How an Obscure Outfit Called MERS Is Subverting Our Entire System of Property Rights
"For the first time in the nation's history, there is no longer an authoritative, public record of who owns land in each county." -- University of Utah law professor Christopher Peterson
There is an unbelievable scandal in the making that threatens to subvert our four-century-old method for guaranteeing a fundamental building block of the American republic—property ownership. The biggest reason why you probably haven’t heard much about it is that it involves one of the most generic and boring company names imaginable: Mortgage Electronic Registration Systems, Inc., or MERS. It is a story of deception engineered at the highest level of power for short-term gain, and another epic failure of the private sector to uphold the laws and traditions of American society, even something as fundamental as property rights.
Created in 1995 by the country's biggest banks, MERS quietly took control of and privatized mortgage record-keeping across the country and, in the span of a few years, scrambled America's private property ownership records to the point where no one could figure out who owns what. This was no accident, and was done by design: MERS was a tool used by America's top financial institutions to pump up the real estate market. Mortgage-backed securities, robo-signers, lightning quick foreclosures, subprime mortgages and just about everything else that went into feeding the biggest real estate bubble in U.S. history could not function without help from MERS. But unlike many of the Wall Street scandals, this one could blow up in the banks’ faces, with the little guy laughing all the way back to his free McMansion, and local governments seeing their empty coffers fill back up with the billions of dollars in unpaid fees that MERS circumvented.
The story begins in mid-'90s with the founding of MERS, Inc. by the nation's most powerful banks, ostensibly with the aim of streamlining and modernizing the process of registering and tracking mortgages. Traditionally, there has been no centralized registry of real estate ownership information, with counties maintaining their own records for properties within their borders—a system that has remained virtually unchanged since colonial times.
The MERS database went live in the middle of the dot-com bubble, and was supposed take inefficient government bureaucracies kicking and screaming into the future by providing a centralized, national registry of mortgage ownership information. "MERS addresses a problem that was costing the industry a significant amount of money," Rick Amatucci, a Fannie Mae vice president and the agency's liaison with MERS, told Mortgage Banking magazine, just as the new registry went online in 1997. The database would give lenders across the country instant access to real-time mortgage information, diminish potential for fraud, and lower costs for servicers and borrowers, according to Mortgage Banking Association, which was tasked with overseeing the project.
But that kind of talk was just for the press release. The banking industry wasn't concerned with efficiency or transparency or the greater good. It was all about making money, as quickly and cheaply as possible. And that is what MERS was for. It was created to help the industry push its latest money-maker: mortgage-backed securities, a Wall Street financial scam that dressed up the most toxic, guaranteed-to-fail loans as Grade A investment vehicles that could be sold to suckers looking for an easy gain.
But before mortgage-backed securities could be unleashed on the residential housing market on a massive scale, bankers needed to get rid of America's long-standing real estate recording laws, which required lenders to file all mortgage transactions—the origination of a new loan, for instance, or the transfer or sale of a mortgage between banks—with the county in which the property is located. While this recording requirement was not a problem in the sleepy pre-securitization days of the home loan business, when mortgage transactions were kept to a minimum, it was going to be much more difficult—if not impossible—with widespread use of securitization, which jacked up the industry like high-grade meth. Mortgages would be changing hands dozens of times, going from loan originators to banks to Wall Street investment houses, which would collect them by the thousands and package them into complex debt instruments that would be chopped up into shares and sold off to multiple investors all over the world.
Bankers needed a quick, clean way of reassigning mortgages without having to go through the "cumbersome" process of recording them with county courts and recorder offices. But instead of working with municipalities to modernize title registration by a creating a national database that was aboveboard and that everyone could use, the banking industry did what it does best: hid the information with sly accounting tricks.
And it succeeded. In just a few short years, MERS took over the bulk of residential mortgage registration. There are about 80 million residential mortgages in America today, and MERS tracks 60 percent of them.
"[M]ortgage 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," wrote University of Utah law professor Christopher Peterson, who wrote a key paper on MERS and the mortgage industry.
