee or the beneficiary of the deed of trust. At

best, MERS is an agent.

If that is the case then, what are the implications? If I say MERS is not

the mortgagee, nobody really cares. However, take a look at this quote

from the Supreme Court of the United States, in Carpenter v. Longan63 in

1872. This case has not been reversed, and it has been quoted a milliontimes since 1872. It said, The note and mortgage are inseparable; the

former as essential, the latter as an incident. An assignment of the note

carries the mortgage with it, while an assignment of the latter alone is a

nullity.64

In a standard MERS as mortgagee transaction, the payee on the

promissory notemeaning the party that is entitled to the paymentsis

the lender. The lender is the payee on the note. The mortgagee,

remember, according to the mortgage, is MERS. So if the payee on the

note is the lender and MERS is the mortgagee, that seems that you have

attempted to separate the note and the mortgage. Only, being a simple

man, I thought that the note and the mortgage are inseparable. Inseparable

does not mean that usually they are together; it means that they are not

capable of being separated. So how is it that MERS can be the mortgagee

if the note and the mortgage are inseparable and MERS is not listed as the

payee on the note? This simple analysis seems to be that MERS is not

really the mortgagee. That is the end of the discussion, at least if the courts

59 See Christopher L. Peterson, Two Faces: Demystifying the Mortgage Electronic

Registration Systems Land Title Theory, 53 WM. & MARY L. REV. 111, 14142 (2011)

(discussing the historical evolution of the equitable lien)60 See, e.g., In re Fleming Companies, 308 B.R. 693, 69697 (Bankr. D. De. 2004)

(stating and then applying the economic realities test).61Id. at 696 ([T]he form or title chosen by the parties is not determinative.).62Id.63 83 U.S. 271 (1872).64Id. at 274.


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are going to follow what the Supreme Court of the United States held in

Carpenter v. Longan. As it turns out, some courts have come to thatrealization in recent years.

First, I dont think we have yet quite answered who MERS is. To

know what people are involved with MERS, we have to read a corporate

resolution or a letter. There is a corporate resolution that MERS issued for

years, appointing what are called certifying officers of MERS. As it turns

out, there are actually two MERS companies.65 It is common to talk about

MERS as though it is one company, but there is actually MERS Corp.

which operates a database, and then there is a wholly-owned subsidiary of

MERS Corp. called MERS, Inc.66 MERS Inc. is the company that is

listed as the mortgagee or the beneficiary of the deeds of trusts in 60% of

our home loans, including mine.67 MERS Inc., it turns out, has no

employees.68 It is just a company that is registered in Delaware, but doesnot actually have any employees. 69 MERS Corp., on the other hand, has

about forty or fifty employees that run their databasea relatively small

company.70 MERS Inc., though, has no employees. So how is it that they

do business? How is it that they keep track of and interface with all this

controversial litigation in all fifty states?

MERS, Inc. does this by using a corporate resolution.71 If you are an

employee of a servicing company or a foreclosure law firm, or a debt

collection agency, you go on the MERS web page and there is a boilerplate

template where you put your name in, you put your company in, and you

65 Deposition of R.K. Arnold at 22, Henderson v. Merscorp, Inc., No. CV-08-900805.00

(Ala. Cir. Ct. Sept. 25, 2009).66Id. at 2223.67Id. at 57.68 Deposition of William Hultman at 70, Bank of New York as Trustee for the

Certificate Holders CWABS, Inc. Asset-Backed Certificates, Series 2005-AB3 v. Ukpe, No.

F-10209-08 (N.J. Super Ct. Ch. Div. 2008).69Remarks and Testimony of R.K. Arnold President and CEO of MERSCORP, Inc.

Before the Subcommittee on Housing and Community Opportunity House Financial

Services Committee, MERS (Nov. 18, 2010), http://www.mersinc.org/mersproducts/

publications.aspx?mpid=1 [hereinafterRemarks and Testimony].70Id. at 11.71 Corporate Resolution Request Form, MERS, http://web.archive.org/web/

20090321015658/http://mersinc.org/MersProducts/forms/crrf/crrf.aspx (last visited Mar. 20,

2012) (formerly available at http://www.mersinc.org/MersProducts/forms/crrf/crrf.aspx).


