Must Read Paper | The MERS Mortgage in Massachusetts: Genius, Shell Game, or Invitation to Fraud?

This comes in from Rockwell P. Ludden, Esq. of LuddenKramerLaw P.C.

Although the title says “in Massachusetts,” I think that many of its salient points have broader application.

I am halfway through reading it and it is fascinating. There must have been some long and hard hours put into this paper.

This was sent to me directly from the author so if you want to replicate/repost it please honor his copyright terms that are on the bottom of each page of the report.

It is also not the final draft so if you have any comments or corrections send the author an email which is also at the bottom of each page.

Here are some interesting excerpts from the first few pages…

One of the first challenges facing the industry was to decide the capacity in which MERS
would hold the mortgage. Should it do so as the mortgagee—which, in Massachusetts would be
the owner of legal title to the secured property—or should it do so in a representative capacity?
Then, too, there was the question of the note itself. If MERS were to act solely on the lender’s
behalf, should it have the authority to assign both the mortgage and the note, and perhaps even to
foreclose the mortgage? And what if it were to do so in its own name; might this not be yet more
efficient? There were several possible roles, and each of them came with its own benefits and
shortcomings. It seemed, though, that the benefits of one tended to offset the shortcomings of
another and that they might best work in combination with one another. Hence it was around this
idea of multiple roles that MERS began to take shape. It was as revolutionary as it was original,
much like a shell game in which every shell conceals a pea.

The problem lies not so much with the idea itself but with the fact that every effort to
place the MERS model within the framework of existing law reveals itself to be something we
might have expected from Procrustes, that rascally giant of Attica given, as he was, to seizing
travelers and either stretching them or cutting off their legs in order to make them fit in his iron
bed. The down-side is that many courts have satisfied themselves with the fact that there is a pea
to every shell and have not bothered to question the legality of the game itself; they have, in other
words, simply taken at face value the MERS model’s own profession of validity. And yet, a mere
inconvenience to the industry does not entail the right to ignore well-settled principles of law and
equity or the reasoned analysis by which we expect those principles to be applied. Nor does it
entail the right to make an end run around a legislative and democratic process already imperiled
by the opacity that pervades the MERS model in its present form.


A “continuity” made of smoke and mirrors. In the MERS model, the mortgage doesn’t pass by
assignment from one owner to the next by formal assignment; in fact, it really doesn’t pass at all,
at least not in any ordinary sense that would involve time and a sequence of events. Rather, in the
Mersian world there is a kind of simultaneity of time and event in which all ownerships of the
mortgage exist ab initio by virtue of the MERS membership agreement and do not have to be independently
established. It is very much a framework of interrelationships in the form of a venn
diagram. Let’s say that a particular mortgage changes hands three times before it is foreclosed—
which would mean a total of four owners. And let’s use a circle to represent each of the four
owners. In the MERS model, these four circles are arranged symmetrically so that each one overlaps
the other three in equal measure to form a common area at the center. That common area is
MERS acting, as Arnold has said, as a “common agent” with respect to that mortgage. Because
each owner is already tied conceptually to the mortgage, there is no need for an assignment and
MERS, in its capacity as agent, may therefore simply remain the mortgagee of record at the local
land office. Indeed, the MERS model is in many ways quite elegant. But the complex and recondite
nature of the thing has served well to obscure its falsity under well-settled principles of
agency and contract law.

There is a point about which we must be very clear from the outset, and it is one that has
been overlooked in a number of foreclosure cases: what is “common” to MERS members is the
use of MERS as their agent—not the ownership of the mortgage itself. Membership in MERS
cannot and does not establish a joint ownership of the mortgage. Given the functional identity
between principal and agent and the fact that MERS is acting in a representative capacity, ownership
of the mortgage must still pass from Lender A to Owner B regardless of whether or not they
happen to be using the same agent. The same principle would apply to any subsequent transfer,
as, say, from Owner B to Owner C, all the way down to the foreclosing entity. There is no legal
authority in Massachusetts that stands for the proposition that the mere use of a common agent
serves to transfer ownership of the mortgage with regard to which the agency has been established.

