How MERS Use Led to Varied Legal Opinions

The problems for Merscorp Inc. began with questions from the lawyers representing borrowers fighting to avoid foreclosure: Who, or what, is MERS Inc., the company whose name kept popping up in the public land records and on foreclosure documents in millions of cases?

The answer of course is Mortgage Electronic Registration Systems, the brainchild of the government-sponsored enterprises and many of the mortgage industry's largest participants.

The legal questions surrounding MERS are numerous and the answers vary from state to state. Both Merscorp, of Reston, Va., and its legal critics have both won their share of court decisions.

Merscorp controls a number of businesses, like Mortgage Electronic Registration Systems Inc., a subsidiary. MERS Inc. is the entity named on the mortgage documents filed in land recording offices. Another component is the MERS System, an electronic platform that tracks changes in promissory note ownership.

With MERS in control of the publicly recorded mortgages that are tied to the notes on the MERS System, a legal structure was created to allow note owners to take action on the mortgages to execute transfers and assignments to non-MERS members, lien releases and, of increasing regularity, foreclosure documents. Individuals called "certifying officers" are typically officers or lawyers of MERS members who are granted the authority to sign and execute documents on behalf of MERS Inc.

So when Bank of America Corp. — a MERS shareholder with one of the highest volumes of notes in the system — forecloses on a borrower, the process is done in the name of MERS Inc. but is executed by a B of A attorney authorized as a certifying officer. This allows the note owner to foreclose without filing an assignment and has been the preferred method of foreclosure by MERS members, especially in judicial states where the foreclosure process is protracted.

The arrangement is based on the legal concept of an agency relationship. Each state has its own definition and requirements for agency relationships between two entities, leading to conflicting rulings from courts deciding challenges to MERS' standing in foreclosures.

For example, in the same week of February, federal bankruptcy judges in Kansas and New York issued opposing rulings on MERS' status as an agent of its members.

Judge Robert Grossman of the U.S. Bankruptcy Court for the Eastern District of New York declared that the contractual relationship between MERS Inc. and MERS members is insufficient to allow foreclosures where MERS Inc. is the foreclosing entity.

But in a similar case, a Kansas federal bankruptcy judge, Janice Miller Karlin, ruled the same contractual relationship was sufficient for MERS to act on the servicer's behalf. The difference in the rulings was the judges' interpretation of state agency laws — Karlin ruled the agreement created an express agency relationship, and noted that even if it didn't, it satisfied the test for an implied agency, which is permitted in Kansas.

Grossman's interpretation of New York law found that neither the mortgage document nor the MERS membership agreement it has with members contain the word "agency," and they do not expressly spell out in writing that the arrangement is an "agency relationship," which he said is a critical tenet of New York State contract law.

Judges in other states have handed down decisions on both sides of the agency question, opening the door for a state-by-state review of the MERS contract's adherence to each state's agency laws.

"It would be kind of crazy to think that it didn't pass the agency requirements initially," said Mike Wileman, the president and chief executive of Orion Financial Group, a provider of document recording and retrieval services.

A request to interview Merscorp executives and board members was declined.

Some of the strongest criticism of the MERS System has been over its role as the named entity in foreclosure suits. In April, the Michigan Court of Appeals ruled MERS Inc. is ineligible to use the state's nonjudicial foreclosure process. Michigan law says that in order to use this expedited process, the foreclosing entity must be "either the owner of the indebtedness or of an interest in the indebtedness secured by the mortgage or the servicing agent of the mortgage."

The decision vacated the 2009 foreclosure and eviction of two borrowers, but the court said that had MERS Inc. filed an assignment transferring mortgage ownership to the notes' custodians before the foreclosure sales, the cases would have stood. Additionally, MERS Inc. and the custodians could have filed a judicial foreclosure without recording the assignment and successfully foreclosed.

"MERS seeks to blur the lines between itself and the lenders in this case in order to position itself as a party that may take advantage of the restricted tool of foreclosure by advertisement," the court said, but other times MERS has "sought to clearly define those lines in order to avoid the responsibilities that come with being a lender."

The court cited a 2005 case in which MERS successfully defended itself against claims by the Nebraska Department of Banking and Finance that MERS meets the state's definition of a mortgage banker and is subject to licensing and registration requirements.

The Nebraska court accepted the MERS argument that it is not a lender, and rather "merely a shell designed to make buying and selling of loans easier and faster by disconnecting the mortgage from the loan," the Michigan court wrote. "Having separated the mortgage from the loan, and disclaimed any interest in the loan in order to avoid the legal responsibilities of a lender, MERS nevertheless claims in the instant case that it can employ the rights of a lender by foreclosing in a manner that the statute affords only to those mortgagees who also own an interest in the loan."

The easiest solution to the foreclosure filing challenges is to assign the mortgage out of the name of MERS Inc. and into the name of the appropriate MERS member before filing foreclosure documents. In 2006, Fannie Mae took that very step, requiring its servicers to file an assignment of the mortgage out of MERS' name before initiating a judicial foreclosure. In April 2011, Freddie Mac enacted a similar directive for its servicers. Now Merscorp officials want the practice of foreclosing in its name to stop entirely.

In March, Merscorp proposed a rule change that would require servicers to assign the mortgage to the name of the foreclosing entity. The rule is pending a 90-day comment period that ends this month, during which time MERS requested that its members not foreclose in its name.

"If that had been done all along, we wouldn't have these issues," said Paul Anselmo, the CEO of the electronic document vendor SigniaDocs. "It would have put the current holder of the note's name on the endorsement chain, which would have eliminated the whole 'Who the hell is MERS?' question."