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fill in your address.72 Then you press submit. The webpage

automatically regurgitates and sends back this boilerplate corporateresolution,73 which reads:

RE: MERS Corporate Resolution Appointing MERS Certifying

Officers

Dear Sir or Madam:

Enclosed is a MERS Corporate Resolution appointing MERS

certifying officers.74

A certifying officer holds the title of an assistant secretary of

MERS and that is the title that should be put on all documents that

are signed for MERS by a certifying officer. However, in a fewstates it has been brought to our attention that it is required that the

signatory hold the office of a vice president or above. Therefore, it

is acceptable to use the title of vice president in Maryland,

Mississippi, Nebraska, Oklahoma, Kansas, North Carolina, South

Carolina and Pennsylvania. Please let me know if you are aware

of other states that require documents to be signed by an individual

with another title other than an assistant secretary.

The corporate seals are $25.00 each plus shipping. MERS will

send an invoice for the cost of the seal(s) and shipping at a later

date.

If you have any questions or comments please feel free to contact

me via email at [email protected] or by phone at (703) 761-

2111.

Very truly yours,

Camelia Martin

Paralegal

Enclosures75

72Id.73Id.74Id.75Id.


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Q: Do you file any reports with MERS relating to assignments?

A: No.Q: Do you know who the president of MERS is?

A: No.

Q: And I guess at some point, somebody explained to you that you

were a Certified Officer is that correct?

. . .

A: Yes.

Q: And what do you remember as to their explanation as to what

that meant?

A: Why I was being chosen as a Certified Officer?

Q: Yes.

A: That it was actually a group of us, we had one meeting and they

explained that people that had an understanding of what anassignment was were going to go ahead and become certified

officers because we then had authorization to execute on behalf of

MERS. 78

Some of you have heard of the robo-signing scandal in the press.

All of these robo-signers are vice presidents of MERS.79 That is who

they are.

Now I want to turn to the problematic legal foundation of MERS. I

think that this structure, this business model, actually has some legal

problems.

At first thought, it seems that MERS should not have standing in

foreclosure cases without a properly indorsed promissory note. Unless

they are a holder of that note, they are not the appropriate party to bring a

foreclosure action.

Why do I think that? Recalling theLongan case, the Supreme Court of

Kansas held that MERS did not demonstrate, in fact did not attempt to

demonstrate, that [they] possessed any tangible interest in the mortgage

beyond a nominal designation as the mortgagor.80 The court said

mortgagorI think they mean mortgagee. Having suffered no injury,

[MERS] does not qualify for protection under the Due Process Clause of

78 See Deposition of Kimberly Litchfield at 36, Wells Fargo Bank, N.A. v. Van

Siegman, No. 16-2008-CA-009724 (Fla. Cir. Ct. July 28, 2008).79See, e.g., Gretchen Morgenson, The Banks Still Want a Waiver, N.Y.TIMES, July 23,

2011, at BU1.80 Landmark Natl Bank v. Kesler, 216 P.3d 158, 169 (Kan. 2009).


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either the United States or the Kansas Constitutions.81 The Supreme

Court of Kansas has held MERS has no ownership interest.82 If whateveryou own is not protected by the Constitution that probably means you do

not own anything. This, in turn, means that you are not the party that has

suffered a real injury and are not the party that should be litigating that

case. MERS, as a mortgagee, has no right, in my view, to bring a

foreclosure action and should not be doing that. More courts are starting to

agree, other than just Kansas. The Supreme Court of Arkansas and the

Supreme Court of Maine have also gone along with this holding.83

The Supreme Court of Maine noted: MERS is not a

mortgagee . . . because it has no enforceable right in the debt obligation

securing the mortgage.84 So it turns out that the Supreme Court of Maine

agrees with me. Remember that sentence in all of those mortgages? It

said: MERS is the mortgagee. The Supreme Court of Maine said:MERS is not a mortgagee.85 That seems to be a pretty big discrepancy

pretty close to x and not x. This may be a real, underlying problem for

some of the other ideas that are behind all this. Do not take me to

represent that all of the cases are going against MERS. In fact, I think the

majority of the cases are going along with MERS. It is just that, in my

humble opinion, those cases do not make any sense. I do not understand

them and I do not understand how MERS can both be an agent and a

mortgagee at the same time.

