MERS: Banks Legislating by Fiat — How Long DO We Permit Banks to Run the Country?

When will borrowers be allowed to use nominees at loan closings? Will they be able to say later that off-record transactions prevent the lender from enforcing loans?

Even the premise that MERS “enables” the REMIC Trust to claim innocence in LENDER mortgage fraud, is flawed: none of them claim the status of holder in due course because they cannot produce proof of an actual transaction in which they paid for the origination or acquisition of a mortgage in good faith and without knowledge of the borrower’s defenses.

So lenders can create a legal fiction to avoid liability under the deceptive lending laws but borrowers cannot. It follows that if nominees are to be allowed, that borrowers should be allowed the same privilege.

Besides being plain wrong and violative of Federal and State statutes on lending and recording, this seems like a clear case of violation of equal protection under Federal and State constitutions. — Neil F Garfield, www.livinglies.me

Hat tip to very reliable contributor whose identity is kept anonymous:

Without beating a dead horse, I think the concurring opinion shown below displays the inherent defects in the chain of title of anyone who thinks they own property or own a mortgage encumbrance on any property in which MERS is in the title chain. The principal point is that public records are intended to provide certainty in the marketplace. MERS does the opposite. If you see MERS in the title chain, it means automatically that the loan is subject to claims of securitization. And we now know that most such claims are false. Hence satisfactions of mortgage, the filings of lis pendens, notices of sale, notices of default, substitutions of trustees, and all those robo-signed, forged, fabricated assignments, allonges etc. are all clouds on title.

As to equitable assignment of mortgages, this ratifies any practice that violates law if it is done on a large enough scale. There is no such thing as equitable title, equitable mortgage or equitable mortgages. either it is properly executed and recorded pursuant to an actual contract consisting of offer, acceptance and consideration or it is not. If it is not, the documents should not be used or delivered to anyone, much less the county recorder or any civil court for recording.

I have emphasized by BOLD letters those portions of the concurring opinion that are especially important.

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Case: Dow V. PHH Mortgage Case 2013AP221 7/10/14 WI SP CT

¶49  SHIRLEY S. ABRAHAMSON, C.J.   (concurring).  This is a mortgage foreclosure case, one of many in Wisconsin and across the country.1    PHH Mortgage Corporation, which claims to be assignee of the note and the mortgage in the instant case, has been a party in over 2,300 cases filed in the Wisconsin circuit courts, with many cases still open.  PHH, and by extension the Mortgage  Electronic Recording System (MERS), upon which it relies, represent the modern mortgage system, which has become the subject of frequent litigation in the Great Recession,during   which    many     homeowners     have      lost         the         American             dream——private home ownership.¶50  Some  fear  the  economic  damage  from  foreclosures; others fear the economic damage from encumbering the mortgage financing industry.  MERS benefits its members, but the question remains whether the MERS system provides benefits to home buyers and borrowers and whether MERS has a deleterious effect on real property and mortgage law.¶51  I do not join the majority opinion or support its blanket application of the nineteenth-century doctrine of equitable assignment to the modern mortgage system. ¶52 The doctrine of  equitable assignment and the longstanding state policy favoring recording of  documents affecting real estate are being applied to twenty-first-century transactions  that  were  not  imagined  when  the  equitable assignment doctrine and the Wisconsin recording statutes developed.  The majority opinion does not attempt to address the practical concerns of the current mortgage foreclosure crisis, the realities of the modern mortgage market, the values of the recording system, or the current and future problems associated with the modern mortgage system presented in the instant case.

¶53 My concurrence describes the characteristics of traditional and modern real estate mortgages, the doctrine of equitable assignment, the purpose and value of the recording statutes, and unresolved issues raised by the majority opinion’s blanket acceptance of the doctrine of equitable assignment and MERS.

¶54  PHH  is  just one of  along  list of MERS’s members.

((2 Developed in 1993, MERS is a major player in the modern real estate mortgage system and the secondary mortgage market.  MERS is a private, “member-based organization” whose members include “lenders, servicers, sub-servicers, investors, and government institutions.”3   Members pay fees to subscribe to MERS’s system2  See MERS Member   Search,www.mersinc.org/about-us/member- search (last visited June 30, 2014).3 Shelby D. Green & JoAnn T. Sandifer, MERS Remains Afloat in a Sea of Foreclosures, Prob. & Prop., July/Aug. 2013, at 18, 19.of  “electronic processing  and tracking  of ownership and transfers of mortgages.”))

¶55  MERS is the mortgagee of record and, as the majority opinion points out, is strangely also the agent for the entity that ultimately holds the note and mortgage.5   MERS is presumably both principal and agent, and the entity on whose behalf MERS holds legal title to the mortgage changes every time the promissory note is assigned.

¶56  MERS does not have an interest in the promissory notes; it has never had such an interest. Yet sometimes the debtor is advised that MERS does have an interest in the note. Further, MERS does not lend money or collect on the notes secured by mortgages for which it is named as mortgagee.

¶57  MERS facilitates transfers of mortgage notes without the necessity of recording an assignment of the mortgage.10 Members of MERS avoid recording fees because “MERS remains the mortgagee of record” in county recording offices regardless of how many times the note is transferred.

¶58  The doctrine of equitable assignment is a common-law principle  that  “a transfer of an obligation secured by a mortgage on property also constitutes a transfer of the mortgage.”12   The idea of equitable assignment is that a mortgage has no significance without reference to the note it secures.

¶59 Although the majority opinion concludes “that the doctrine  of  equitable  assignment  is  alive  and  well  in Wisconsin”13   “as  evidenced  by  established  case  law,”14   its proffered case law does not support its conclusion.

