- Mortgages bundled into securities were a favorite investment
of speculators at the height of the financial bubble leading up to the
crash of 2008. The securities changed hands frequently, and the companies
profiting from mortgage payments were often not the same parties that negotiated
the loans. At the heart of this disconnect was the Mortgage Electronic
Registration System, or MERS, a company that serves as the mortgagee of
record for lenders, allowing properties to change hands without the necessity
of recording each transfer.
- Over 62 million mortgages are now held in the name of
MERS, an electronic recording system devised by and for the convenience
of the mortgage industry. A California bankruptcy court, following landmark
cases in other jurisdictions, recently held that this electronic shortcut
makes it impossible for banks to establish their ownership of property
titles-and therefore to foreclose on mortgaged properties. The logical
result could be 62 million homes that are foreclosure-proof.MERS was convenient
for the mortgage industry, but courts are now questioning the impact of
all of this financial juggling when it comes to mortgage ownership. To
foreclose on real property, the plaintiff must be able to establish the
chain of title entitling it to relief. But MERS has acknowledged, and recent
cases have held, that MERS is a mere "nominee"-an entity appointed
by the true owner simply for the purpose of holding property in order to
facilitate transactions. Recent court opinions stress that this defect
is not just a procedural but is a substantive failure, one that is fatal
to the plaintiff's legal ability to foreclose.
- That means hordes of victims of predatory lending could
end up owning their homes free and clear-while the financial industry could
end up skewered on its own sword.
- California Precedent
- The latest of these court decisions came down in California
on May 20, 2010, in a bankruptcy case called In re Walker, Case no. 10-21656-E-11.
The court held thatMERS could not foreclose because it was a mere nominee;
and that as a result, plaintiff Citibank could not collect on its claim.
The judge opined:
- Since no evidence of MERS' ownership of the underlying
note has been offered, and other courts have concluded that MERS does not
own the underlying notes, this court is convinced that MERS had no interest
it could transfer to Citibank. Since MERS did not own the underlying note,
it could not transfer the beneficial interest of the Deed of Trust to another.Any
attempt to transfer the beneficial interest of a trust deed without ownership
of the underlying note is void under California law.
- In support, the judge cited In Re Vargas (California
Bankruptcy Court); Landmark v. Kesler (Kansas Supreme Court); LaSalle Bank
v. Lamy (a New York case); and In Re Foreclosure Cases (the "Boyko"
decision from Ohio Federal Court). (For more on these earlier cases, see
here, here and here.) The court concluded:
- Since the claimant, Citibank, has not established that
it is the owner of the promissory note secured by the trust deed, Citibank
is unable to assert a claim for payment in this case.
- The broad impact the case could have on California foreclosures
is suggested by attorney Jeff Barnes, who writes:
- This opinion . . . serves as a legal basis to challenge
any foreclosure in California based on a MERS assignment; to seek to void
any MERS assignment of the Deed of Trust or the note to a third party for
purposes of foreclosure; and should be sufficient for a borrower to not
only obtain a TRO [temporary restraining order] against a Trustee's Sale,
but also a Preliminary Injunction barring any sale pending any litigation
filed by the borrower challenging a foreclosure based on a MERS assignment.
- While not binding on courts in other jurisdictions, the
ruling could serve as persuasive precedent there as well, because the court
cited non-bankruptcy cases related to the lack of authority of MERS, and
because the opinion is consistent with prior rulings in Idaho and Nevada
Bankruptcy courts on the same issue.
- What Could This Mean for Homeowners?
- Earlier cases focused on the inability of MERS to produce
a promissory note or assignment establishing that it was entitled to relief,
but most courts have considered this a mere procedural defect and continue
to look the other way on MERS' technical lack of standing to sue. The more
recent cases, however, are looking at something more serious. If MERS is
not the title holder of properties held in its name, the chain of title
has been broken, and no one may have standing to sue. In MERS v. Nebraska
Department of Banking and Finance, MERS insisted that it had no actionable
interest in title, and the court agreed.
- An August 2010 article in Mother Jones titled "Fannie
and Freddie's Foreclosure Barons" exposes a widespread practice of
"foreclosure mills" in backdating assignments after foreclosures
have been filed. Not only is this perjury, a prosecutable offense, but
if MERS was never the title holder, there is nothing to assign. The defaulting
homeowners could wind up with free and clear title.
- In Jacksonville, Florida, legal aid attorney April Charney
has been using the missing-note argument ever since she first identified
that weakness in the lenders' case in 2004. Five years later, she says,
some of the homeowners she's helped are still in their homes. According
to a Huffington Post article titled "'Produce the Note' Movement Helps
- Because of the missing ownership documentation, Charney
is now starting to file quiet title actions, hoping to get her homeowner
clients full title to their homes (a quiet title action 'quiets' all other
claims). Charney says she's helped thousands of homeowners delay or prevent
foreclosure, and trained thousands of lawyers across the country on how
to protect homeowners and battle in court.
- Criminal Charges?
- Other suits go beyond merely challenging title to alleging
criminal activity. On July 26, 2010, a class action was filed in Florida
seeking relief against MERS and an associated legal firm for racketeering
and mail fraud. It alleges that the defendants used "the artifice
of MERS to sabotage the judicial process to the detriment of borrowers;"
that "to perpetuate the scheme, MERS was and is used in a way so that
the average consumer, or even legal professional, can never determine who
or what was or is ultimately receiving the benefits of any mortgage payments;"
that the scheme depended on "the MERS artifice and the ability to
generate any necessary 'assignment' which flowed from it;" and that
"by engaging in a pattern of racketeering activity, specifically 'mail
or wire fraud,' the Defendants . . . participated in a criminal enterprise
affecting interstate commerce."