It also seems that MERS should really be regarded as a debt collector

under the Federal Fair Debt Collection Practices Act.86 Recall that a debt

collector, under this consumer protection statute, means any person in the

business, the principal purpose of which is the collection of any debts

owed to somebody else, to another person.87 If MERS does not really own

anything, what is it actually doing?

81Id. at 170.82Id. at 16768.83See Mortg. Elec. Registration Sys. Inc. v. Sw. Homes of Ark., Inc., 301 S.W.3d 1, 5

(Ark. 2009) (reaching the same conclusion as the Supreme Court of Kansas nearly five

months beforeKeslerwas decided); Mortg. Elec. Registration Sys. Inc. v. Saunders, 2 A.3d.

289, 295 (Me. 2010).84Saunders, 2 A.3d at 297.85Id.86 15 U.S.C. 1692ap (2006).87 15 U.S.C. 1692a(6).


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What I think it is trying to do is facilitate these foreclosure actions. It

was expected to be the single national foreclosure plaintiff for ourcountry.88 Moreover, the term debt collector does not include a person

collecting a debt on behalf of another to the extent that such activity

concerns a debt that was not in default at the time it was obtained.89

The argument for MERS not being a debt collector is that they were

the mortgagee from the very beginning of the transactionbefore the debt

ever went into default. However, what if you look past the simple

designation of MERS as the mortgagee and decide for yourself that MERS

is not the mortgagee? What is its involvement in the loan, beyond placing

some ink on that paper?

MERS only becomes involved in the loan once the loan is in default

and they initiate the foreclosure action. That is the same sort of role that a

debt collection agency plays. We ought to have the debt collection statueapply to the company that is the debt collector for all the delinquent

mortgages. I do not want to belabor it, but one more provision in that

statute says:

It is unlawful to design, compile, and furnish any form

knowing that such form would be used to create the false

belief in a consumer that a person other than the creditor of

such consumer is participating in the collection of or in an

attempt to collect a debt . . . when in fact such person is

not so participating.90

Is that not exactly the kind of thing that is happening in our foreclosure

actions? The paperwork that facilitates foreclosure would lead somebody

to believe that someone other than the creditor is attempting to collect the

debt. When what we really have is an employee of the servicer who is

pretending to be MERS, who is pretending to own the loan on behalf of the

servicer. It is a 360-degree illusion that is created through these agency

ideas. In any event it seems that this is misleading to the least

sophisticated consumer.91 We ought to be more candid and forthcoming

when we take homes away from peoplepeople like Carlene Balderrama.

88 Peterson,supra note 21, at 1374.89Id.90 15 U.S.C. 1692j(a).91See Miller v. Javitch, Block & Rathbone, 561 F.3d 588, 592 (6th Cir. 2009) (applying

the least-sophisticated-consumer test to a Fair Debt Collection Practices Act claim).


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Third, loans registered with the MERS system arguably lack priority in

some property disputes. The following is a holding from the SupremeCourt of Iowa over a century ago: It has been frequently held that slight

omissions in the acknowledgment of a deed destroy the effect of the record

as constructive notice. A fortiori, it seems to us, should so important and

vital an omission as that of the name of the grantee have that effect.92

Under this case, if you recorded a mortgage in Iowa and that mortgage

happened to omit the name of the mortgagee, then this was not sufficient to

provide notice, because the recorder could not include the conveyance in

the grantor or grantee index that tracks the chain of title.93 In effect, it

meant that that lien was an unperfected lien.

Here we have something slightly different. It is not that there is no

grantee listed. Instead what we have is a shell company that has no

employees but 20,000 vice presidents that is listed as the grantee of thelien. Is that enough to perfect it? This should be chilling to everyone. The

fact that this is even a plausible question is a testament to how aggressive

its securitization strategy was with respect to some basic legal rights.

In this case, I am talking about MOM mortgages, or MERS as

original mortgagee transactions. This is different from the initial way

they did it, where they had an actual mortgagee and they recorded an

assignment to MERS. It turns out the vast majority of MERS mortgage

loans list MERS as the original mortgagee now. There are some that do

not, from earlier vintages from the early 2000s or late 1990s. However,

once they started using MERS, no one wanted to pay that initial recording

fee. It was about $35 cheaper to do it with MERS as the original

mortgagee. What we have then are millions and millions of mortgage

loans that list MERS as the original mortgagee.

