Foreclosure Crisis: Much Ado About MERS?

Of the many stories that garnered national coverage during Tuesday’s midterm elections, Thomas Miller’s successful election to an eighth term as Iowa’s Attorney General went largely unnoticed by the talking heads at MSNBC and Fox. Miller is the point-man for the 50-state investigation into the burgeoning mess the media likes to call the “Foreclosure Crisis”. We’ve already learned about the dangers of RoboSigners (see Rick’s blog post), and the past weeks have seen a notable increase in coverage regarding a ubiquitous but heretofore relatively unknown company called MERS.

The Mortgage Electronic Registration Systems– a company essentially founded by industry participants (the GSE’s and some big-time private label issuers) – serves two primary functions. First, the company acts as record title holder of the mortgage (as nominee for the noteholder) and keeps track of the owner of the beneficial interests in the note. Second, in states where it is permitted, MERS will appear in court to execute the foreclosure process. Seems pretty innocuous – placing nominal title to a security interest in the name of a nominee for the benefit of the actual stakeholders in the debt. But in early October, a judge in Oregon stopped a foreclosure of a securitized sub-prime residential mortgage loan on the grounds that the assignment of a mortgage to MERS was ineffective because MERS didn’t hold the note – leading the judge to find that MERS lacked a cognizable interest in the property (I expect that this will not be the last we here with respect to this ruling). Then Jamie Dimon commented during an earnings call that his firm no longer used MERS, a story picked up by CNBC (turns out JP Morgan cut ties with MERS in 2008). The Times followed with a story last week detailing two recent scholarly articles by law professors at Utah and Georgetown that take issue with MERS from a public policy perspective.

MERS is a creature of necessity, established in the wake of the explosive growth of residential securitization. When a mortgage loan (residential or commercial) is sold, the promissory note (evidencing the debt) is assigned to the purchaser via allonge – the mortgage (which is placed of record at origination) is assigned through a recorded assignment. Relatively simple, until one considers the number of mortgage loans being securitized, the fact that the securitization of a single mortgage loan may require multiple assignments (remember, the GSEs are accumulators, not direct lenders, and therefore needed to first acquire the underlying loans, to say nothing of assignments to depositors and repo lenders) and also, the fact that (with extremely few exception) the land recordation system in place in this country is almost impossibly outmoded in terms of technology. The overwhelming number of assignments – coupled with the inability of local recorders to keep pace – created a need for a more modern approach to tracking the ownership of mortgage loan, and MERS satisfied this need by offering a DTC-like registry for mortgages.

This is a developing story, and one sure to play out over the course of coming months. Last week we issued this Dechert OnPoint to clients that might be concerned with respect to potential issues in their foreclosure processes. Of course, we will continue to monitor these issues as they develop.

By Matt Clark.