Christopher Lewis Peterson
University of Utah – S.J. Quinney College of Law

Date posted: October 01, 2010


Hundreds of thousands of home foreclosure lawsuits have focused judicial scrutiny on the Mortgage Electronic Registration System (“MERS”). This Article updates and expands upon an earlier piece by exploring the implications of state Supreme Court decisions holding that MERS is not a mortgagee in security agreements that list it as such. In particular this Article looks at: (1) the consequences on land title records of recording mortgages in the name of a purported mortgagee that is not actually mortgagee as a matter of law; (2) whether a security agreement that fails to name an actual mortgagee can successfully convey a property interest; and (3) whether county governments may be entitled to reimbursement of recording fees avoided through the use of false statements associated with the MERS system. This Article concludes with a discussion of steps needed to rebuild trustworthy real property ownership records. 

Full Document Below…


The Market Ticker breaks it down…

And threatens to crumble into dust….

Yes, this is a draft.  But it is coming from a law school’s scholarly paper mill – not exactly the sort of place you want to ignore.  A few good cites will set the table for those willing to dig into what’s really not that hard to understand…

In the mid-1990s mortgage bankers decided they did not want to pay recording fees for assigning mortgages anymore.11 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.12

What do you call an artifice designed to evade the payment of taxes – which these fees are?

They incorporated the shell company in Delaware and called it Mortgage Electronic Registration Systems, Inc.13

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.14

What do you call selling something to someone that claims an ownership right as an inherent part of the bargain – indeed, it’s the only consideration that is offered in exchange for money, yet the state legislatures have not ratified this as proper, and in fact the county and state legislatures say it is not?

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.15 For the first time in the nation’s history, there is no longer an authoritative, public record of who owns land in each county.

Oh yes there is.  It’s at the county, where it always was.

Both the MERS-as-an-agent and the MERS-as-an-actual mortgagee theories have significant legal problems. If MERS is merely an agent of the actual lender, it is extremely unclear that it has the authority to list itself as a mortgagee or deed of trust beneficiary under state land title recording acts. These statutes do not have provisions authorizing financial institutions to use the name of a shell company, nominee, or some other form of an agent instead of the actual owner of the interest in the land. After all the point of these statutes is to provide a transparent, reliable, record of actual—as opposed to nominal—land ownership.

Conversely, if MERS is actually a mortgagee, then while it may have authority to record mortgages in its own name, both MERS and financial institutions investing in MERS-recorded mortgages run afoul of longstanding precedent on the inseparability of promissory notes and mortgages.

Yep.  Pick which way you’d prefer to die on this one.  Of course Banks don’t seem to care about these pesky things called laws…. and haven’t for quite some time.  How successful this will be on a forward basis is an interesting question (and one I’ll explore to some degree later in this piece.)

As a practical matter, the incoherence of MERS’ legal position is exacerbated by a corporate structure that is so unorthodox as to arguably be considered fraudulent. Because MERSCORP is a company of relatively modest size, it does not have the personnel to deal with legal problems created by its purported ownership of millions of home mortgages. To accommodate the massive amount of paperwork and litigation involved with its business model, MERSCORP simply farms out the MERS, Inc. identity to employees of mortgage servicers, originators, debt collectors, and foreclosure law firms.22 Instead, MERS invites financial companies to enter names of their own employees into a MERS webpage which then automatically regurgitates boilerplate “corporate resolutions” that purport to name the employees of other companies as “certifying officers” of MERS.23 These certifying officers also take job titles from MERS stylizing themselves as either assistant secretaries or vice presidents of the MERS, rather than the company that actually employs them. These employees of the servicers, debt collectors, and law firms sign documents pretending to be vice presidents or assistant secretaries of MERS, Inc. even though neither MERSCORP, Inc. nor MERS, Inc. pays any compensation or provides benefits to them. Astonishingly, MERS “vice presidents” are simply paralegals, customer service representatives, and foreclosure attorneys employed by other companies. MERS even sells its corporate seal to non-employees on its internet web page for $25.00 each.24 Ironically, MERS, Inc.—a company that pretends to own 60% of the nation’s residential mortgages—does not have any of its own employees but still purports to have “thousands” of assistant secretaries and vice presidents.25

Oh Jesus.  So I can have an official MERS Corporate Seal for $25 and start recording things?  Uh, this is a wee problem, don’t you think?

Never mind the logical fallacy of thousands of vice-presidents and assistant secretaries, none of which receive any renumeration from MERS in any form!

How can you be an employee – in any sense of the word – if you’re not compensated?  The entire premise of employment is that of a contract, which requires (as do all contracts) meeting of the minds, consideration and performance.

If consideration is lacking, then there is no employment status and that’s that.  Oops.

Worse, MERS may have literally “split the baby” and rendered millions of mortgages unsecured:

Typically, the same person holds both the note and the deed of trust. In the event that the note and the deed of trust are split, the note, as a practical matter becomes unsecured. Restatement (Third) of Property (Mortgages) § 5.4. Comment. The practical effect of splitting the deed of trust from the promissory note is to make it impossible for the holder of the note to foreclose, unless the holder of the deed of trust is the agent of the holder of the note. Id. Without the agency relationship, the person holding only the note lacks the power to foreclose in the event of default. The person holding only the deed of trust will never experience default because only the holder of the note is entitled to payment of the underlying obligation. Id. The mortgage loan became ineffectual when the note holder did not also hold the deed of trust.41

That’s an actual holding of the Missouri Court of Appeals.

It gets worse.

