MERS: Should Counties Sue Them to Collect Unpaid Recording Fees?

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 Systems, Inc.

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. . . ."