Here is how the plaintiffs in a class action suit filed in Florida in July 2010 against MERS and a legal firm described the MERS registration system:
The whole purpose of MERS is to allow "servicers" to pretend as if they are someone else: the "owners" of the mortgage, or the real parties in interest. In fact they are not. … With the oversight of Defendant Merscorp and its unknown principals, the MERS artifice and enterprise evolved into an "ultra-fictitious" entity, which can also be understood as a "meta-corporation." To perpetuate the scheme, MERS was and is used in such a way that the average consumer, or even legal professional, can never determine who or what was or is ultimately receiving the benefits of any mortgage payments. The conspirators set about to confuse everyone as to who owned what. They created a truly effective smokescreen which has left the public and most of the judiciary operating "in the dark" through the present time.
The use of MERS as a generic placeholder for the real owner of a mortgage was a crucial component of the entire securitization machine."[T]he entire scheme was predicated upon the fraudulent designation of MERS as the 'beneficiary' under millions of deeds of trust," according to a class action suit filed in Nevada in 2009 against MERS and all the big, crooked banks we’ve learned to fear and hate. "Before MERS, it would not have been possible for mortgages with no market value . . . to be sold at a profit or collateralized and sold as mortgage-backed securities. Before MERS, it would not have been possible for the Defendant banks and AIG to conceal from government regulators the extent of risk of financial losses those entities faced from the predatory origination of residential loans and the fraudulent re-sale and securitization of those otherwise non-marketable loans."
How efficient was MERS at perpetuating trickery in the real estate market? Well, according to statistics published by the U.S. Treasury’s Financial Crime Enforcement Network, from 1997—the year MERS went online—to 2005, mortgage fraud reports increased by 1,411 percent.
The MERS hustle had another benefit: it saved the banking industry—and cost municipal governments—tens of billions of dollars by allowing lenders to avoid paying county filing fees, which cost an average of $30 a pop. According to the AP, if every mortgage tracked by MERS had been resold and re-recorded with a county just one time, the system would have saved the banking industry $2.4 billion in filing fees. In reality, most mortgages are sold and resold a dozen times—sometimes more, which means that MERS extracted at minimum around $30 billion from cash-strapped local governments. "Some counties also use recording fees to fund their court systems, legal aid organizations, low-income housing programs, or schools. In this respect, MERS's role in acting as a mortgagee of record in nominee capacity is simply a tax evasion tool," says Professor Peterson.
But there was one major downside to the scam: because MERS departed from established real estate recording requirements, there was no guarantee that its claim to ownership, if challenged, would be honored by the courts.
Transparent real property registration was one of the earliest—and most important—functions of the American government, a practice that has changed amazingly little since the colonial times. According to "Foreclosure, Subprime Mortgage Lending, and the Mortgage Registration System," American colonists began to enact laws requiring land sales, transfers and mortgages to be entered into the public record with a government agency going back almost 400 years. The Massachusetts Plymouth Bay Colony adopted its first such "recording law" in 1636, which stated that "all sales exchanges giftes mortgages leases or other Conveyances of howses and landes the sale to be acknowledged before the Governor or anyone of the Assistants and committed to publick Record."
By the time the Boston Tea Party rolled around, every English colony had passed laws that required lenders and landowners to enter their names and property and mortgage information into the public record. The reasons for the popularity of the laws are simple and utilitarian: transparent public records of property ownership prevented disputes over who owned what and allowed people to use land as collateral on loans. "The necessity and usefulness of these early public title records is attested to by their nearly universal and uninterrupted force in subsequent American law. Indeed, Pennsylvania's first recording act, first adopted in 1717, remains in force to this day," wrote Peterson. Banks that failed to register mortgage transactions risked losing their ability to enforce the contract. And that is exactly what is on the verge of happening with mortgages registered with MERS.
Dozens of lawsuits all across the country have been filed against MERS and its partners to put this very issue to the test. And while most of them are still ongoing, it's clear that MERS is fighting for its life.
The Wall Street Journal:
Now, critics and homeowners facing foreclosure are increasingly challenging, among other things, MERS' role and legal standing in home foreclosures where it acts as legal representative of the mortgage holder. MERS has fought and won legal challenges in the past. But the nationwide epidemic of foreclosures in the wake of the housing collapse will present it with a wave of challenges unlike any it has seen previously.
Trouble for MERS could add risk to banks by slowing down the securitization process, and creating uncertainty during a time when banks are struggling to reassure shareholders and customers. One hedge fund investor said Friday that questions around MERS are adding to his concerns about banks in the mortgage business and are keeping him from investing in the sector.