If the growing line of cases asserting that MERS is neither a mortgagee nor a deed of trust beneficiary is correct, then courts must soon confront profound questions about the very enforceability of MERS’ security agreements. … There is a compelling legal argument that loans originated through the MERS system fail to create enforceable liens.


The mortgage industry has premised its proxy recording strategy on this separation despite the U.S. Supreme Court’s holding that “the note and the mortgage are inseparable.”66 If today’s courts take the Carpenter decision at its word, then what do we make of a document purporting to create a mortgage entirely independent of an obligation to pay? If the Supreme court is right that a “mortgage can have no separate existence”67 from a promissory note, then a security agreement that purports to grant a mortgage independent of the promissory note attempts to convey something that cannot exist.68

While this argument will surely strike a discordant note with the mortgage bankers that invested billions of dollars in loans originated with this simple flaw, the position is consistent with a long and hitherto uncontroversial line of cases. Many courts have held that a document attempting to convey an interest in realty fails to convey that interest when an eligible grantee is not named.69 Courts all around the country have long held: “there must be, in every grant, a grantor, a grantee and a thing granted, and a deed wanting in either essential is absolutely void.”70

Now consider this – assignments of the Grantee in blank are thus invalid too.  Oh, yeah, they went there.

Nonetheless, in Chauncey, the trial court, intermediate appellate court and New York’s highest court all agreed that the attempt to convey an “in blank” mortgage failed.78 The Court of Appeals explained, “No mortgagee or obligee was named in [the security agreement], and no right to maintain an action thereon, or to enforce the same, was given therein to the plaintiff or any other person. It was, per se, of no more legal force than a simple piece of blank paper.”79

Double Oops.

And then, in a very nice throwback to something I wrote we get this:

In a stunning betrayal of the policies that ground the ancient statute of frauds principal commanding that we commit transfers of land interests to writing, mortgage bankers wrote millions of mortgage loans that did not specify who the actual mortgagee was. For over a hundred years, our courts have held that “legal title to real property may not be established by parole.”90

Oh yeah, I seem to remember this….

There’s a reason that property law in most states require “wet signatures” and unbroken chains of assignment.  It’s the same reason that The Statute of Frauds requires (under most state legal codes) that all agreements to be performed over more than a year’s time, or in which interest in real property is conveyed, must be in writing and bear an actual signature by the party so bound.

The reason for these requirements is that contracts pertaining to real estate, for large sums of money, or where performance is envisioned to stretch over long periods of time are usually of such import that if someone gets ripped off they are grievously harmed.

No, “electronic records” do not suffice.  No, “the dog ate my homework” does not suffice either when one of the parties intentionally destroyed the originals, or intentionally used an electronic system so as to EVADE the requirements of the statute.

And grievous harm is exactly what has repeatedly occurred here.

The “conveyances” established by the so-called “electronic” passage of records where such is a part of a contract that falls under these statutes are VOID!


Then there’s the little problem with REMICs that don’t actually have title because MERS claims to (well, sometimes)

And, all rights to a mortgage loan must be deposited into the trust for it to achieve tax exempt status under federal REMIC law—which does not contemplate the use of a proxy mortgagee. Yet, despite claiming sole ownership of mortgages sold to investors, in documents regularly recorded with county officials these same institutions maintain that MERS is the sole owner of the mortgage. The chain of financial institutions linking originators to securitization depositors collectively want to have their lien and sell it too.

That should go over well with the IRS.

Communities around the country have elected and hired county recorders to act as their custodian of property rights. Those recorders who agree the MERS system poses a threat to real property records have an obligation arising from their office to reclaim and restore faith in land title records. While some individual county recorders may reasonably feel reluctant to take on a powerful national system backed by some of the nation’s largest financial institutions, this is precisely what they were hired to do. If county recorders do not protect county real property records, who will? A pathway to reclaiming authority over real property records could involve joining with other recorders to raise a unified voice. State and national county recorder trade associations could have a significant impact on pending cases by submitting amicus curiae briefs. Courts are likely to respect county recorders’ expertise in maintaining and preserving transparent records, both because of recorders’ experience but also because of their democratic mandate. Even more to the point, county recorders should consider appealing to the courts directly to stop financial institutions from recording false documents. In lawsuits to recover unpaid recording fees counties could hire private counsel on contingent fee agreements that would place no financial burden county taxpayers.


It is time to take this edifice and throw it in the trashcan, after forcing its members to fix all the titles they have damaged – at their expense – and record true and correct assignment information.

Oh wait – that’s a problem isn’t it….. what if the assignments never actually happened, and the REMICs hold an empty box?  Why that could get messy….. Hmmmm….

Finally, the nation’s judges should recognize that, despite crushing caseloads, mortgage foreclosure cases are no longer routine matters. Putting the short term consequences of enforcing the law to the side, surely jurists will know that ratifying a security agreement which does not specify a true grantee—when never authorized by state legislatures or Congress to do so—is poor lawmaking. Perhaps we should not be too surprised that the mortgage finance industry’s bacchanal of “pump-and-dump” mortgage origination happened to coincide with a bizarre and unsustainable theory of land title ownership. But, ratifying a standard industry practice of conveying rights to realty without specifying a true grantee will inevitably cause hidden liens, cases of exposure to double liability, and fraud.

My only comment: IT ALREADY HAS.

Time to shut this crap down AND force all the not-conveyed paper back where it belongs – on the securitizers, whether it be the sponsor or whoever – and force them to eat it.


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Two Faces:
Demystifying the Mortgage Electronic Registration System’s Land Title Theory