- Local governments deprived of filing fees may also be
getting into the act, at least through representatives suing on their behalf.
Qui tam actions allow for a private party or "whistle blower"
to bring suit on behalf of the government for a past or present fraud on
it. In State of California ex rel. Barrett R. Bates, filed May 10, 2010,
the plaintiff qui tam sued on behalf of a long list of local governments
in California against MERS and a number of lenders, including Bank of America,
JPMorgan Chase and Wells Fargo, for "wrongfully bypass[ing] the counties'
recording requirements; divest[ing] the borrowers of the right to know
who owned the promissory note . . .; and record[ing] false documents to
initiate and pursue non-judicial foreclosures, and to otherwise decrease
or avoid payment of fees to the Counties and the Cities where the real
estate is located." The complaint notes that "MERS claims to
have 'saved' at least $2.4 billion dollars in recording costs," meaning
it has helped avoid billions of dollars in fees otherwise accruing to local
governments. The plaintiff sues for treble damages for all recording fees
not paid during the past ten years, and for civil penalties of between
$5,000 and $10,000 for each unpaid or underpaid recording fee and each
false document recorded during that period, potentially a hefty sum. Similar
suits have been filed by the same plaintiff qui tam in Nevada and Tennessee.
- By Their Own Sword: MERS' Role in the Financial Crisis
- MERS is, according to its website, "an innovative
process that simplifies the way mortgage ownership and servicing rights
are originated, sold and tracked. Created by the real estate finance industry,
MERS eliminates the need to prepare and record assignments when trading
residential and commercial mortgage loans." Or as Karl Denninger puts
it, "MERS' own website claims that it exists for the purpose of circumventing
assignments and documenting ownership!"
- MERS was developed in the early 1990s by a number of
financial entities, including Bank of America, Countrywide, Fannie Mae,
and Freddie Mac, allegedly to allow consumers to pay less for mortgage
loans. That did not actually happen, but what MERS did allow was the securitization
and shuffling around of mortgages behind a veil of anonymity. The result
was not only to cheat local governments out of their recording fees but
to defeat the purpose of the recording laws, which was to guarantee purchasers
clean title. Worse, MERS facilitated an explosion of predatory lending
in which lenders could not be held to account because they could not be
identified, either by the preyed-upon borrowers or by the investors seduced
into buying bundles of worthless mortgages. As alleged in a Nevada class
action called Lopez vs. Executive Trustee Services, et al.:
- Before MERS, it would not have been possible for mortgages
with no market value . . . to be sold at a profit or collateralized and
sold as mortgage-backed securities. Before MERS, it would not have been
possible for the Defendant banks and AIG to conceal from government regulators
the extent of risk of financial losses those entities faced from the predatory
origination of residential loans and the fraudulent re-sale and securitization
of those otherwise non-marketable loans. Before MERS, the actual beneficiary
of every Deed of Trust on every parcel in the United States and the State
of Nevada could be readily ascertained by merely reviewing the public records
at the local recorder's office where documents reflecting any ownership
interest in real property are kept....
- After MERS, . . . the servicing rights were transferred
after the origination of the loan to an entity so large that communication
with the servicer became difficult if not impossible .... The servicer
was interested in only one thing - making a profit from the foreclosure
of the borrower's residence - so that the entire predatory cycle of fraudulent
origination, resale, and securitization of yet another predatory loan could
occur again. This is the legacy of MERS, and the entire scheme was predicated
upon the fraudulent designation of MERS as the 'beneficiary' under millions
of deeds of trust in Nevada and other states.
- Axing the Bankers' Money Tree
- If courts overwhelmed with foreclosures decide to take
up the cause, the result could be millions of struggling homeowners with
the banks off their backs, and millions of homes no longer on the books
of some too-big-to-fail banks. Without those assets, the banks could again
be looking at bankruptcy. As was pointed out in a San Francisco Chroniclearticle
by attorney Sean Olender following the October 2007 Boyko [pdf] decision:
- The ticking time bomb in the U.S. banking system is not
resetting subprime mortgage rates. The real problem is the contractual
ability of investors in mortgage bonds to require banks to buy back the
loans at face value if there was fraud in the origination process.
- . . . The loans at issue dwarf the capital available
at the largest U.S. banks combined, and investor lawsuits would raise stunning
liability sufficient to cause even the largest U.S. banks to fail . . .
- Nationalization of these giant banks might be the next
logical step-a step that some commentators said should have been taken
in the first place. When the banking system of Sweden collapsed following
a housing bubble in the 1990s, nationalization of the banks worked out
very well for that country.
- The Swedish banks were largely privatized again when
they got back on their feet, but it might be a good idea to keep some banks
as publicly-owned entities, on the model of the Commonwealth Bank of Australia.
For most of the 20th century it served as a "people's bank,"
making low interest loans to consumers and businesses through branches
all over the country.
- With the strengthened position of Wall Street following
the 2008 bailout and the tepid 2010 banking reform bill, the U.S. is far
from nationalizing its mega-banks now. But a committed homeowner movement
to tear off the predatory mask called MERS could yet turn the tide. While
courts are not likely to let 62 million homeowners off scot free, the defect
in title created by MERS could give them significant new leverage at the
- Ellen Brown wrote this article for YES! Magazine, a national,
nonprofit media organization that fuses powerful ideas with practical actions.
Ellen developed her research skills as an attorney practicing civil litigation
in Los Angeles. In Web of Debt, her latest of eleven books, she shows how
the Federal Reserve and "the money trust" have usurped the power
to create money from the people themselves, and how we the people can get
it back. Her websites are webofdebt.com, ellenbrown.com, and public-banking.com.