While MERS officials say they are confident about their business model, it has become clear that their scheme might very well be on the verge of toppling. On November 17, Congress quietly rammed through a sneaky, vaguely worded bill that would have legalized MERS’ dealings retroactively. And while the bill didn't pass, we can expect Wall Street's lackeys in Congress to continue their efforts. After all, if courts continue to rule against MERS's business model—and it looks like they will—many homes may become foreclosure proof. As Reuters put it: “If court rulings against MERS' authority to foreclose proliferate, many foreclosure cases may be halted indefinitely, and some homeowners in default may end up with clear title to their homes.” Owners will still owe money to banks, but their homes would no longer be counted as collateral on the loan. In short, banks would not be able to kick people out of their homes. And clearly, that is something that America's plutocracy just cannot abide.
So who or what is MERS? How was this little-known corporation able to change nearly 400 years of legal practice in the span of a decade, and do so much damage so quickly? And why did no one blow the whistle?
As a result of the lawsuits being filed against MERS, a lot of previously unknown information about the inner workings of MERS is coming to light.
The people who developed the concept of MERS were connected with Fannie Mae and Freddie Mac, as well as the most corrupt lending institutions in America. People like Brian Hershkowitz, former director of the Mortgage Bankers Association and founder of the association’s technology committee that oversaw the early development of MERS in the early '90s, according to a homeowner-turned-activist-blogger, who is involved in a class action lawsuit against MERS (In 1993, Mortgage Banking magazine referred to this new mortgage resignation system as “New Age Delivery.”)
Hershkowitz was an early tech-booster in the banking industry, heralding a new age where efficiency and profitability would reign supreme. In the early 90s he attributed the success of Countrywide Financial to the fact that it embraced emerging computer technology. "They use technology in ways that give them a competitive advantage and set them apart. They were operating with excess capacity, and now they are putting it to use," Hershkowitz, then-associate director of the Mortgage Bankers Association, told the New York Times in 1991. A few years later he went to work for Countrywide as an executive involved in "areas of strategic planning and executive management." From 1982 to 2003, Countrywide performed like a Ponzi scheme, with shareholders gleefully getting a 23,000.0 percent return on their investment, until the bank collapsed under the weight of its own fraud schemes in 2007.
It seems that MERS has operated along similar lines. According to sworn testimony by various MERS executives, the organization has cycled through four different corporate entities in its brief lifespan. MERS also has almost no paid employees and does not seem to keeps any records or minutes of corporate meetings. When pressed to explain the inner workings of the organization, its executives evaded questions, feigned ignorance and generally acted like provincial mafia bosses on trial—exactly the kind of professionalism one would expect for a company responsible for tracking the ownership information of 50 million mortgages. It was just a couple of guys sitting around, chatting, smoking…and making sure not to leave any evidence behind. No wonder county officials who blew the whistle on MERS early on were squashed.
Edward Romaine, a Republican recorder of deeds for New York's Suffolk County, was one of the few officials who tried to refuse to take filings from MERS. "He argued that not only would the county lose out on fees—$1 million in one year alone—but that MERS failed to even maintain a clear chain of title on a property. He got backing from New York's attorney general," reported the Associated Press. MERS sued Suffolk County and took the case all the way up to the state's highest court, where it won on appeal in 2007. The court forced the county to accept MERS filings because the county lacked the statutory authority. Put another way, the court forced a municipal government to do business with a criminal organization, despite objections from county officials.
MERS cost local governments billions of dollars in lost revenue, but there is a chance that the cash-strapped counties will be able to claw some of that money back. Lawsuits have been filed against MERS in California, Nevada, Tennessee and 14 other states that accuse the company of functioning as a tax evasion vehicle designed to help banks circumvent filing fee requirements. “In California, the suit against MERS could cost the company somewhere between $60 to $120 billion in damages and penalties. With so much money extracted from California's municipalities, no wonder the Golden State is facing a $25 billion budget gap,” reported the Association Press.
We're constantly being told that liberalization, deregulation and privatization automatically equal greater freedom and increased efficiency. But MERS provides us with a different narrative, one in which the government works perfectly well, when not corrupted by corporations who want to use it to loot public wealth.