MERS Unmasked by Kansas Supreme Court

Mortgage Electronic Registration

Much wailing and gnashing of teeth was heard in mortgage banking circles after the Kansas Supreme Court answered the question:  “What is MERS?”

MERS, an acronym for Mortgage Electronic Registration Systems, Inc., was set up some years back by mortgage bankers to be the “straw man” or placeholder for lenders, with MERS to be the mortgagee or recipient of mortgage to real estate, while the debt was held by the mortgage lender.  It is really an electronic database, nothing more.   MERS is privately owned by, you guessed it, the mortgage bankers who created this fictional entity.

State laws require that there be a clear chain of assignment recorded at the county level.  MERS allowed lenders to circumvent this requirement, and had the added benefit of permitting lenders to avoid paying registration fees and recording costs to local governmental units.  This also allowed a number of other things to occur, all beneficial to the mortgage banking industry, and none helpful to homeowners.  By putting the mortgage in the name of MERS, lenders could then sell and assign their notes to each other without the worry of recording an assignment.  Farewell to transparency.  Homeowners would know that MERS held their mortgage, but might not have the foggiest notion about who owned the note, i.e., who was the creditor in the transaction.  Moreover, even if the homeowner knew at the beginning of the loan who the lender was, the creditor holding the note might change on a regular basis through assignments to other mortgage lenders.  Last but certainly not the least, a third party, known as a “loan servicer,” would often be the entity to whom payments were made by borrowers.

Beyond that, this tactic was part and parcel of the mortgage “securitization” bugaboo that was instrumental in bringing on the worst recession since the Great Depression.   Securitization might thought of as the mortgage industry’s version of the “kitchen magician.”  They sliced and diced home loans, repackaged the bits and pieces into “mortgage backed securities” which they then marketed to the investing public.  Many of these repackaged mortgage debts included high risks loans, where the debt  exceeded the value of the home, and other devices, such as “interest only” mortgage loans, where the homeowner was betting on the eventual increase in value of the home.  Finally, many of these mortgages had adjustable rate features with “teaser” rates at inception.

So what is wrong with these home buying strategies?  Well, now we know, two years into the recession.  When home value appreciation stalled, there was no incentive for the speculative homeowner to continue to make payments, even if interest only.  Likewise, when interest rates adjusted upward, after expiration of the teaser period, home buyers walked away.  These sliced and diced mortgages, now repackaged as mortgaged backed securities, began to lose value.  If the underlying mortgages were increasingly falling into nonperforming status, the value of the “securities” had nowhere to go but down.  And so it was.

So what did the Kansas Supreme Court have to say about the MERS folly?  Just this:  No debt is owed to MERs, and therefore, MERS has no right to foreclose.  The entity that has  the debt has no security in the form of a home mortgage to back up the debt, so it is an unsecured creditor.  It has no right to foreclose.  Said the Court:

“The law generally understands that a mortgagee is not distinct from a lender: a mortgagee is a party to whom property is mortgaged, which is to say, a mortgage creditor or lender. A mortgagee and a lender have intertwined rights that defy a clear separation of interests.  By statute, assignment of the mortgage carries with it the assignment of the debt. K.S.A. 58-2323 . Although MERS asserts that, under some situations, the mortgage document purports to give it the same rights as the lender, the document consistently refers only to rights of the lender, including rights to receive notice of litigation, to collect payments, and to enforce the debt obligation. The document consistently limits MERS to acting ’solely’ as the nominee of the lender.”

The Court went on to state that:

“The practical effect of splitting the deed of trust from the promissory note is to make it impossible for the holder of the note to foreclose, unless the holder of the deed of trust is the agent of the holder of the note. [Citation omitted.] Without the agency relationship, the person holding only the note lacks the power to foreclose in the event of default. The person holding only the deed of trust will never experience default because only the holder of the note is entitled to payment of the underlying obligation. [Citation omitted.] The mortgage loan becomes ineffectual when the note holder did not also hold the deed of trust.” Bellistri v. Ocwen Loan Servicing, LLC, 284 S.W.3d 619, 623 (Mo. App. 2009).

Apologist for the mortgage banking industry have characterized the opinion as having “narrow application.”  Maybe narrow in the sense that the case only applies to Kansas mortgages.  And while that may be, courts in other states are showing interest and asking, “What is MERS.”  It is a question we should all be asking.