Foreclosure, Subprime Mortgage Lending, and the Mortgage Electronic Registration System

1. Foreclosure, Subprime Mortgage Lending, and the Mortgage Electronic Registration System Christopher L. Peterson Associate Dean for Academic Affairs & Professor of Law

2. About 6.6 million foreclosures initiated during the crisis

3. Goldman Sachs projects up to 12 million foreclosures in the next 5 years

4. Fitch ratings estimates that about 50% of subprime mortgages originated since 2006 will end in foreclosure

5. 61% of 2006 subprime loans that went to people who could have qualified for prime loans with better terms

6. Over 50% of American Residential Mortgages are nominally owned by a company called Mortgage Electronic Registration System, Inc.

7. Over 50% of American Residential Mortgages are nominally owned by a company called Mortgage Electronic Registration System, Inc. “MERS”

8. What was MERS’ role in the American foreclosure lending crisis? • Legal Background of Land Title Recording Systems • The Business Practices and problematic Legal Foundation of the new MERS system • An Analysis of What MERS tells us about: • the financial crisis • Public information infrastructure • Democratic Governance of Commerce

9. Background: State Land Title Recording Systems • The problem of opaque land ownership

10. Background: State Land Title Recording Systems • The problem of opaque land ownership • The innovation of land title recording systems

11. The First American Recording Acts: In 1636 -- The Plymouth Bay Colony required: “all sales exchanges fites mortgages leases or other Conveyences of howses and lands the sale to be acknowledged before the Governor or any one of the Assistants and committed to the public Record.” Drawing of the Plymouth Court House c.1830

12. The First American Recording Acts: In 1636 -- The Plymouth Bay Colony required: “all sales exchanges fites mortgages leases or other Conveyences of howses and lands the sale to be acknowledged before the Governor or any one of the Assistants and committed to the public Record.” Drawing of the Plymouth Court House c.1830

13. The First American Recording Acts: In 1636 -- The Plymouth Bay Colony. In 1639 – Connecticut General Court required: “all bargines or mortgages of land whatsoever shall be accounted of no value until they be recorded.” Drawing of the Plymouth Court House c.1830

14. The First American Recording Acts: In 1636 -- The Plymouth Bay Colony. In 1639 – Connecticut General Court required: “all bargines or mortgages of land whatsoever shall be accounted of no value until they be recorded.” Drawing of the Plymouth Court House c.1830

15. The First American Recording Acts: In 1636 -- The Plymouth Bay Colony. In 1639 – Connecticut General Court . In 1639 – Virginia also adopted a recording statute. Drawing of the Plymouth Court House c.1830

16. The First American Recording Acts: In 1636 -- The Plymouth Bay Colony. In 1639 – Connecticut General Court . In 1639 – Virginia also adopted a recording statute. By the American Revolution all thirteen colonies had adopted recording acts. Drawing of the Plymouth Court House c.1830

17. The First American Recording Acts: In 1636 -- The Plymouth Bay Colony. In 1639 – Connecticut General Court . In 1639 – Virginia also adopted a recording statute. By the American Revolution all thirteen colonies had adopted recording acts. Pennsylvania's Recording Act (1717) remains in force today. Drawing of the Plymouth Court House c.1830

18. Mortgage Recording in a Subprime Structured Finance Conduit Traditional

19. Mortgage Recording in a Subprime Structured Finance Conduit Traditional Foreclosure

20. Mortgage Recording in a Subprime Structured Finance Conduit Traditional Foreclosure

21. Background: State Land Title Recording Systems • The problem of bona fide purchasers • The innovation of land title recording systems • The problems of land title recording systems

22. The Innovation of MERS • 1993 Mortgage finance company white paper released at an annual convention- • Mortgage Bankers Assoc. Steering Committee formed • 1995 Committee creates a business plan • 1996 Group of servicers, investors, originators, and insurers form an agreement. • MERS, Inc. and MERS Corp., Inc. incorporate in Delaware and begin recording loan assignments in the name of MERS in public secondary mortgage market • 1999 Moody’s issues opinion endorsing MERS

23. What does MERS do? • Tracks servicing rights for mortgages registered in its national database • Interacts with county recording offices on behalf of mortgage bankers • Brings foreclosure lawsuits on behalf of mortgage industry

