LOSING OUR HOMES, LOSING OUR WAY, OR BOTH?

FORECLOSURE, COUNTY PROPERTY RECORDS, AND THE MORTGAGE ELECTRONIC REGISTRATION SYSTEM
CHRISTOPHER L. 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 a consummate 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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take the conservative assumption of one person per home), the demographic group of individuals facing the loss of their homes exceeds the 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 2006 sub-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
See Population 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. See Soldiers 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. 20092010.48, 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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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.13 Betty 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

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-tosuicide-of-nice-lady-307253.php. 7 Id. 8 Id. 9 See 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-noticesfannie-mae-joyce-smith?_s=PM:US. 12 Id. 13 Id. 14 Family Says Suicide Caused by Foreclosure Action, VINDY.COM (Feb. 12, 2009), http://www.vindy.com/news/2009/feb/12/family-files-suit-after-suicide/. 15 Foreclosure Threat Drives Some to Suicide, CBS NEWS (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 insurance proceeds 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 and Washington: 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
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. 16 Id. (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 . . . .). 17 Id. 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-ssuicide-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 role in 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 in our 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
Id. at 137374. See, 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 was often 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 recording statute 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

Id. at 64546. See WILLIAM B. STOEBUCK & DALE A. WHITMAN, THE LAW OF PROPERTY 16 (3d ed. 2000) (discussing the feudal system following the Norman conquest). 27 Id. at 21. 28 Cf. id. (Throughout the . . . United States, it seems clear that tenure never existed.). 29 Id. at 869. 30 RICHARD R. POWELL & PATRICK J. ROHAN, POWELL ON REAL PROPERTY 1046 (1968). 31 Id. 32 JOYCE PALOMAR, PATTON AND PALOMAR ON LAND TITLES 10 (3d ed. 2003). 33 Id. at 11 n.7. 34 Id. at 10. 35 Id. at 11 n.7. 36 See 76 C.J.S. Registers of Deeds 3 (2007) (describing the office as either appointive or elective). Accord Natl 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 the securitization 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 38

POWELL & ROHAN, supra note 30, at 1047. 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 the next 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 to foreclose 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
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, 18 WM. 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 urban areas, 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 an agreement 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,
For a classic discussion of factors influencing the decline of many American cities in the later twentieth century see KATHARINE L. BRADBURY, ANTHONY DOWNS & KENNETH A. SMALL, URBAN DECLINE AND THE FUTURE OF AMERICAN CITIES 28 (1982). 43 Document 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, 31 IDAHO L. REV. 805, 81011 (1995) (describing the purpose, process, and goals set forth in the whitepaper). 45 See 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. 47 Id. at 34. 48 Lipton, supra note 39. 49 Id.
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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 legislature adopted 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
Id. Arnold, supra note 46, at 32, 34. 52 Id. 53 See Frequently 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 accept responsibility 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

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.). 55 Id. 56 See Legal Documents, Instructions, EFANNIEMAE.COM, https://www.efanniemae.com/ sf/formsdocs/documents/secinstruments/doc/3045.doc (last visited Mar. 20, 2012) [hereinafter Legal 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 that sentence, 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 is MERS? 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 58

BLACKS LAW DICTIONARY 1076 (8th ed. 2004). Legal 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 on Security 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 million times 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
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). 61 Id. at 696 ([T]he form or title chosen by the parties is not determinative.). 62 Id. 63 83 U.S. 271 (1872). 64 Id. 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 that realization 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 does not 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

Deposition of R.K. Arnold at 22, Henderson v. Merscorp, Inc., No. CV-08-900805.00 (Ala. Cir. Ct. Sept. 25, 2009). 66 Id. at 2223. 67 Id. 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). 69 Remarks 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 [hereinafter Remarks and Testimony]. 70 Id. 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 corporate resolution,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 few states 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 cameliam@mersinc.org or by phone at (703) 7612111. Very truly yours, Camelia Martin Paralegal Enclosures75
72 73

Id. Id. 74 Id. 75 Id.