In any event, this is pretty similar to the case ofDisque v. Wright.94 Of

course it is an old case, but the reality is that you do not see mortgage loans

very often where the parties who are going to receive the right to foreclose

does not write down their name on the document. It just does not happen

very often.

Similarly, the court in Chauncey v. Arnold95 held: No mortgagee or

obligee was named in [a mortgage], and no right to maintain an action

thereon, or to enforce the same, was given therein to the plaintiff or any

92 Disque v. Wright, 49 Iowa 538, 540 (Iowa 1878).93Id.94Id.95 24 N.Y. 330 (N.Y. 1862).


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other person. It was, per se, of no more legal force than a simple piece of

blank paper.96 Corpus Juris Secundum reads: Notice may be deemed notpresent in cases of insufficient attestation or where the instrument itself is

so defective as to be void as a matter of law, as where it wholly omits the

name of the mortgagee.97

Another big potential problem is that county recording offices may be

entitled to recover unpaid recording fees on mortgage and deeds of trust

assignments. Here is the argument: Regular good old-fashioned unjust

enrichment theory from your first year in law school says that unjust

enrichment requires

(1) a benefit conferred upon the defendant by the plaintiff;

(2) an appreciation or knowledge by the defendant of the

benefit; and (3) the acceptance and retention by thedefendant of the benefit under such circumstances as to

make it inequitable for the defendant to retain the benefit

without the payment of its value.98

The county recorders give mortgagees the benefit of having a perfected

lien. There is an appreciation by the mortgage finance companies of the

service that the county provides. The tough question is whether the

finance company is accepting or retaining the benefit of a perfected lien

under these circumstances that make it inequitable for the company to

retain the benefit of a perfected lien without paying all of those intervening

assignment fees that traditionally they would have paid.

If you do not believe that the lien is unperfected, then it seems that this

becomes your bigger problem. If the lien is perfected and they sold a lien

that had full value to investors on Wall Street, they surely did not pay the

counties for the value of the services the county provided. Financial

institutions did this by saying something that, arguably, is not truethat

MERS is the mortgagee.

I think that, perhaps, there is an argument whether the mortgage

conveyance is even effective. Is there actually a valid mortgage that is

created? Whitaker v. Miller,99 an Illinois case, held that [t]here must be,

96Id. at 335.97 59 C.J.S.Mortgages 306 (2009).98 66 AM.JUR.2DRestitution and Implied Contracts 11 (2011).99 83 Ill. 381 (Ill. 1876).


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in every grant, a grantor, a grantee and a thing granted, and a deed wanting

in either essential is absolutely void.100So who is the grantee on a MERS mortgage? If you read the whole

document, the only person ever listed as a grantee of the property right is

MERS. Thus, MERS is the mortgagee.101 Only at least in Maine,

MERS is not the mortgagee.102 So who is the grantee? Does that mean

that we automatically reform the grantee to be the lender, even though the

lender was not named as such? My sense is that under good old-fashioned

property law, courts do not just start picking a new grantee. If the deed did

not list somebody who is an eligible grantee, then that means that the deed

failed as a conveyance, and you have to try it again.103 That is not to say

we could not have an equitable mortgage instead, just like, for example,

promissory estoppel can sometimes replace a standard contract. It seems

like this is a perfect case for an equitable mortgage. Again though, thisshould be breathtakingthe notion that 60% of our nations residential

mortgage loans face a colorable, basic argument that because they just

failed to name a grantee, according to Blackstones commentaries104 and

several old cases,105 these mortgages are facially defective. That is

chilling. Do not look at me like its my faultI am not the one that

created this situation. I am just merely pointing out an obvious, basic

defect. I did not make this mess. I am just quoting a case that says that if

you do not name a grantee, then it is not a valid lien.

A bit of free advice, to all of you out there who represent financial

institutions: Going forward, why dont you tell your financial institutions

you work with to stop making and buying MERS loans, at least for the

100Id. at 385.101See Mortg. Elec. Registration Sys., Inc. v. Saunders, 2 A.3d 289, 294 (Me. 2010).102Id. at 297.103See LEONARD A.JONES, ATREATISE ON THE LAW OF MORTGAGES OF REAL PROPERTY

43 (6th ed. 1904).104See 2 WILLIAM BLACKSTONE,COMMENTARIES (Univ. of Chicago Press, 2d ed. 2002)

(1766) 15758.105See Davidson v. Ala. Iron & Steel Co., 19 So. 390, 39091 (Ala. 1896) (detailing the

importance of accurately and fully recording the names of the parties to a deed); Richey v.

