Commentary – MERS, the Unreported Effects of Lost Chain of Title on Real Property Owners and Their Neighbors
Location: New York
Author: David E. Woolley
Date: Wednesday, August 3, 2011
Many problems with MERS, the private mortgage title registry system created by the banking industry, have been reported in print media, in movies, on television and in academic journals. Courts have ruled against MERS’ standing to foreclose, states Attorneys’ General and Federal Bank Regulators are investigating MERS practices including fraudulently robo-signing and back dating missing documents and county recorders are suing to recover lost filing fees.
What none of the experts are analyzing (in specific terms) is the destructive effect that the MERS system will have on 400 years of recorded property rights in the United States. Most articles mention lost chain of title but stop short of explaining what this means, or how these problems will affect homeowners with or without mortgages in the MERS system. These problems deal with determining (1) property boundaries (senior and junior property rights) and (2) proof of ownership in order to obtain title insurance and financing. Because MERS is utilized for transferring title and these transfers are not publically recorded (thereby imparting constructive notice), MERS does not comply with race (first in time) or (constructive or actual) notice statutes and therefore, senior/junior property rights cannot be determined when a discrepancy arises in property boundary lines. Consider the following:
What happens if the chain of title cannot be determined because there are no accurate and publicly recorded deeds/title documents showing chain of title to determine senior and junior rights designations for boundary determinations between neighbors?
What happens when you destroy the property rights and records of homeowners who never defaulted on their mortgages and are now forced to litigate boundary disputes and property rights?
Why, if land title was actually stable, did the title insurance companies repeatedly refuse to underwrite foreclosures?
Historically, when land was subdivided in America, states enacted laws that required a land surveyor to file a public record. These laws made property line determinations available to the public, thus avoiding the need for litigation to resolve boundary disputes. In the Western U.S., subdivided 640 acre parcels were sold/homesteaded based on a government plat showing perfect rows of sections; however, in reality, each 640 acre sections varied from a few inches to a few hundred feet. Because of historically inaccurate surveying technology, there are many inaccurate boundaries that continue to be discovered today. Historically and today, the only practical way for a surveyor to resolve boundary discrepancies, absent litigation, is by examining chain of title records (history of conveyances from one owner to another) to determine senior and junior property rights.
To prove ownership of a particular parcel, a property owner must show a continuous title record back to the first conveyance. When boundary discrepancies arise, the following principles are followed:
As between private parties in a land dispute, a senior right is superior to a junior right.
As between private parties, a junior grant, in conflict with a senior grant, yields to the senior grant.
A grantor cannot convey what he does not own.
Between equal equities, the first in order of time shall prevail.
See Diagram Afor an explanation of these principles in a normal (non-MERS) sequential conveyance when a shortage of land is discovered in a boundary dispute between neighbors. When the principles listed above are followed, the boundary dispute is settled without the need for litigation between neighbors. The neighbor who obtained their land first in time keeps the entire amount conveyed. The neighbor who obtained their land second in time, keeps the remainder of the land that the original owner had left to convey.
MERS Has Broken/Diluted Chain of Title
MERS was set up to electronically move paper at a high rate of speed to accommodate the securitization of mortgages and to avoid the time and cost associated with the local county recording process. When a MERS member transfers an interest in the mortgage loan to another MERS member, MERS may privately track the assignment within its system but MERS remains the mortgagee of record in publicly recorded documents. Today MERS is sometimes the only company listed in local government records and subsequent changes of ownership are shown in the MERS system only. Unfortunately, the MERS system is entirely inaccurate. A spokeswoman for Fannie Mae told the New York Times that the company could never rely on MERS to find ownership of a loan. In 2010, Professor Alan M. White of Valparaiso University Law School matched MERS ownership records to public domain records and found that fewer than 30% of mortgages had an accurate record in MERS. Currently, it is estimated that MERS holds over half of all mortgages in the United States – approximately 60 million mortgages and, in the event the chain of title is lost, MERS has a negative effect on the mortgaged homes, and each adjoining property (even those homes with no mortgage).
In many cases today, homeowners cannot search public records to find out who held their mortgage because records show MERS as the mortgage holder and/or the purchaser of the foreclosed property. Chain of title is lost because it cannot be traced amongst the hundreds of thousands of MERS transactions and any property (even without a mortgage) that shares a common property boundary line with the foreclosed property may have also lost its senior rights in a boundary dispute. Boundary disputes between neighbors are very common, however, they were historically not well publicized. This is simply because these boundary disputes were previously resolved by searching chain of title records and dividing property according to the basic principles listed above. Now that chain of title is destroyed or severely diluted, these same boundary disputes will require court intervention to settle boundary lines. Additionally, because of clouded titles, both foreclosed properties and their neighbors may not be able to sell their properties because buyers will not be able to obtain title insurance (without indemnification that banks may provide but subsequent individual sellers will not be able to provide) and consequently, they will not be able to obtain financing.
See Diagram Bfor a graphic explanation of these problems created by MERS.
We have already started to see this MERS problem in the context of title insurance become a reality. According to Bloomberg, October 20, 2010 “Fidelity National To Require Banks To Sign Foreclosure Warranty,” because of the problems with MERS, in order for an individual buyer to obtain title insurance on a foreclosed home purchased from a bank, banks were required to provide a written indemnity to the title insurer and buyer stating that the bank actually owns the property and would defend against any subsequent claims on title. At one point in October 2010, Old Republic was reportedly refusing to write title policies for some foreclosures all together (although this policy was subsequently changed). Subsequently, the title insurance companies relaxed the indemnification requirement. Why? Because if one of the four major title companies required indemnity or refused to insure foreclosures altogether, this would be the demise of the title industry. The problems with boundary disputes will soon follow.
The only known alternative to the chain of title system is the Torrens system registering the owner rather than the land. To institute a Torrens system, you must have a court finding that eliminates the necessity for a chain of title and a declaration of the property location. Conceivably, if done properly, a Torrens system would take hundreds of years to create – not exactly a feasible solution.
MERS, a shell company with approximately 45 employees and 20,000 Vice Presidents (paying $25.00 each for the right to use the MERS name), may destroy our land title records affecting all American homeowners (not just those unfortunate enough to face foreclosure) if appropriate actions are not taken. Chain of title destruction boils down to the destruction of a basic American right – land ownership with a verifiable clear title.
David E. Woolley is a California Licensed Land Surveyor and Certified Fraud Examiner, who is a principal of Harbinger Analytics Group in Tustin, CA. Thanks to David and Lisa Herzog, who edited the study and performed research, for summarizing the paper
Full paper below…