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What’s missing from Delaware’s settlement with MERS?

When Delaware Attorney General Beau Biden filed his suit against the Mortgage Electronic Registration Systems last October, I wrote that the complaint should cause shivers in the securitization industry. Biden’s suit didn’t just assert that MERS didn’t have standing to bring foreclosure actions, it also claimed that MERS-held mortgages had been improperly bundled into mortgage-backed securities, since insufficiently documented loans were erroneously transferred to securitization trusts. If Biden was right, I said at the time, the entire model for mortgage-backed securitization would be threatened.

It looks like Biden was wrong. On Friday, Delaware agreed to a settlement with MERS that makes absolutely no mention of Biden’s securitization allegations. (And, for that matter, it doesn’t seem to require much of MERS beyond what the bank-created registry has previously agreed to do.) That’s because, in the words of MERS spokeswoman Janis Smith, “There is absolutely nothing at all to the premise that MERS is responsible for securitization failures.”

According to MERS, the flaw in Biden’s reasoning (and that of New York Attorney General Eric Schneiderman) is that it doesn’t account for the distinction between mortgage notes and mortgage liens. Mortgage notes are the actual debt obligations that are transferred to MBS trusts in securitization deals. Mortgage liens, on the other hand, are rights to the underlying property. MERS typically holds title to mortgage liens whose notes have been securitized. In response to assertions of incomplete transfers in MBS deals, MERS and its lawyers at Morgan, Lewis & Bockius have repeatedly argued that title to the liens does not have to be transferred to securitization trusts along with the notes.

Rest here…