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MERS - MACRO W FINAL EDITS - NOV 2011 (DO NOT DELETE) 11/17/2011 10:40 AM The Magic of the Mortgage Electronic Registration System: It Is and It Isn’t by David P. Weber* “Never imagine yourself not to be otherwise than what it might appear to others that what you were or might have been was not otherwise than what you had been would have appeared to them to be otherwise.”1 I. INTRODUCTION The Mortgage Electronic Registration System, Inc. (MERS) is the brainchild of some of the most powerful
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  Electronic copy available at: http://ssrn.com/abstract=1898306 MERS   -   M ACRO W FINAL EDITS -   N OV 2011   (D O N OT D ELETE ) 11/17/2011   10:40   AM 101   The Magic of the MortgageElectronic Registration System:It Is and It Isn’t by David P. Weber*“Never imagine yourself not to be otherwise thanwhat it might appear to others that what you wereor might have been was not otherwise than what youhad been would have appeared to them to beotherwise.”  1   I. INTRODUCTIONThe Mortgage Electronic Registration System,Inc. (MERS) is the brainchild of some of the mostpowerful constituents in the U.S. mortgageinvestment industry. 2 The concept behind MERS wasto create an electronic, efficient, investor-   * Associate Professor of Law, Creighton University School of Law.The author wishes to thank the following for useful comments,suggestions, research ideas, and/or research assistance: DeanMarianne Culhane, Prof. Michaela White, Judge Rich Leonard, Prof.Stephen Ware, Emma Nagengast, José Rodríguez and Vijay Malik. 1 L EWIS C ARROLL ,   A LICE IN W ONDERLAND 73–74, (Western Publishing Company1970) (1865) (also referred to as A LICE ’ S A DVENTURES IN W ONDERLAND ). Inconversation the Duchess advised Alice that “everything’s got amoral, if only you can find it.” Id.   2   See Christopher L. Peterson, Foreclosure, Subprime MortgageLending, and the Mortgage Electronic Registration System , 78 U.   C IN .   L.   R EV . 1359, 1370 n.61 (2010) (naming the charter members of MERS,including Fannie Mae, Freddie Mac, GE Capital Mortgage, GMACResidential Funding, Merrill Lynch Credit Corp, and Chase ManhattanMortgage).  Electronic copy available at: http://ssrn.com/abstract=1898306 MERS   -   M ACRO W FINAL EDITS -   N OV 2011   (D O N OT D ELETE ) 11/17/2011   10:40   AM 102 AMERICAN BANKRUPTCY LAW JOURNAL (Vol. 85friendly informal recording system. 3 The theorywas that lenders and investors could save hundredsof millions of dollars annually in assignment andrecordation fees by naming a proxy mortgagee orbeneficiary (MERS) on the recorded mortgage ordeed of trust and allowing informal transfers ofthe underlying debt thereafter ad infinitum amongMERS’s members with essentially no additional per-transaction cost. 4 While at first lauded by some, 5  it quickly became apparent that the MERS modelcontains a surfeit of problems. Among the manyproblems are the lack of transparency in ahistorically transparent legal regime, 6 theinability of mortgagors or trustors to ascertainthe identity of anyone other than a loan servicerin order to engage in settlement discussions orloan workouts, 7 the loss of millions of dollars inrevenue to the counties from recording, 8 and the 3 Beau Phillips, MERS: The Mortgage Electronic Registration System ,63   C ONSUMER F IN .   L.   Q.   R EP .   262, 263 (2009). 4   See, MERSCORP, Inc. v. Romaine, 861 N.E.2d 81, 83 (N.Y. 2006).Throughout this article many references are made to mortgages,mortgagors and mortgagees, however, MERS is also actively involved indeeds of trust which are more prevalent in some jurisdictions andaffect trustors, trustees and beneficiaries. Much of the legalanalysis remains the same whether the security instrument at issue isa mortgage or deed of trust and the parties are mortgagors ortrustors, or mortgagees or beneficiaries. See R ESTATEMENT (T HIRD ) OF P ROP .:   M ORT . § 1.1 (1997). The principles of a secured interest inreal property as set forth in this Restatement apply equally to deedsof trust. Id. at § 1.1 cmt. 5   See, e.g., R.K. Arnold, Yes, There Is Life on MERS , P ROB .   &   P ROP .,July–Aug. 1997, at 32, 36 (stating “[c]hange defines the future.Advancements in technology have made MERS possible. MERS presents adramatic change in mortgage loan practices. Adjusting to that changemay not be as difficult as it first appears. Moreover, this changeshould ultimately benefit lenders, title insurers, consumers andtheir counsel.”). 6 Robert E. Dordan, Mortgage Electronic Registration System (MERS),Its Recent Legal Battles, and the Chance for a Peaceful Existence , 12L OY .   J.   P UB .   I NT .   L. 177, 177–180 (2010). 7   See Richard J. Aalberts, Is There Life in MERS? , 38 R EAL E ST .   L.J.i. (2010). 