24. Mortgage Recording in a Subprime Structured Finance Conduit MERS as Assignee

25. Mortgage Recording in a Subprime Structured Finance Conduit MERS as Original Mortgagee (“MOM”)

26. Mortgage Recording in a Subprime Structured Finance Conduit MERS as Original Mortgagee (“MOM”) Foreclosure

27. What is MERS? • A typical mortgage agreement states: “’MERS is Mortgage Electronic Registration Systems, Inc. MERS is a separate corporation that is acting solely as nominee for Lender and Lender’s successors and assigns. MERS is the mortgagee under this Security Instrument. MERS is organized and existing under the laws of Delaware….”

28. What is MERS? • A typical mortgage agreement states: “’MERS is Mortgage Electronic Registration Systems, Inc. MERS is a separate corporation that is acting solely as nominee for Lender and Lender’s successors and assigns. MERS is the mortgagee under this Security Instrument. MERS is organized and existing under the laws of Delaware….”

29. What is MERS? • A typical mortgage agreement states: “’MERS is Mortgage Electronic Registration Systems, Inc. MERS is a separate corporation that is acting solely as nominee for Lender and Lender’s successors and assigns. MERS is the mortgagee under this Security Instrument. MERS is organized and existing under the laws of Delaware….”

30. What is MERS? • A typical mortgage agreement states: “’MERS is Mortgage Electronic Registration Systems, Inc. MERS is a separate corporation that is acting solely as nominee for Lender and Lender’s successors and assigns. MERS is the mortgagee under this Security Instrument. MERS is organized and existing under the laws of Delaware….”

31. What is MERS? • A typical mortgage agreement states: “’MERS is Mortgage Electronic Registration Systems, Inc. MERS is a separate corporation that is acting solely as nominee for Lender and Lender’s successors and assigns. MERS is the mortgagee under this Security Instrument. MERS is organized and existing under the laws of Delaware….” • No. It’s not.

32. What is MERS? • A typical mortgage agreement states: “’MERS is Mortgage Electronic Registration Systems, Inc. MERS is a separate corporation that is acting solely as nominee for Lender and Lender’s successors and assigns. MERS is the mortgagee under this Security Instrument. MERS is organized and existing under the laws of Delaware….” • No. It’s not. • MERS is not entitled to receive the proceeds of a foreclosure sale.

33. What is MERS? • A typical mortgage agreement states: “’MERS is Mortgage Electronic Registration Systems, Inc. MERS is a separate corporation that is acting solely as nominee for Lender and Lender’s successors and assigns. MERS is the mortgagee under this Security Instrument. MERS is organized and existing under the laws of Delaware….” • No. It’s not. • MERS is not entitled to receive the proceeds of a foreclosure sale. • MERS is not entitled to receive monthly payments on the note.

34. What is MERS? • A typical mortgage agreement states: “’MERS is Mortgage Electronic Registration Systems, Inc. MERS is a separate corporation that is acting solely as nominee for Lender and Lender’s successors and assigns. MERS is the mortgagee under this Security Instrument. MERS is organized and existing under the laws of Delaware….” • No. It’s not. • MERS is not entitled to receive the proceeds of a foreclosure sale. • MERS is not entitled to receive monthly payments on the note. • MERS does not pay value for the mortgage lien.

35. What is MERS? • A typical mortgage agreement states: “’MERS is Mortgage Electronic Registration Systems, Inc. MERS is a separate corporation that is acting solely as nominee for Lender and Lender’s successors and assigns. MERS is the mortgagee under this Security Instrument. MERS is organized and existing under the laws of Delaware….” • No. It’s not. • MERS is not entitled to receive the proceeds of a foreclosure sale. • MERS is not entitled to receive monthly payments on the note. • MERS does not pay value for the mortgage lien. • We have a venerable legal tradition of looking to the economic substance of contracts, particularly contracts that create liens.

