The Myths And Merits Of MERS

In 1993, key residential mortgage lending industry participants1gathered in order to bring then current developments in technology to the forefront in the establishment of a central, electronic registry for tracking interests in mortgage loans, thereby facilitating the transfer, acquisition and identification of those interests for custodians, servicers, investors and other participants in the industry. The goal was to eliminate the need and administrative expense for paper assignments of various mortgage-related rights as much as possible. The result of these efforts was the creation of the Mortgage Electronic Registration System, known as the MERS® System.2

Prior to the development of the MERS® System, when an interest in a mortgage loan was transferred, the parties would often change the mortgagee by assigning and recording the security instrument in the land records.3 Mortgage loans were frequently originated in the name of one lender and then transferred to aggregators, which might transfer contractual servicing rights to still another party. In each case, an assignment was recorded so that the purchaser or servicer would appear in the land records4 so that they would receive service of process and other legal notices as the lienholder in the public land records. To complicate matters further, when the servicing remained with the seller, the seller often remained mortgagee of record. If servicing changed hands, the land records were updated only if the new servicer wanted to receive service of process.5 This process could take a long time to complete—up to six months for a modest loan portfolio. County recorder offices struggled to manage the volume of filings, which threatened the integrity of the land title recordation system and jeopardized the ability of consumers to obtain residential mortgage loans. Error rates as high as 33% were common, with assignments recorded in the wrong sequence or missing altogether—clouding title to properties.6

The founders of the MERS® System intended for it to be a system that was open and available to mortgage industry participants, applying information technology to reduce costs and streamline the process, similar to implementation by the securities industry of book entry systems.

The stated benefits of the initially proposed MERS® System concept7 were:

Elimination of the need for subsequent assignments of the mortgage lien following closing of a loan. Significant simplification of the loan tracking process. Improvement of the lien release process. Assistance in fraud reduction. Simplification of procedures for delivering legal notices to mortgagees by providing an accurate database of beneficial owners of mortgage rights. Cost reduction through voluntary immobilization of the mortgage note.8 The MERS® System was put into effect with the organization of Mortgage Electronic Registration Systems, Inc. ("MERS Inc."), which serves as "mortgagee", "grantee" or "beneficiary" (depending on state law; we will use the term "mortgagee" to refer to all three) in the security instrument, as nominee for the original lender and subsequent beneficial owners of the secured note. MERS Inc. is a wholly owned subsidiary of MERSCORP Holdings, Inc. ("MERSCORP Holdings"), which is owned by certain member financial institutions that utilize its services. The industry leaders, having worked hard to develop and achieve these laudable and practical goals, clearly had no idea what would befall the residential mortgage industry, nor how their motives and intentions would be twisted and vilified by critics in the current economic downturn.9

THE PRINCIPLES OF MERS

The principles behind the MERS® System were derived from similar principles governing the establishment and function of the book entry registration and transfer system for securities established by The Depository Trust Company ("DTC"). Like the MERS® System, DTC is a member-owned institution that was created for the benefit of broker-dealer participants to facilitate transfers of securities in the securities markets. The benefits to the efficiency of securities transfers brought about by DTC have been clearly demonstrated and widely accepted.10 Much as "Cede & Co." (the nominee holder of title to securities for DTC) does for beneficial owners of securities in the securities markets, MERS Inc. acts as the nominee of the lender (and its successors and assigns), who are beneficial owners of mortgage loans in the mortgage industry. In so doing, MERS Inc. becomes the mortgagee or beneficiary of record for the related mortgages and/or deeds of trust, for the benefit of the lender participants in the MERS® System.