Sinclair, 47 N.E. 364, 365 (Ill. 1897) (The law is well settled that a deed without the name

of a grantee is invalid.); Menage v. Burke, 45 N.W. 155, 156 (Minn. 1890) ([I]t is

necessary to the legal validity of such instruments that there be a grantee having a legal

existence, capable of taking and certainly designated, or so designated that his identity can

be certainly ascertained . . . .).


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time being. There is a cloud of uncertainty surrounding this company. It

might make sense to just do it the old-fashioned way and pay those $35fees for the time being.

Does MERS have a role in the subprime and exotic mortgage mess? I

think that it does. It seems that MERS created an illusion of permanence

that did not really exist. A lot of investors knew that these sub-prime

mortgage lenders were thinly capitalized and were not going to be in it for

the long haul if there was ever a down-turn in the economy.

However, by listing MERS as the mortgagee, it created the illusion that

there would always be a placeholder in the county real property records

that could bring foreclosure actions.106 It turns out that really, in the end,

MERS is a bit of legal snake oil. It is Uncle MERS Magic Lien

Perfecting Serum. It was expected to be this perfect way that you could

just put one name in the county real property records, never have to payrecording fees, and always be able to foreclose.107

The fact that MERS was expected to be the foreclosing entity is part of

the reason the securitization documentation practices were so bad. 108 You

do not need to keep track of all the promissory notes, make sure that you

have documents demonstrating the recording of assignments, nor make

sure it all gets to the securitization trustee or the document custodian.

Why? Because who is going to foreclose? We will simply foreclose in the

name of MERS. It does not matter whether we actually have documents

that say that we own anything, because MERS owns it. Problem solved.

Only it turns out that some courts have agreed with me: MERS is not an

appropriate party to bring a foreclosure action.109 In a growing number of

106 See Creola Johnson, Fight Blight: Cities Sue to Hold Lenders Responsible for the

Rise in Foreclosures and Abandoned Properties,2008 UTAH L.REV. 1169, 1185 (2008).107See id.108 See Raymond H. Brescia, Beyond Balls and Strikes: Towards a Problem-Solving

Ethic in Foreclosure Proceedings,59 CASE W.RES. L.REV. 305, 345 (2009) (discussing

judicial activism to protect the due process rights of mortgagors); Chris Markus et al.,From

Main Street to Wall Street: Mortgage Loan Securitization and New Challenges Facing

Foreclosure Plaintiffs in Kentucky, 36 N. KY. L. REV. 395, 40708 (2009); Katherine

Porter,Misbehavior and Mistake in Bankruptcy Mortgage Claims,87 TEX.L.REV. 121, 172

(2008) (stating that bankruptcy rules fail to deter mortgagees from disregarding

documentation requirements).109See Mortg. Elec. Registration Sys., Inc. v. Sw. Homes of Ark., Inc., 301 S.W.3d 1, 5

(Ark. 2009) (MERS holds no authority to act as an agent and holds no property interest in

the mortgaged land. It is not a necessary party.); Mortg. Elec. Registration Sys., Inc. v.

(continued)


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jurisdictions this means that in the end, you actually do need all those

documents.110 Now robo-signers have been trying to churn out a bunch ofdocuments to replace all of that.111 It is not that MERS business model

necessitated robo-signing; rather, it is just that it facilitated the situation

which necessitated all the robo-signing.

Second, I think MERS has contributed to the demise of our public

information infrastructure. MERS was sold in the dot-com era. It was

expected to be the new digital solution to an old problem.112 I think that

narrative makes a lot of sense. I like computers and think that we should

have digital records. However, I do not really think that is what was

happening. MERS was not a digital solution. What it really was was an

attempt to privatize. The narrative that is most analogous to this situation

is the bridge in Minnesota that fell down because we neglected our

transportation infrastructure.113 We were neglecting our informationinfrastructure which created the opportunity for a private company to come

in and privatize it, to take it out of the public sphere.