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What is a certifying officer? If youre a paralegal or a file clerk, because you pressed submit on the Internet, you now hold the title of assistant secretary of MERS. That is the title that these people are instructed to put on all documents that are signed for MERS by certifying officers. In a few states (Maryland, Mississippi, Nebraska, Oklahoma, Kansas), they want you to be vice president; therefore, in those states you can be a vice president.76 I have seen them sign as vice president in lots of other states too that are not on this list. I think it may be because it is just more fun to sign your name as a vice president. If you are a file clerk, what do you want to be, an assistant secretary or a vice president? In addition to all this, you can buy a corporate seal for $25 plus shipping and handling, and they will send you a corporate seal.77 So it turns out that the people who work on behalf of MERS, Inc. are actually file clerks and paralegals of other companies all across the country. MERS, Inc. has no employees, but they have about 22,000 vice presidents. For lawyers, especially those in Delaware, perhaps that is a proposition within the zone of reasonableness. However, when I talk to little old ladies, my Mom, and regular people off the street, they call this fraud. They do not believe that these file clerks are vice presidents. In the English language that they use, the words vice president are not amenable to this interpretation in any way at all. I think if this ever gets to a jury, its likely that they will decide that these people are not vice presidents. I would like to offer a little more about these vice presidents. What follows is a deposition of a MERS vice president from Florida: Q: Did you have to have any sort of training to become a Certified Officer? A: No. Q: Do you know where MERS is located? A: No. Q: Have you ever been there? A: No. Q: Have you ever spoken with anyone at MERS? A: No. Q: Have you ever had e-mail transmissions back and forth with anyone from MERS? A: No.
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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 an assignment 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 the Longan 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

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). 79 See, 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 whatever you 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?

Id. at 170. Id. at 16768. 83 See 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 before Kesler was decided); Mortg. Elec. Registration Sys. Inc. v. Saunders, 2 A.3d. 289, 295 (Me. 2010). 84 Saunders, 2 A.3d at 297. 85 Id. 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 our country.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 statue apply 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.

Peterson, supra note 21, at 1374. Id. 90 15 U.S.C. 1692j(a). 91 See 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 Supreme Court 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 the lien. 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 of Disque 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 93

Disque v. Wright, 49 Iowa 538, 540 (Iowa 1878). Id. 94 Id. 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 not present 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 the defendant 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,

96 97

Id. at 335. 59 C.J.S. Mortgages 306 (2009). 98 66 AM. JUR. 2D Restitution 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.100 So 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, this should 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
Id. at 385. See Mortg. Elec. Registration Sys., Inc. v. Saunders, 2 A.3d 289, 294 (Me. 2010). 102 Id. at 297. 103 See LEONARD A. JONES, A TREATISE ON THE LAW OF MORTGAGES OF REAL PROPERTY 43 (6th ed. 1904). 104 See 2 WILLIAM BLACKSTONE, COMMENTARIES (Univ. of Chicago Press, 2d ed. 2002) (1766) 15758. 105 See 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 $35 fees 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 pay recording 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
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). 107 See 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). 109 See 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 of documents 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 information infrastructure 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). 111 Remarks 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.

Arnold, supra note 46, at 36. GARRY WILLS, LINCOLN AT GETTYSBURG: THE WORDS THAT REMADE AMERICA 145 (1992). 116 Udo J. Keppler, You Dirty Boy!, PUCK MAGAZINE, 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 I would 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 longterm foundation for commerce. There may also have been some agent cases out there where some 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 has gone 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 to be transferred without the re-recording?

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RESPONSE, DEAN PETERSON: The Ibanez117 decision in Massachusetts is illustrative on this point. 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 be that 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? RESPONSE, DEAN PETERSON: 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
117 118

U.S. Bank Natl Assn v. Ibanez, 941 N.E.2d 40 (Mass. 2011). Id. at 5354. 119 Id. 120 Id.

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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 on behalf 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 MERSrecorded 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? RESPONSE, DEAN PETERSON: 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 standard boilerplate 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 the lender 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 are transferring 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.
Ronald J. Mann, Searching for Negotiability in Payment and Credit Systems, 44 UCLA L. REV. 951, 97172 (1997). 122 Id. 123 Id. 124 See 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.