Putting absurdity aside, let us nonetheless assume for argument’s sake that the opposite is
true. There is yet a further problem: the MERS model, like our venn diagram, is spatial, but the
twin realities of ownership and representation are both spatial and temporal; thus the MERS
model is unavoidably static, while the transactional reality it seeks to control is dynamic. Stated
less abstractly, before MERS can represent Lender A with regard to the mortgage, Lender A must
in fact own the mortgage. The point is elementary and applies in equal measure to all subsequent
owners: the ownership of the mortgage by the principal must precede, in time, any authority the
agent may have to act with regard to that mortgage. This follows from the well-settled principle
that an agent cannot do what the principal herself cannot not do.33 However, the MERS model
turns the reality on its head by asserting that ownership of the mortgage passes without the need
for an assignment precisely because the agency relationship was established first in time via the
MERS membership agreement.

A somewhat overlapping problem is this: In the MERS model, there is again no need for
a written assignment anytime the mortgage changes hands—unless the mortgage is going to be
foreclosed by someone other than Lender A or removed from the MERS system. An unavoidable
side-effect of this is that Lender A remains the mortgagee of record at the local land office, albeit
with MERS acting on its behalf. In other words, the clear implication is that Lender A’s status as
mortgagee at the local land office somehow survives the multiple transfers of the note that take
place along the road to securitization. But MERS cannot have it both ways: the MERS model is
designed in its own way to tie ownership of the mortgage to ownership of the note—which means
that once Lender A has sold the note it has no further interest in the mortgage and its continuing
status as mortgagee in the land office records34 is at best a negligent misrepresentation and at
worst an act of fraud. It is also in any event a breach of the complete transparency required under
G.L. c. 244, § 14.35 This “personality disorder” has a further consequence as well.

Because Lender A remains the mortgagee of record, any subsequent assignment of the
mortgage must name Lender A as the grantor in order not to memorialize a discontinuity in the
chain of ownership and thus cast a cloud on the title; if Lender A (with MERS as it agent) is the
mortgagee of record there cannot be an assignment from the true present owner of the mortgage,
say, Owner C. And here we meet the same conundrum: if we accept the validity of the “common
agent” device by which MERS avoids the need for assignments, Lender A no longer owns the
mortgage and has nothing left to assign; thus an assignment directly from Lender A is also at best
a negligent misrepresentation and at worse an act of fraud. Its failure to name the true grantor
would be contrary to existing law.36 If the assignee happened to be a part of the mischief, it would
further diminish her authority to foreclose the mortgage.37 Again, the assignment would violate
the statutory requirement of transparency. It is upon this bedrock of sober fact that the mortgage
industry and registry officials must weigh the integrity—and indeed the legality—of every
recorded assignment directly from MERS as nominee for the originating lender to the foreclosing
entity in a case where there have been interim owners.

There is yet another wrench in spokes of the MERS model. Even if the “common
agency” mechanism could somehow allow Lender A’s role as mortgagee to survive multiple
transfers of the note on the secondary market, and if, as Arnold has said, the mortgage follows the
note, the agency relationship vis-à-vis the mortgage ends when the note is transferred; like
Lender A’s status as mortgagee, it cannot survive the transfer. This owes itself to a few basic
principles of agency law. Without an interest to assign, the agency relationship between MERS
and Lender A that was established in order to act with regard to that mortgage interest necessarily
ends; Lender A’s circle is in effect removed from the Venn diagram previously mentioned.

What has happened is that the purpose for which the agency relationship was created no
longer exists with regard to that particular mortgage; there has been “an occurrence” the effect of
which is to terminate the agent’s authority.38 Once the originating lender, Lender A, has divested
herself of her interest in the mortgage, she can no longer be the mortgagee and therefore MERS
can no longer act as mortgagee on her behalf vis-à-vis that mortgage. Notice of the termination
need not be expressly given to MERS;39 rather its actual authority “may terminate upon the occurrence
of circumstances under which the agent should reasonably conclude the principal would no
longer assent to the agent’s taking action on the principal’s behalf. If the principal has engaged
the agent for a particular task, its completion is such a circumstance.”40 Surely, MERS, with its
sophisticated tracking system, is presumptively aware of any termination.