That is a troubling thing, particularly when they never had a state

legislature sign off on it. Maybe we want to privatize the system? Maybe a

private company will be better than all the public real property recorders

who were democratically elected? However, if you are going to do that,

Graham, 247 P.3d 223, 229 (Kan. Ct. App. 2010); Bellistri v. Ocwen Loan Servicing, LLC,

284 S.W.3d 619, 62324 (Mo. Ct. App. 2009).

110 See, e.g., Bank of N.Y. v. Williams, 979 So. 2d 347, 34748 (Fla. Dist. Ct. App.

2008) (affirming dismissal of the foreclosure complaint for failure to show ownership

interest in mortgage and note); HSBC Bank USA v. Perboo, No. 38167/07, 2008 WL

2714686, at *3 (N.Y. Sup. Ct. July 11, 2008) (denying foreclosure plaintiffs application for

default judgment); Wells Fargo Bank, Natl Assn v. Reyes, No.5516/08, 2008 WL

2466257, at *1 (N.Y. Sup. Ct. June 19, 2008) (dismissing complaint for plaintiffs failure to

establish ownership of mortgage); In re Foreclosure Cases, Nos. 1:07CV2282 et al., 2007

WL 3232430, at *2 (N.D. Ohio Oct. 31, 2007) (dismissing consolidated foreclosure cases

for failure to produce evidence demonstrating ownership or assignment of promissory

notes).111Remarks and Testimony,supra note 69, at 3.112 Arnold,supra note 46, at 35.113 See Matthew L. Wald, Faulty Design Led to Minnesota Bridge Collapse, Inquiry

Finds, N.Y.TIMES, Jan. 15, 2008, at A19 (noting that while the design was sufficient when

the bridge opened in the 1960s . . . it gradually gained weight causing a previously

competent but critical connecting plate to fail catastrophically).


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you need to have a legislature make that decision, not a company that just

does it as a matter of private contract law.My last point, then, is about democratic governance. The following a

quote from the MERS CEO who stepped down recently: MERS is owned

and operated by and for the mortgage industry.114

I remember when I read that sentence it really popped off the page for

me. I was trying to think what about the syntax that made it so powerful

for me. MERS is owned and operated by and for the mortgage industry.

Then, it dawned on me, and I realized where that comes from. It was

Lincolns Gettysburg Address, where he exhorted us that government of

the people, by the people, for the people, shall not perish from the

earth.115 MERS used a pretty similar sentence, only they inserted

MERS for the word government and mortgage industry for the word

people.If you were to identify a particular point in time where society

transitions from being properly classified as a democratic republic into a

corporate oligarchy, perhaps that point would be when they decided that

the ownership of land would be maintained, not by a democratically

elected officials, but by a private company. Here, that private company

keeps all the records confidential and is wholly owned by financial

institutions. Here, that company self-proclaims that it is operating for the

benefit of the industry as opposed to the people. Maybe this is key time in

the evolution of a society that is changing between those two types of

governments. The story of MERS seems to tell us a little bit about what

our society is becoming.

In conclusion, I would like to show a picture that features the second

greatest Republican President in the history of our country: Teddy

Roosevelt. In this editorial comic from 1907, President Roosevelt is giving

flim-flam finance a very rigorous bath in honesty soap. 116 It seems that

Teddy Roosevelts example could be useful for us these days.

114 Arnold,supra note 46, at 36.115 GARRY WILLS,LINCOLN AT GETTYSBURG:THE WORDS THAT REMADE AMERICA 145

(1992).116 Udo J. Keppler, You Dirty Boy!, PUCKMAGAZINE, Sept. 1907, cover. Reprinted with

permission from the Theodore Roosevelt Collection, Harvard College Library.


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QUESTION & ANSWER SESSION

QUESTION:

It seems that as a matter of law there should be no problem in

having an agent act on behalf of the beneficial owners. Under the

U.C.C. for example, there is no question that you can have a

security agent. You do not need to disclose who the parties are for

whom the security agent acts. The U.C.C. is different from the

real property law, but real property law would incorporate,

presumably, the common law when we had trust law, where we

had the separation of legal and beneficial title. If the mortgage is

recorded in the name of MERS, its a legal titleholder to the

mortgage and recognizing that the beneficial titleholder would be

parties who own the promissory notes. That would be way Iwould analyze it. I was asking Dean Peterson what he thought of

that analysis.

