It all started when some clever Wall Streeter came up with the idea of combining subprime mortgages, loans sold to the least creditworthy buyers, and selling them as premium financial product called mortgage backed securities (MBS). The securities were marketed in the lightening fast international derivatives market. Even though it was required by law, recording the names true investors in the mortgage every time a MBS changed hands wouldn't do. It did not come close to meeting the requirements presented by the constant churn of the international derivatives market. Constant modifications would have prevented the sale of MBS derivatives.
What did the banks do? They created MERS, an entity that recorded and electronically stored real estate sales documents. In the boilerplate contracts for millions of home sales, MERS represented itself as both the loan holder and nominee for the loan holder
Having a real estate registration system in which there was only one named lender, recorded only one time, performed two critical functions. It eliminated the process of modifying loan registrations with county recorders each time the mortgagee changed, i.e., the MBS buyers. It also kept the names of the purchasers far from public scrutiny.
University of Utah law professor Christopher L Peterson recently documented the failures and highly questionable legal foundation of MERS. His comprehensive article was published by University of Cincinnati Law Review (Summer, 2010): Foreclosure, subprime mortgage lending, and the Mortgage Electronic Registration System. Peterson explains and elaborates the logic of key court decisions against MERS. These include the Kansas Supreme Court 2009 ruling and the highly publicized Massachusetts Supreme Court affirmation of the Ibanez case, which devastated MERS.
Peterson summarizes the foundation of his arguments elegantly
"Under this recording strategy, the originating lender makes a traditional mortgage loan by listing itself as the payee on the promissory note and as the mortgagee on the security instrument. The loan is then assigned to a seller for repackaging through securitization for investors. Instead of recording the assignment to the seller or the trust that will ultimately own the loan, however, the originator pays MERS a fee to record an assignment to MERS in the county records. MERS's counsel maintains that MERS becomes a mortgagee of record even though its ownership of the mortgage is fictional" (p. 1370).
MERS placed homeowner mortgage in a fictional system that, without any doubt, fails to meet standard of contract law. The real mortgagee (the lender) is never mentioned. MERS is represented as the lender from the start to finish.
When the mortgage finishes in a foreclosure, MERS compounds the fiction. Peterson notes:
"To move foreclosures along as quickly as possible, MERS has allowed actual mortgagees and loan assignees or their servicers to bring foreclosure actions in MERS's name, rather than in their own name" (p. 1372).
Peterson's arguments attacking the legal basis for MERS are devastating. (Headings in italics are from Peterson.)
A. MERS Does Not Own Legal Title to Mortgages Registered on its Database
This is a given.
"Federal consumer protection and bankruptcy law also suggests that the MERS does not own legal title to loans registered on its database. For example, under both the Truth in Lending Act and the Home Ownership and Equity Protection Act, a mortgage assignee can be liable for an original lender's violations of those statutes" (p.1378).
Since MERS does not own legal title, it follows that the loan process represents a deliberate misrepresentation. Surely, MERS knew that it didn't meet the standards for ownership. That didn't stop the organization and its creators, the big banks, from proceeding with over sixty million contracts for home purchases.
B. MERS Lacks Standing to Bring Foreclosure Actions
In order for MERS to act as the named party in a foreclosure action, it must have suffered injury by the homeowner's failure to make loan payments. Peterson is clear that the investors who purchased MBS can show a clear injury. However, these investors are not named in the recording documents. MERS is. Peterson makes a salient point with this question, "How [can] a debtor's failure to pay causes an injury in fact to MERS, a company that has no factual expectation of receiving loan payments or the proceeds of a foreclosure sale" (pp. 1381-1382).