The persistence of MERS as Lender A’s agent in the public record in effect accomplished
with smoke and mirrors—and it conjures a host of evils. Yes, every MERS member establishes
its own agency relationship with MERS. But immediately upon transfer of the mortgage from
Lender A the agency relationship between MERS Lender A ends. The agency between MERS
and Owner B is in fact a new and distinct agency relationship—and, given the functional identity
between principal and agent, a new and distinct “MERS” as well. Again, in the absence of a
valid assignment, the status of MERS as the mortgagee in the public records becomes a misrepresentation
of material fact at the very instant the mortgage is assigned by Lender A, and from that
point on the mortgage industry is, in effect, using a ghost to do its bidding—and one of dubious
character at that. Only the name “MERS” remains; the “continuity” is a chimera, an illusion, the
purpose of which is to make an end run around the need for a formal assignment. It has also
served as a red herring, distracting courts from the sober fact that the role of MERS as a “common
agent,” for all of its theoretical elegance and self-proclaimed validity, simply cannot in its
present form be fit into the framework of existing law without inflicting collateral damage upon
the very principles of fairness and transparency on which that framework has been built over
many years and through many efforts and sacrifices.

What this all boils down to it this: in order for MERS to remain the mortgagee of record
at the local land office without fraudulently misrepresenting itself as such three things must occur.
First, since an assignment of mortgage is a conveyance of an interest in land that requires a writing
signed by the grantor,41 there must in fact be an assignment of the mortgage from Lender A to
Owner B. If the public record indicates that the mortgage is being held by MERS on behalf of
Lender A, the assignment must be from MERS on behalf of Lender A. Second, the assignment
must make clear that the mortgage will be held by MERS in its capacity as agent for Owner B;
that is, it must say something to the effect that “MERS, solely as nominee for Lender A, hereby
transfers its interest in the mortgage to MERS, solely as nominee for Owner B.” This distinction
is not an easy one to draw, but it is essential to knowing the substance of the transaction. And
third, to avoid discontinuity in the land office records and allow for proof of ownership in the
event of foreclosure, the assignment must be recorded. The same would apply to a subsequent
transfer from Owner B, and so forth all along the chain of ownership.

That’s only a few excerpts up to page 14 and there are a total of 42.

I suggest making time to read this one in full.

Excellent work Rocky!

Full Paper below…



The MERS Mortgage in Massachusetts: Genius, Shell Game, or Invitation to Fraud?

[scribd id=72281793 key=key-x20qzntbhoartyqeln4 mode=list]

2 Responses to “Must Read Paper | The MERS Mortgage in Massachusetts: Genius, Shell Game, or Invitation to Fraud?”
  1. Shawn Newman says:

    As MERS goes, so goes Fannie and Freddie. It is important to recognize how the term “mortgage” is missused (“I owe on my mortgage”). In common parlance, a mortgage (or Deed of Trust) includes the underlying loan (promissory note) and the security on that loan (mortgage or Deed of Trust). This ignores the fact that the note and mortgage (or DOT) are two separate contracts governed by some different laws and legal principals.

    As noted in Powell on Real Property, sec. 37.27 [2] (Michael Allan Wolf ed., LexisNexis Matthew Bender 2010)

    “It must be remembered that the mortgagee has two interests: (1) the debt or obligation which is owned to him, and (2) the security interest in land represented by the mortgage…. In fact, the primary interest is the personalty debt obligation. The interest in land which is available in case security is necessary because of the debtor’s default is considered as collateral interest. Much trouble has been caused by mortgagees attempting to transfer only one of these two interests. Where the mortgagee has “transferred” only the mortgage, the transaction is a nullity and his “assignee,” having received no interest in the underlying debt or obligation, has a worthless piece of paper.”