36. What is MERS? • A typical mortgage agreement states: “’MERS is Mortgage Electronic Registration Systems, Inc. MERS is a separate corporation that is acting solely as nominee for Lender and Lender’s successors and assigns. MERS is the mortgagee under this Security Instrument. MERS is organized and existing under the laws of Delaware….” • No. It’s not. • “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.” • --Carpenter v. Longan, 83 U.S. 271, 274 (1872)

37. Who is MERS? RE: MERS Corporate Resolution Appointing MERS Certifying Officers   Dear Sir or Madam:   Enclosed is a MERS Corporate Resolution appointing MERS certifying officers. ... 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) 761-2111. Very truly yours, Camelia Martin Paralegal Enclosures

38. Who is MERS? RE: MERS Corporate Resolution Appointing MERS Certifying Officers   Dear Sir or Madam:   Enclosed is a MERS Corporate Resolution appointing MERS certifying officers. ... 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) 761-2111. Very truly yours, Camelia Martin Paralegal Enclosures

39. Who is MERS? RE: MERS Corporate Resolution Appointing MERS Certifying Officers   Dear Sir or Madam:   Enclosed is a MERS Corporate Resolution appointing MERS certifying officers. ... 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) 761-2111. Very truly yours, Camelia Martin Paralegal Enclosures

40. Who is MERS? RE: MERS Corporate Resolution Appointing MERS Certifying Officers   Dear Sir or Madam:   Enclosed is a MERS Corporate Resolution appointing MERS certifying officers. ... 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) 761-2111. Very truly yours, Camelia Martin Paralegal Enclosures

41. The Problematic Legal Foundation of MERS • MERS Should Not Have Standing in Foreclosure Cases

42. The Problematic Legal Foundation of MERS • MERS Should Not Have Standing in Foreclosure Cases “MERS's contention that it was deprived of due process in violation of constitutional protections runs aground in the shallows of its property interest. As noted in the discussion of the first issue above, MERS did not demonstrate, in fact, did not attempt to demonstrate, that it possessed any tangible interest in the mortgage beyond a nominal designation as the mortgagor. It lent no money and received no payments from the borrower. It suffered no direct, ascertainable monetary loss as a consequence of the litigation. Having suffered no injury, it does not qualify for protection under the Due Process Clause of either the United States or the Kansas Constitutions.” --- LANDMARK NATIONAL BANK v. KESLER Kan. S.Crt.

43. The Problematic Legal Foundation of MERS 2. MERS Should be Regarded as a Debt Collector Under the Fair Debt Collection Practices Act

44. The Problematic Legal Foundation of MERS 2. MERS Should be Regarded as a Debt Collector Under the Fair Debt Collection Practices Act 15 U.S.C. 1692a(6) “debt collector” means any person … in any business the principal purpose of which is the collection of any debts… owed to … another.

45. The Problematic Legal Foundation of MERS 2. MERS Should be Regarded as a Debt Collector Under the Fair Debt Collection Practices Act 15 U.S.C. 1692a(6) “debt collector” means any person … in any business the principal purpose of which is the collection of any debts… owed to … another. the term does not include: … (F) any person collecting … to the extent that such activity … (iv) concerns a debt which was not in default at the time it was obtained by such person.

46. The Problematic Legal Foundation of MERS 2. MERS Should be Regarded as a Debt Collector Under the Fair Debt Collection Practices Act 15 U.S.C. 1692a(6) “debt collector” means any person … in any business the principal purpose of which is the collection of any debts… owed to … another. the term does not include: … (F) any person collecting … to the extent that such activity … (iv) concerns a debt which was not in default at the time it was obtained by such person.

47. The Problematic Legal Foundation of MERS • MERS Should be Regarded as a Debt Collector Under the Fair Debt Collection Practices Act 15 USC 1692 j. “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.”

48. The Problematic Legal Foundation of MERS 3. Loans Registered with MERS should Lack Priority in Many Property Disputes

49. The Problematic Legal Foundation of MERS 3. Loans Registered with MERS should Lack Priority in Many Property Disputes Disque v. Wright, 49 Iowa 538, 1878 WL 623 (Iowa 1878) (“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.”);

50. The Problematic Legal Foundation of MERS 3. Loans Registered with MERS should Lack Priority in Many Property Disputes Disque v. Wright, 49 Iowa 538, 1878 WL 623 (Iowa 1878) (“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.”);