RESPONSE, DEAN PETERSON:

Starting out with the notion of whether MERS can be the legal

title owner, and then there is a beneficial interest that is the

financial institutions. How does that work, in an example of the

deed of trust? In a deed of trust, the beneficiary of the deed of

trust is typically the lender. The trustee on the deed of trust is the

legal titleholder. This is the same structure of divided ownership.

Now how is that possible when they list MERS as the beneficiary

of the deed of trust? That means, I suppose you are saying,

MERS has legal title to an equitable ownership interest. That

presumes some sort of meta-notion of legal titleness. How can

you have legal title to a beneficial interest? You are sort of

dividing, metaphysically, this notion of beneficiary in a way that I

do not think exists in the real property law. I do not think this

notion really is there in deed of trust states. I am not sure that it is

there in mortgage states either. Although, perhaps it is. I

recognize that courts can and do disagree about this. However, I

think that my more simple interpretation provides a better long-

term foundation for commerce.

There may also have been some agent cases out there wheresome jurisdictions allowed a security agent, particularly for Article

9 purposes. What we do not have is a case where one agent acts

on behalf of everyone in our society so that we no longer have


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meaningful public records. Prior to the MERS era, there was not a

single case in the country that said that financiers could do this.MERS has forced county real property recorders,

democratically elected officials, into conducting a bizarre puppet

show. All the records that they have been maintaining for three

hundred years now increasingly just repeat the word MERS over

and over again.

There was no case that said this agency concept can be used to

try and force the county real property records to no longer have

meaning. The analogy that I would draw is the Irish fable where

the guy catches a leprechaun and makes the leprechaun tell him

where his pot of gold is. The leprechaun says, its right here.

The guy ties a red handkerchief around the tree and then leaves to

try to pick up his shovel. When he comes back, the leprechaun hasgone around and tied red handkerchiefs around every tree in the

entire forest. Then the leprechaun keeps his gold.

That seems that is similar to what MERS has done. There is

no rule that says you cannot have your friend put that handkerchief

on the tree for you. However, if your friend puts handkerchiefs on

every tree in the entire forest, there is no case that says that is all

right. It seems that courts ought to step up to the plate and say that

we have county real property recording systems because we want a

democratic check on Wall Street and financial institutions. We

want to ensure that they do not co-op all the records and keep them

in one undiversified, undemocratic, unaccountable recording

system. Having multiple recorders is a diversification strategy.

QUESTION:

If you are right on MERS, assuming we dont have MERS,

that would mean the mortgage would be recorded in the name of

the originator. The originator would sell it to an SPE, who would

sell it to another SPE, but it would not be a continuous recording.

You would have the exact same problem as you have with MERS,

but it would be in the name of the originator and not in the name of

MERS. Doesnt the inaction in 2001 of U.C.C. effectively

supersede when the whole MERS system came to place in 1999,

before the U.C.C. was amended to enable even mortgage notes tobe transferred without the re-recording?


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The Ibanez117 decision in Massachusetts is illustrative on thispoint. Massachusetts does not follow the Supreme Court of the

United States rule that says you cannot separate the note and the

mortgage.118 Massachusetts mortgagesaccording to a Supreme

Court of Massachusetts decision that came down just a year ago

said each mortgage has to be transferred through an independent

assignment.119 An Article 9 transfer of the note does not carry

along the mortgage with it, at least in Massachusetts.120 Going

forward in Massachusetts, they have to separately transfer the

mortgage between each of the individual entities that own the lien

with an assignment. It is not that hard to come up with a piece of

paper. Also, if the county recorders are digitally sophisticated, and

allow recording of that on the internet, then it is not going to bethat expensive or that inconvenient either. It seems that is the way

we ought to go. We ought to requiremake it clearthat we

want all the transfers to have a record, at least with respect to land.

Maybe not for personal property transfers under Article 9, but with

respect to land, we ought to expect that there is an assignment that

is recorded with each county recorder. To try and make that more

efficient, I would recommend that Congress give out block grants

to county governments in exchange for adopting some uniform

interfacing practices that make it easy for industry to record those

mortgage assignments. The federal government should sponsor

purchasing equipment necessary to facilitate that.