    Regarding #1, the debt is the loan contract (i.e. the promissory note). Promissory notes are governed by the Uniform Commercial Code (UCC) Art. 3 (Negotiable Instruments). The UCC is a uniform law adopted by every state. In addition to promissory notes, negotiable instruments include checks. Like a check, you must negotiate (deliver with proper endorsements) the promissory note to another for that person to claim ownership of the promissory note. Absent proper negotiation of the note, another party cannot claim ownership. So, for example, you find a check made payable to someone else and it is not endorsed to you; you cannot cash it because you are not the owner.

    Regarding #2, the security on the debt (i.e. mortgage or deed of trust), is a contractual interest in land with the home buyer designated as the mortgagor and the lender/creditor as the mortgagee. Because a mortgage/DOT is an interest in land, the Statute of Frauds requires such contracts to be in writing and signed to be enforceable. Any assignment of a mortgage or deed of trust must be in writing and signed to be enforceable. Agreements that violate the Statute of Frauds are void and unenforceable as contracts. There are some exceptions to the Statue of Fraud’s writing requirement including an admission in court and under oath “by the party to be charged” that there is a contract (this can be done via discovery). So, as is the case with most mortgages, they are sold by the originating bank (or mortgage company) to either Freddie Mac or Fannie Mae. This is known as the “secondary mortgage market” (secondary, since Freddy and Fannie don’t originate the loans but buy them up from the banks and mortgage companies that do). According to Freddie Mac’s website:

    “Every day, Freddie Mac provides a continuous flow of funds to mortgage lenders. We do so not by making individual mortgage loans to consumers; instead, we support the U.S. home mortgage market by providing money directly to lenders, ensuring that the system is liquid, stable and affordable. To fulfill this vital mission, Freddie Mac buys residential mortgages and mortgage-related securities and guarantees mortgages made by lenders. We issue debt securities to the global capital markets to fund the purchase of mortgages and mortgage-related securities we hold as an investor. We also create and sell mortgage-related securities to the capital markets, providing a guarantee to investors on those securities.
    Freddie Mac pools the mortgages it purchases from lenders across the country and packages them into securities that can be sold to investors. These investors include the lenders themselves, pension funds, insurance companies, securities dealers, commercial and central banks, and others. Freddie Mac also is one of the largest investors in mortgage-related securities, purchasing and holding in portfolio a portion of our own securities and those issued by others.”

    This brings me to an issue raised by Professor Dale Whitman in his article, “How Negotiability Has Fouled Up the Secondary Mortgage Market, and What To Do About It,” 37 Pepp. L. Rev 738, 757-758 (2010):

    “While delivery of the note might seem a simple matter of compliance, experience during the past several years has shown that, probably in countless thousands of cases, promissory notes were never delivered to secondary market investors or securitizers, and, in many cases, cannot presently be located at all. The issue is extremely widespread, and, in many cases, appears to have been the result of a conscious policy on the part of mortgage sellers to retain, rather than transfer, the notes representing the loans they were selling.”

    This “policy” creates fundamental problems with any foreclosure.

    First, as noted above, it is important to understand that a mortgage contract is an interest in land and, as such, must be in writing to be enforceable per the Statute of Frauds (or fall within one of the exceptions such as an admission in court). Any “sale” or assignment to Freddy or Fannie must also be in writing per the Statute of Frauds. Some states (like Ohio) require such transfers to be recorded. If you are challenging a foreclosure action, the mortgagor (borrower) should ascertain if a servicer (loan originator or its successor) has sold the mortgage to Freddy or Fannie. This can be done on line at either:
    Chances are Fannie or Freddie “own your mortgage.” If you are in litigation, you should follow up with targeted discovery requests to the servicer confirming the servicer does not “own” your mortgage. Moreover, you should inquire and demand any records showing Freddie or Fannie assigned the mortgage to the servicer. You’ll find that servicers will point to Freddie or Fannie servicing guidelines which basically provide that the servicer forecloses in its (the servicer’s) own name. However, given a mortgage is an interest in land and the requirement under the statute of frauds that such contracts be in writing, the servicer’s standing to foreclose can be challenged absent some proof that the mortgage was specifically assigned by Freddie or Fannie to the servicer. Unless there is a written assignment from the mortgage owner (Freddy or Fannie) to the servicer, the servicer cannot foreclose for the simple reason they are not part of the mortgage contract. Simply put, only the mortgage owner can foreclose on the mortgage contract.

