What is MERS?

MERS, or Mortgage Electronic Registration System, Inc., is a company formed by the residential mortgage lending industry to avoid paying government mortgage recording fees and to make it simpler to buy and sell residential mortgage loans. It is easier to understand what MERS is if you first understand why it was created. A mortgage loan has two parts: a promissory note and a mortgage instrument (mortgage deed or deed of trust). The mortgage instrument must be recorded with a governmental office. In most states, the governmental recording office is the County Clerk or County Recorder. In other states, like Connecticut, the governmental office is the Town Clerk. The governmental office charges a fee to record the mortgage instrument. Recording helps potential new creditors evaluate whether to accept the mortgaged property as collateral for a loan because it determines the order in which the creditors are paid if the property is sold. Recording also identifies the parties claiming interests in the property. This information can be necessary to foreclosure proceedings. It is also important to know where to direct questions about the claimed interest.

The mortgage securitization industry is in the business of buying, selling and pooling mortgage loans and then selling rights to receive a fraction of the payments on the mortgages in the pool. Every time a mortgage loan is sold, an “assignment of mortgage” or “mortgage assignment” is supposed to be filed with the government recording office. The assignment must specifically describe the individual mortgage being assigned and must be signed by the assignor. The recording office charges a fee for recording the assignment. Since securitizations involve hundreds or thousands of mortgage loans, it is burdensome to prepare and sign an assignment for each individual loan. It is also difficult and expensive to identify the proper recording office and to pay the recording fee for each assignment.

The mortgage industry formed MERS to avoid the burdens and costs associated with recording mortgage assignments. Think of MERS as a club, with membership open to mortgage loan originators, buyers and sellers. The mortgage loan originator who is a MERS member has the borrower sign a note payable to the originator and a mortgage instrument in favor of MERS. The borrower is charged the recording fee as a closing cost. The closing agent for the loan sees to it that the mortgage instrument is recorded in MERS’ name in the proper recording office. The member-originator can sell the loan to another MERS member without having to record a mortgage assignment. The buyer-member can also turn around and sell the loan without having to record an assignment. The members are supposed to report mortgage loan sales to MERS so that MERS can keep track of who owns which debt. If MERS receives an inquiry about a mortgage interest, or is named in a foreclosure proceeding, MERS notifies the member who owns the associated debt.

The industry’s theory is that MERS is merely a placeholder in the recording office for the owner of the debt. As we will see in future posts, however, there is an argument that giving the note to one party and the mortgage interest to another voids the mortgage interest such that the loan is unsecured.

Produce the Note, An Alternate View, Part 2

Picking up where I left off in Produce the Note, An Alternate View, Part 1, UCC 3-301 is entitled “Person Entitled to Enforce Instrument.” It provides in relevant part that the “Person entitled to enforce” an “instrument” is the holder of the “instrument.” UCC 3-104 defines “instrument” as “an unconditional promise or order to pay a fixed amount of money.” In other words, as far as the UCC is concerned, an instrument is a promissory note. Instruments under the UCC do not include mortgage deeds or deeds of trust. This is the main problem with the produce the note defense. By the express terms of UCC 3-301, the party that can produce the note has nothing more than the right to enforce the note. But, the foreclosing party is not trying to enforce the note. The foreclosing party is trying to enforce the mortgage deed or deed of trust because it’s the mortgage deed or deed of trust, not the note, that describes the lender’s rights to the property and how to exercise those rights.

Not only is UCC 3-301 expressly limited to the enforcement of notes, no court can expand its reach to mortgage deeds or deeds of trust. The statute provides that “[a] person may be a person entitled to enforce the instrument even though the person is not the owner of the instrument or is in wrongful possession of the instrument.” We saw in Part 1 that at common law the owner of the debt is directly injured by its non-payment (“common law” is judge made law as opposed to legislature made law). UCC 3-301 does not require any injury. It gives the right to enforce the note to a nonowner or even a thief, i.e., a person “in wrongful possession of the instrument.” Because the statute provides a right to sue without requiring an injury, it is “in derogation of the common law” or, more simply, changes common law. It is a fairly universal principal that statutes in derogation of the common law must be “strictly construed.” That’s just a complicated way of saying that a judge can’t expand a statute that changes the common law; the statute means only what it says and nothing more. Under this principle, a judge can’t expand UCC 3-301 to apply to the enforcement of mortgage deeds or deeds of trust.

In Part 3, I will discuss how producing the note actually makes it easier for a “lender” to overcome challenges to its standing.

Foreclosure is Not Neccessarily Flipping a Switch

When you took your mortgage loan, you signed a mortgage instrument, which gave the lender an interest in your real estate as collateral for repayment of the mortgage loan. The mortgage instrument normally is called a “mortgage deed” or “deed of trust” depending on the state where the property is located. The mortgage instrument provides that if you do not pay the loan, you are in default. This activates the lender’s right to take the collateral. “Foreclosure” is the process by which the lender takes the collateral.

The steps in the foreclosure process are determined by the state where the property is located. Some states, like Connecticut and New York, are “judicial” foreclosure states. This means that the lender must start a lawsuit against you in order to foreclose. The lender’s goal is a foreclosure judgment. The lawsuit is, for the most part, like any other lawsuit, which is to say that it can take considerable time for the lender to obtain the foreclosure judgment. The borrower has rights that it can exercise as part of the foreclosure lawsuit that can delay the foreclosure judgment or, in some circumstances, stop the lawsuit entirely. This is “foreclosure defense.” So, in Connecticut and New York (and possibly any other judicial foreclosure state) a lender does not foreclose merely by flipping a switch. With proper assistance, the property owner can often retain the property for an extended period.

I frequently use a train analogy to describe the foreclosure lawsuit process. The first stop on the train is the summons and complaint, which starts the lawsuit. The foreclosure judgment is the last stop. There are a number of stops between the summons and complaint and foreclosure judgment. Foreclosure defense is trying to make sure the lender moves as slowly as possible between stops and attempting to insure that the lender makes every stop. Sometimes a borrower can derail the train, which means that the lender has to start the process all over again.

Connecticut and New York have programs associated with foreclosure lawsuits that are designed to help homeowners and lenders achieve a mortgage modification. The programs, in addition to helping with modification, slow the foreclosure lawsuit process. Connecticut’s program is called “Foreclosure Mediation” and New York’s is the “Foreclosure Settlement Conference Program.” Borrowers are admitted to these programs when the foreclosure lawsuit starts.

The foreclosure process is closer to flipping a switch in nonjudicial foreclosure states because the lender does not need to involve the courts. Instead, it follows the procedure set forth in the mortgage instrument, which ordinarily provides the lender the right to sell the property at an auction on a specified number of days notice to the borrower.

Some states provide for both judicial and nonjudicial foreclosures. Click here for RealtyTrac’s state-by-state listing of foreclosure procedures. I don’t know how RealtyTrac calculated the “Process Period” but my experience in Connecticut and New York has been different.