Whenever a document is recorded with a county recorder, the recording party
must pay a recording fee. This includes the initial filing of a mortgage
or deed of trust (they are essentially identical in California), as well
as any assignment of the mortgage or deed of trust. When mortgage lenders
began the process of securitizing mortgage debt, they realized that a
significant amount of money would have to be paid in fees to county recorders,
because each securitization will result in about 4-6 “sales”
of the note, and consequently, assignment of the mortgage. For this reason,
these mortgage lenders created the Mortgage Electronic Registration Systems (MERS).
The purpose of MERS is to essentially act as a shell entity on the title
records for whoever really holds the note and mortgage. The problem with
this is that this is not really contemplated by property law in any of
the states. Real property law provides that the owner of the mortgage
is listed on the mortgage.
In a fascinating article, Prof. Christopher Peterson delves into the legal
no man’s land created by MERS. One of the things he discusses is whether counties should be entitled
to recover the recording fees that were avoided through the use of false
statements associated with the MERS system. The essence of the argument
is that MERS being a “nominee” of the mortgagee and, often,
the mortgagee at the same time is a fraudulent attempt to avoid paying
recording fees. Thus, the real owners of the mortgage (if they can be
found) should have to pay the recording fees.
Professor Peterson describes the reasons for the formation of MERS:
In the mid-1990s mortgage bankers decided they did not want to pay recording
fees for assigning mortgages anymore. This decision was driven by securitization-a
process of pooling many mortgages into a trust and selling income from
the trust to investors on Wall Street. Securitization, also sometimes
called structured finance, usually required several successive mortgage
assignments to different companies. To avoid paying county recording fees,
mortgage bankers formed a plan to create one shell company that would
pretend to own all the mortgages in the country-that way, the mortgage
bankers would never have to record assignments since the same company
would always "own" all the mortgages. They incorporated the
shell company in Delaware and called it Mortgage Electronic Registration
Even though not a single state legislature or appellate court had authorized
this change in the real property recording, investors interested in subprime
and exotic mortgage backed securities were still willing to buy mortgages
recorded through this new proxy system. Because the new system cut out
payment of county recording fees it was significantly cheaper for intermediary
mortgage companies and the investment banks that packaged mortgage securities.
Acting on the impulse to maximize profits by avoiding payment of fees
to county governments much of the national residential mortgage market
shifted to the new proxy recording system in only a few years. Now about
60% of the nation's residential mortgages are recorded in the name
of MERS, Inc. rather than the bank, trust, or company that actually has
a meaningful economic interest in the repayment of the debt. For the first
time in the nation's history, there is no longer an authoritative,
public record of who owns land in each county.
Essentially, what the MERS system has done is create a private system of
recordation of mortgage ownership. The article then analyzes some of the
arguments MERS advances as to why it exists:
MERS describes itself as "an innovative process that . . . eliminates
the need to prepare and record assignments when trading residential and
commercial mortgage loans." The phrase, which the company uses both
in legal briefs and public relations material, hints that recording assignments
was merely some useless, archaic formality. It is far from clear that
state appellate courts will agree that MERS does eliminate the need to
record assignments. But even if MERS does eliminate the need to record,
it most certainly does not eliminate the need for records. The policy
justifications behind recording statutes are as germane today as they
were hundreds of years ago when the first American colonies began adopting
the statutes. Society needs an authoritative, transparent source of information
on who owns land in order to protect property rights, encourage commerce,
expose fraud, and avoid disputes.
Unfortunately, as Professor Peterson points out, MERS does not provide
such an authoritative and transparent source of information:
After seeing loan after loan in her court room with incomplete documentation
and incoherent transactional records, Judge Jennifer Bailey, a Circuit
Court Judge in Miami recently stated:
[T]here are 60,000 foreclosures filed last year. Every single one of them-
. . . almost every single one of them-represents a situation where the
bank's position is constantly shifting and changing because they don't
know what the Sam Hill is going on in their files.
That MERS maintains a database of servicing rights simply does not provide
a commercially reliable, authoritative source of lien information because
servicers, who are in business to make profit through providing financial
services, do not have an incentive to maintain permanent, transparent,
publically available records of mortgage ownership.
MERS also does not systematically track beneficial ownership rights of
the mortgages registered on its system. Recall that MERS only maintains
a database which its members can enter information upon if they want to.
When the beneficial ownership interest in a loan changes hands, such as
through negotiation of a promissory note and a written assignment of the
mortgage, the parties to that transaction can send an electronic message
to MERS updating a field of information in the database. MERS calls this
process an "electronic handshake." But, unlike most county real
property recorders, MERS does not keep digital or hard copies of documents
that embody the agreement-making it much more difficult to track fraud
and errors through the record keeping system. Even more troubling, MERS
members are not legally bound to update this information on the database.
In the words of the MERS' CEO, the system "is capable of being
used to track [beneficial ownership interests] if the members utilize
it for that reason." But, if the MERS members choose not to use the
database to reveal themselves, MERS does not investigate further or otherwise
insist that members actually use this feature of the database. Instead,
MERS leaves this to the "business model" of the financial institution.
When asked whether MERS expects financial institutions to update the MERS
database regarding changes in loan ownership, the company's CEO replied,
"not so much. . . ."