    Second, according to Powell on Real Property section 37.27 (quoted above),

    “It must be remembered that the mortgagee has two interests: (1) the debt or obligation which is owed to him, and (2) the security interest in land represented by the mortgage …. In fact, the primary interest is the personalty debt obligation. The interest in land which is available in case security is necessary because of the debtor’s default is considered a collateral interest. Much trouble has been caused by mortgagees attempting to transfer only one of these two interests. Where the mortgagee has “transferred” only the mortgage, the transaction is a nullity and his “assignee,” having received no interest in the underlying debt or obligation, has a worthless piece of paper.”

    Given what Professor Whitman describes as a “conscious policy on the part of mortgage sellers to retain, rather than transfer, the notes representing the loans they were selling,” it would appear that any alleged “sale” of the note or mortgage to Freddy and Fannie is a fraud. By analogy, you cannot cash a check that is not in your possession or that is not made payable to or endorsed to you. Not only is the sale of the note a sham where there is no delivery and/or endorsement of the underlying loan/note to Freddie or Fannie, if their records (per the website) “show that Freddie Mac is the owner of your mortgage”, then the unity of interest (i.e. loan/note and mortgage/security must be transferred together) is destroyed leaving Freddie and Fannie with nothing.

    This begs the question: why would MERS, Fannie and Freddy have such a policy given the laws governing mortgage contracts and promissory notes? Consider the fact that Freddie and Fannie are Government Sponsored Entities [GSEs] albeit private corporations owned by the major banks. Together they created MERS but with the same fatal flaw concerning the law of negotiable instruments with respect to delivery and transfer of the note. It seems to me that Freddie and Fannie are either the puppet masters or educated idiots used by the major banks to buy up bad mortgages and then seek a bailout from the taxpayers. As Gretchen Morgeson and Joshua Rosner conclude in their book “Reckless Endangerment”, Freddie and Fannie are the root of the problem.

  2. talktotennessee says:

    Let me get this straight if possible, succinctly? The courts eiher recognize or want to legitimize MERS because it is a convenient construct of legal convenience despite flaunting property law in most states, right?

    Is this a corruption of our courts or sheer laziness in enforcing law because those doing so have made their own judgment call against those who are suffering loss or in dealing with unwelcome default?

    A family member is undergoing foreclosure in a non-judicial state. The foreclosure was executed by CHASE, the servicer . Original loan originated by Sun Trust who force-wrote insurance, immediately dumped the first position loan onto Chase and returned a check payment before a ‘transfer’ deadline, reporting the 30 default on the person’s credit, showing up in the reporting agencies. A 2nd mortgage loan went to EMC (a pseudo entity of Chase) Chase picked up servicing and charged excessive premium for force insurance shorting the escrow, which was demanded in cash. The homeowner immediately protested to SunTrust damage to his credit, the force placed insurance and the transfer, his complaint fell on deaf ears. They had transferred “servicing” to Chase. Chase declined responsibility for error, damage to credit, force placed insurance and payment return. Default resulted, then bankruptcy. Repeated efforts to modify this loan fell on deaf ears.
    Now the foreclosure mill is foreclosing under the ORIGINAL SunTrust name, as the original note creditor and MERS as their nominee, no mention of CHASE who is behind the action.. According to Wilson and Associates FDPA letters, SunTrust is foreclosing with MERS as their nominee and a Wilson associate as an assigned trustee.
    These crooked servicers have so raped the public, courts, property law and individuals that if we fail to rise up and challenge, no one will! This family member does not have the knowledge, ability, time or support to challenge this gave injustice. There are millions like him across this country and their voices are not being heard because they don’t know who or where to go for help! Even those of us who realize the truth have not been able to affect change or influence the public that laws are being broken, criminal action and fraud has taken place.
    This has to be stopped, somehow, some way!.

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