To understand how the MERS® System operates, it is important to clarify the basic elements of a mortgage loan, which typically consists of two documents: (i) a promissory note between the lender and the borrower that sets forth the terms of the loan and establishes the obligation of the borrower to repay the loan secured by real property; and, (ii) a security instrument, which may be called a "mortgage," "deed of trust" or a "security deed" (depending on state law; we will use the term "mortgage" to refer to all three), evidencing the pledge of the purchased or refinanced property as collateral or security for the loan. The mortgage is recorded in the real property records in order to provide public notice to third parties of the security interest encumbering the property. Sometimes the terms "note" and "mortgage" have been used interchangeably, resulting in confusion. They represent two different documents with separate but interrelated functions. For that reason, as discussed below and based on long-standing case law and regulations, it is not necessary that both documents be in the name of the same person or entity.

It is also important to understand what the MERS® System is and what it is not. Under the MERS® System, MERS Inc. and its parent, MERSCORP Holdings, serve two distinct functions. First, MERSCORP Holdings owns, operates and maintains the MERS® System, which is an electronic database or registry of mortgage loans that tracks changes in servicing rights and beneficial ownership interests in residential mortgage loans. Second, MERS Inc. serves as the mortgagee or beneficiary of record, or holder of the mortgage lien, in the public land records for the benefit of its members.

MERS Inc. claims no right to retain payments made on the promissory notes. It is not a mortgage banker. MERS Inc. does not take applications, underwrite loans, make decisions on whether to extend credit, collect mortgage payments, hold escrows for taxes and insurance or provide any loan servicing functions. MERS Inc. does not lend money or acquire the right to receive payments on mortgage loans. MERS Inc. does not receive compensation from consumers, just fees from its members.11

The bifurcation of roles and parties was not instituted by MERS Inc., rather it has a long history in mortgage finance and other developing commercial operations and in fact has been incorporated into state laws and regulations as will be discussed below.12 Where the mortgage (or an assignment thereof) names MERS Inc. as the mortgagee (or assignee of the mortgagee), then MERS Inc. has legal title13 to the real estate interest serving as collateral for the repayment of the loan, and the owner(s) of the note owns the beneficial interest in the loan secured by the mortgage. In such capacity, MERS Inc. remains the mortgagee of record, and pursuant to its contractual agreements with its members who are owners of the notes or servicers acting on behalf of the owners, any transfer of ownership or servicing must be communicated to the MERS® System to enable it to track such changes in order to provide the owner and servicer with filings and communications that MERS Inc. receives in its capacity as mortgagee of record. The borrower deals with the loan servicer—not MERS Inc.—in all matters of payment, modification or default on the loan.

In mortgage (non-deed of trust) states, the operative document defining MERS Inc.'s rights and functions is the mortgage. MERS Inc. is neither a party to, nor named in, the promissory note. Representative language can be found in a typical form of mortgage naming MERS Inc. as the original mortgagee14, which identifies three parties: the borrower, the lender and MERS Inc. MERS Inc. is further described as a separate corporation that is acting as mortgagee solely as a nominee for lender and lender's successors and assigns. Under the mortgage, the borrower mortgages, grants and conveys to MERS Inc. (solely as nominee for lender and lender's successors and assigns) and to the successors and assigns of MERS Inc., the property described therein. Furthermore, the mortgage includes an acknowledgment from the borrower that MERS Inc. holds only legal title15 to the interests granted by the borrower, but if necessary to comply with law or custom, MERS Inc. (as nominee for lender and lender's successors and assigns) has the right: to exercise any or all of those interests, including, but not limited to, the rights to foreclose and sell the mortgaged property; and to take any action required of the lender, including, but not limited to, releasing and canceling the mortgage. Thus, the express language of the mortgage instrument authorizes MERS Inc. to act on behalf of the lender in serving as the legal titleholder and exercising any of the rights granted to the lender thereunder.

In deed of trust states, the operative document defining MERS Inc.'s rights and functions is the deed of trust. Representative language can be found in a typical form of deed of trust naming MERS Inc. as the original beneficiary16, which identifies four parties: the borrower, the lender, the trustee and MERS Inc. MERS Inc. is described as a separate corporation that is acting solely as a nominee for lender and lender's successors and assigns. In addition, MERS Inc. and the...

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