QUESTION:

From a practical standpoint, to the original assertion, couldnt

they just simply assign the mortgage back to the holder of the note

at the point and time of the foreclosure?


That is what they have been doing. That is the strategy they

have adopted in those jurisdictions where judges have said MERS

cannot foreclose. The strategy is to record an assignment, or what

117 U.S. Bank Natl Assn v. Ibanez, 941 N.E.2d 40 (Mass. 2011).118Id. at 5354.119Id.120Id.


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purports to be an assignment, from MERS back to the servicer, or

maybe to the securitization trust, and then the servicer acts onbehalf of the securitization trust through a traditional agency

argument. In Massachusetts it seems that is the strategy that

works. MERS actually is the mortgagee in Massachusetts. The

question I have about that, incidentally, is this: If MERS is the

mortgagee how is there a true sale? If MERS owns that mortgage,

how did they sell it into the securitization trust? The investors do

not own that mortgage. They could not bring a foreclosure action

because they do not own the mortgage. The ownership of the

mortgage and the note have been separated in Massachusetts. That

was not a true sale. Any securitization SPV that has MERS-

recorded Massachusetts loansthose investors do not own those

loans. That seems like a good put-back theory.With respect to foreclosure, I think reuniting the two interests

in Massachusetts works. In states that hold to the notion that the

note and the mortgage are inseparable and that MERS is just an

agent, that assignment from MERS back to the servicer is just

incoherent gibberish in that jurisdiction. It is not an assignment.

You can put the word assignment on a piece of paper, but you

cannot assign something you dont own. MERS does not own it.

However, if enough judges have said this sort of assignment is

legitimateat least then there is a real party that is litigating.

After all, the borrower did not make the payments, so judges let

the real party take the house. That is what happens. However, in

most jurisdictions, I dont think that assignment does anything, its

just nonsense.

QUESTION:

Do you think these mortgage notes are negotiable and if

theyre not, how do we figure out whos entitled to enforce the

debt?


Ronald Mann, who is a professor at Columbia or maybe hes

back in Texas now, has an article that he wrote a while back. It

was a very mischievous article. He points out that the standardboilerplate in Fannie Mae and Freddie Mac promissory notes has

some commitments in it that look like they are extraneous


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undertakings.121 I think one of them is a notice commitment that if

you are going to prepay, then the borrower has to give notice to thelender or to the holder of the note.122 That is not something that is

listed as an exception under Article 3.123 All the courts I have

seenand there are so many cases now it is difficult to keep up

with all of thembut from what I have seen, everyone has just

been operating under the assumption that these notes are

instruments, and they can either be transferred through the Article

3 transfer system or the new Article 9 transfer system, which just

has to meet 9-203(b)(3), I think it is. Under Article 9, you just

have to describe the note being transferred, you dont have to

indorse the note and then transfer a physical possession of it.124 If

the notes are not negotiable instruments, maybe that makes it

easier for the investors to own them, because all you aretransferring is a contract right, an account. The transfer rules are

easier for just accounts, or a payment intangible.

If the note is not negotiable it may be easier to fix the

securitization fail problem. What you dont get is the benefit of

being a holder in due course.125 This will make it much easier to

assert predatory lending type claims against the securitization trust.

On the other hand, those claims are not as serious as perhaps the

put-back lawsuits are, because consumers do not have money to

litigate. They are getting kicked out of their houses. So maybe

that is a better strategy for the industry. We really should have

cleared all this stuff up ahead of time. Before we made all these

millions of loans, if we wanted this type of system, we ought to

have had a statute that says you can have a nominee/mortgagee and

you dont have to record it in the county real property records.

121 Ronald J. Mann, Searching for Negotiability in Payment and Credit Systems, 44

UCLAL.REV.951, 97172 (1997).122Id.123Id.124See U.C.C. 9-203(b)(3) (2000). Under Article 9, the parties to a transaction can

create a security interest in any collateral, including notes, which then attaches to the note

and becomes enforceable when three basic prerequisites exist. Id. at cmt. 1. Those

prerequisites include value . . . rights or power to transfer rights in collateral . . . and

agreement plus satisfaction of an evidentiary requirement . . . . Id. No physical transfer or

indorsement is necessary. Id.125 Mann, supra note 121, at 972.


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You should have had a promissory note that was clearly

negotiable. I guess hindsight is 2020.Thank you.