It’s hard to tell whether Barry Ritholtz doesn’t understand the fundamentals of the real estate mortgage business, or is just trying to pull traffic to his blog, but he’s making a mountain out of a molehill claiming in his latest post that Foreclosure Fraud Reveals Structural and Legal Crisis.
He’s not alone, Gretchen Morgenson of the New York Times claims that it would be “a rare case of poetic justice” if the Mortgage Electronic Registry System (Mers) were “hoisted on its own petard” by the refusal of a court to enforce a lien filed under its name.
This is crazy talk.
Mers was created in 1997 to enable the private assignment of mortgages amongst its members without the expense of filing an assignment in the public records. Where Morgenson and Ritholtz go wrong is assuming that recording a mortgage assignment is a requirement, and not simply an option. Neither seem to understand public records law.
The public records (usually called “Probate Records”) exist, amongst other reasons, to enable the assertion of ownership interests in real estate. When a deed is filed in the public records, it serves as notice to any that might claim otherwise, that the grantee in the deed claims an ownership interest in the property. The same is true of mortgages and other liens. When they are filed, they serve as notice to all the world that there is a lien against the property. Typically liens that are filed against a property have priority in the order in which they are filed. So a first mortgage should be the first lien filed, a home equity line of credit, perhaps second, and so on. If someone purchases the interest of a lien holder (buys the mortgage), an assignment of that interest to the purchaser may be filed in the public records to let the world know that there is a new owner of the lien. It is not a requirment. Any subsequent actions taken in regards to the lien (release, satisfaction, etc) would have to be filed by the new lien holder, if the assignment was filed.
Mers was an attempt to circumvent the filing of assignments of mortgage interests. It is a private registry whose participants (mortgage lenders) agreed among themselves that assignments would be enforceable amongst each other if they were properly recorded in the registry. Thus it operated very much like a probate court’s records, just without the probate court.
The linking mechanism to the probate courts where the actual mortgage was filed was to have the mortgages filed in the name of Mers, as nominee for such and such lender. Then all the subsequent assignments could be done within Mers private registry, so long as the mortgage stayed with the participants in Mers.
There was nothing nefarious and evil or structurally unsound about it. Until a few goofball trial court judges got a hold of cases where Mers was the nominee mortgagee and tried to say Mers didn’t have standing to foreclose. Okay, but then who does have standing to foreclose? If the answer is the lender to whom the mortgage is assigned, then it goes right back to Mers, because the lender has assigned its right to foreclose to Mers. There is nothing at all illegal about assigning contract rights and not recording them in the public records. The assignments between Mers and its participants are as legally enforceable as any contracts between two contractually-capable entities, they are just not enforceable against third-parties that may have an interest in the property.
Morgenson uses the example of a Kansas case to show how Mers may be resting on shaky legal ground:
In April 2006, Mr. Kesler filed for bankruptcy. That July, Landmark National Bank foreclosed. It did not notify either MERS or Sovereign of the proceedings, and in October, the court overseeing the matter ordered the property sold. It fetched $87,000 and Landmark received what it was owed. Mr. Kesler kept the rest; Sovereign received nothing.
Days later, Sovereign asked the court to rescind the sale, arguing that it had an interest in the property and should have received some of the proceeds. It told the court that it hadn’t been alerted to the deal because its nominee, MERS, wasn’t named in the proceedings.
The court was unsympathetic. In January 2007, it found that Sovereign’s failure to register its interest with the county clerk barred it from asserting rights to the mortgage after the judgment had been entered. The court also said that even though MERS was named as mortgagee on the second loan, it didn’t have an interest in the underlying property.
Sovereign was the second mortgage, which was curiously a higher principal amount than the first mortgage (Landmark was $50,000; Sovereign $93,100). A few things need clarification. First, unless Kansas has some strange statutes concerning real estate property exemptions in bankruptcy (not unlike Florida’s), the balance of the loan should have gone to bankruptcy trustee to pay off Mr. Kesler’s debts. Next, Mers is almost never a second lien on a property–it was created specifically to traffic in first-mortgage Fannie Mae/Freddie Mac conforming instruments–and the notice requirements for second lien holders during foreclosure and sale by the first lien holder vary amongst the state. Typically there is very little notice required of first lien holders with respect to others with a property interest, so Sovereign’s assertion that it should have been notified is questionable on those premises alone. Third, notice that the court said that Sovereign’s attempt to enforce its rights under the mortgage were barred after the judgment had been entered, which might seem minor, but not to a court that is looking for a reason to allow a judgment stand, and that knows its ruling has no precedential value. Sovereign didn’t object until the whole thing was over, and it was at least partly responsible for not having paid closer attention to mortgages with Mers as nominee.
But Morgenson thinks this case might operate to throw Mers out the window as able to validly assert a lien against property. This is utter nonsense, and would result in utter chaos in the residential mortgage market, throwing it into an irreversible tail-spin from which it might never recover. If Mers liens are held to be invalid, it would effectively give homes to about 60 million people across the nation. Everyone without a Mers mortgage would be paying for everyone with one. Is this the petard she hopes for Mers to be hoisted upon?
In a more reasonable age, Mers would be seen for exactly what it is–an attempt to streamline the mortgage funding process such that efficiencies thereby gained could make for lower costs–and be appreciated that it was probably one of the good things to come out of the residential real estate boom. Technological innovations happened incidental to the boom provided by the Fed’s easy money policies. Technological innovations are generally good things, allowing for more production while limiting costs. In the residential real estate mortgage funding market, they helped provide a secondary market by making a mortgage in Alabama have effectively the same rights and obligations as a mortgage in Alaska. Mers helped by allowing those interests to be transferred among its members without the expense of preparing and recording assignments, somewhat freeing the money flow from the strictures of local probate courts. It did not alleviate the need to record mortgages, but they had only to be recorded one time, instead of each time the interests in the mortgage were transferred. It meant less expense for mortgagees, and ultimately, for borrowers.
Yet Morgenson and Ritholtz and others now think they’ve found the real culprit–the true evil behind the curtain is the scam of Mers. No. Mers and other technological innovations would have happened anyway, and so far as they streamlined the process and improved efficiencies, they were good. The culprit is the Fed. The real estate mania was the result of about a decade’s worth of overly expansive monetary policy. It in fact was the direct result of the Fed’s insistence that “stable prices” means inflation of 1-2%.
If this bashing of Mers and the assignment and endorsement process gets too carried away, get ready for TARP II and TARP III on the way to just pull the covers over the eyes of the real estate market and the financial system. They’ll both be dead.