8   See Romaine , 861 N.E.2d at 88–89 (Kaye, J., dissenting in part)(noting, “county clerks, of course, are concerned about the depletion  MERS   -   M ACRO W FINAL EDITS -   N OV 2011   (D O N OT D ELETE ) 11/17/2011   10:40   AM 2011) THE MAGIC OF MERS 103insulation from damages of srcinators who mayhave engaged in predatory lending practices.These problems have resulted in mass confusion inthe legal arena regarding the proper treatment ofMERS. 9  Additionally, the MERS model propagates a falsedichotomy where MERS as the nominee or agent ofthe mortgagee 10 can claim to be the mortgagee whenthat status is to its benefit, 11 whilesimultaneously disclaiming that role as it seesfit. 12 The quote at the beginning of this essaycould easily be used to describe MERS’s officiallegal position and its role in lawsuits (includingits standing in both foreclosure and bankruptcyproceedings)—according to the Duchess, she simplywants people to “be what they would seem to of their revenues-allegedly over one million dollars a year inSuffolk County alone.”). 9   See John R. Hooge & Laurie Williams, Mortgage ElectronicRegistration System, Inc.: A Survey of Cases Discussing MERS’Authority to Act , 8 N ORTON B ANKR .   L.   A DVISER 1 (2010); see , e.g. , Bank ofN.Y. v. Silverberg, 86 A.D.3d 274, No. 17464-08, slip op. 05002 (N.Y.App. Div. 2011) (dismissing for lack of standing a foreclosure suitbrought by MERS as mortgagee in a case in which MERS never possessedthe rights of a holder with regards to the promissory note); Fergusonv. Avelo Mortg., LLC, 195 Cal. App. 4th 1618 (Cal. Ct. App. 2011);Saxon Mortg. Serv., Inc. v. Hillery, 2008 WL 5170180 (N.D. Cal.2008); In re Agard, 444 B.R. 231 (Bankr. E.D. N.Y. 2011); U.S. Bank,N.A. v. Flynn, 897 N.Y.S.2d 855 (N.Y. Sup. Ct. 2010) (asserting thatassignee of MERS had proper standing to initiate foreclosureproceedings); Crum v. LaSalle Bank, N.A., 55 So. 3d 266 (Ala. Civ.App. 2009); Gomes v. Countrywide Home Loans, Inc., 192 Cal. App. 4th1149 (Cal. Ct. App. 2011); and Landmark Nat’l Bank v. Kesler, 216P.3d 158 (Kan. 2009). 10   See Phillips, supra note 3, at 263; see also J OHN R AO ET AL .,   N ATIONAL C ONSUMER L AW C ENTER ,   F ORECLOSURES 140 (3d ed. 2010) (noting thatthe MERS model requires MERS to “deliberately draft[] securityinstruments that purport to give it contradictory rights”). 11   See Mortg. Elec. Registration Sys., Inc. v. Southwest Homes ofArk., 301 S.W.3d 1 (Ark. 2009) (noting MERS’s attempt to act as a“necessary party” although its role was only as nominal beneficiaryunder the deed of trust). 12   See infra note 70 and accompanying text (noting MERSsuccessfully argued in Nebraska that it could be mortgagee of recordwhile simultaneously not meeting the requirements of registration formortgage brokers).  MERS   -   M ACRO W FINAL EDITS -   N OV 2011   (D O N OT D ELETE ) 11/17/2011   10:40   AM 104 AMERICAN BANKRUPTCY LAW JOURNAL (Vol. 85be . . .”, 13 whereas MERS’s problem appears to bethat it is trying to be more than it is (except inthose cases where it isn’t).The principal cause of this problem is thepurported splitting of the mortgage or deed oftrust from the promissory note. As with asecurity interest in personal property underU.C.C. Article 9, a mortgage or deed of trust issimply an instrument that grants (or allows theretention of) a security interest in realproperty. 14 A mortgage or deed of trust alone istheoretically worthless as it is only a tool bywhich a creditor seeks repayment of anobligation. 15 Logically, therefore, an assignmentof nothing cannot turn into an assignment ofsomething. However, this is what the MERSstructure seeks to implement by allowing bareassignments of mortgages or deeds of trust. Giventhe current use of asset securitization, anhistorically recent activity, 16 and increasingdemands for efficiency and cost-effectiveness, theidentity and intentions of the parties involved inforeclosures have been dramatically altered in thepreceding half century.This essay argues that real property rights andthe mechanisms for payment and satisfactiondeveloped over centuries should not be modifiedlightly, even given a tremendous shift in thebusiness model. If they are to be modified, themodification should provide a clear mandate fortransparency, oversight and compliance with sometraditional elements of agency law. Courts andcommentators disagree on the proper role of MERS,and that disagreement has led to wildly differentopinions among the jurisdictions in foreclosure 13 C ARROLL ,   supra   note 1, at 74. 14   See R ESTATEMENT (T HIRD ) OF P ROP .:   M ORT . § 1.1 (1997). 15   Id. at cmt. 1 (“Unless it secures an obligation, a mortgage is anullity.”). 16 David Messerschmitt, Note, Overview of the Subprime MortgageMarket , 27   R EV .   B ANKING &   F IN .   L.   3,   4   (2007).
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