¶60 The majority opinion cites no Wisconsin precedent explaining or applying the doctrine of equitable assignment in a case involving real estate in which the note and mortgage were held by two different persons.

¶61 The Wisconsin cases cited by the majority opinion do not all involve real estate and do not involve instances in which the note and the mortgage are held by different persons. For example, Tidioute Savings Bank v. Libbey addresses the validity of a guaranty to repay a sum of money after the corresponding notes were sold,15 and Muldowney v. McCoy Hotel Co. concerns the equitable assignment of a chattel mortgage.16   The majority opinion glosses over the policy concerns unique to real estate transactions, particularly notice, in its use of these cases.

¶62 More importantly, the Wisconsin cases the majority opinion highlights that do address real estate mortgages concern situations in a traditional setting in which the note and the mortgage are held by the same party, as in Tobin v. Tobin,17 Croft v. Bunster,18  and Carpenter v. Longan.19  In the instant case, however, the foreclosure proceedings were initiated when the note and the mortgage were separated.

¶63  The majority opinion relies on “dicta” in nineteenth- and early-twentieth-century cases (when “dicta” really meant dicta) and applies the dicta to a new set of twenty-first- century facts.

¶64 Modern mortgage transactions differ from traditional mortgage transactions.  In the traditional, non-MERS mortgage, the  homeowner  borrows money from a lender-mortgagee.   The lender-mortgagee keeps the note and records the mortgage.  The lender-mortgagee may transfer both the note and mortgage but generally  keeps  them  together,  and  the  assignment  of  the mortgage is ordinarily recorded.20

¶65  In a MERS transaction, MERS is neither the lender nor is it the payee on the promissory note.  The borrower executes a note  to  the  lender.   The borrower executes the mortgage, however, to MERS.  MERS is the holder of the mortgage but not of the promissory note.  The mortgage is recorded, with MERS as the mortgagee.21   Under the traditional view of equitable assignment, naming MERS as the mortgagee separates the mortgage from the promissory note and may cause the note to become unsecured.22

¶66  The MERS system assists the secondary mortgage market in which mortgages are bought and sold.  Many entities may hold a partial interest in the note.   Indeed, it is sometimes difficult to track all the assignments of the note.23    Lenders have been sloppy about keeping track of the promissory notes. In the present case, PHH asserts that it has the note, yet the case is remanded to the circuit court to determine whether PHH actually  has  the note (and thus the mortgage interest by equitable assignment) entitling it to foreclosure.

¶67  The majority opinion ignores the characteristics of the modern real estate mortgage to find a simple solution to the instant case——a solution that creates its own set of problems.

¶68  I turn to the Wisconsin statutes regarding recording of real estate transactions.  Wisconsin statutes governing recording of real estate transactions date back to 1849.24   The recording statutes serve the important purpose of compiling a reliable and public history of title for real estate25 in order to provide protection, in the form of notice, to all parties

¶69  In the nineteenth century, transfers of real estate rights were expected to be documented at the county recording office,26 and mortgages were rarely separated from the promissory note.

¶70  Today  under  MERS,  MERS  remains  the  mortgagee  of record.  When MERS members transfer the notes, non-MERS members cannot access the identity of the true owner of a note and mortgage through the public recording system.28   As Chief Judge Judith Kaye of the New York Court of Appeals has written:

[T]he MERS system, developed as a tool for banks and title companies, does not entirely fit within the purpose of the Recording Act, which was enacted to “protect       the      rights      of      innocent purchasers . . . without    knowledge    of    prior encumbrances”    and   to   “establish   a   public record . . . .”   It is the incongruity between the needs  of  the  modern electronic secondary mortgage market and our venerable real property laws regulating the market that frames the issue before us.

¶71  The modern mortgage system represented in the instant case by MERS and PHH has increasingly challenged Wisconsin’s recording statutes and the state’s strong policy in favor of recording all real estate transactions.  The recording system fosters disclosure of real estate transactions; MERS fosters secrecy.  Under the MERS system, a borrower may access only his or her loan servicer, not the underlying lender.30 As        Chief Judge Kaye has written, this secrecy and avoidance of public recording have undesirable consequences:

The  lack  of  disclosure  may  create  substantial difficulty when a homeowner wishes to negotiate the terms of his or her mortgage or enforce a legal right against the mortgagee and is unable to learn the mortgagee’s identity.  Public records will no longer contain this information as . . . the MERS system will render the public record useless by masking beneficial ownership of mortgages and eliminating records of assignments   altogether.     Not  only  will  this information deficit detract from the amount of public data  accessible  for  research  and  monitoring  of industry trends, but it may also function, perhaps unintentionally, to insulate a noteholder from liability,  mask  lender  error  and  hide  predatory lending practices.31

¶72  Mortgage foreclosure actions are frequently before the Wisconsin circuit courts.  Numerous issues may arise from the application of the equitable assignment doctrine to the MERS system. Indeed, we do not know the extent of the concerns that will be realized.They are left for another day.            Here are a few raised in the case law and the literature:

• Does MERS have standing to bring a foreclosure action?

• Must MERS assign the mortgage to the note owner before a foreclosure action can be initiated?

• What difference does it make that an assignment of the promissory note operates as an equitable rather than legal assignment of the security instrument?

• Can legal and equitable title be separated?

• Must  the  entity  seeking  to  foreclose  have  both equitable and legal title?

• What information must be disclosed to the borrower when the mortgage transaction is negotiated.

• What  protocols  are  warranted  for  dealing  with  a borrower in financial distress?

• Does the lack of disclosure create difficulty when the homeowner  wants  to  renegotiate  the  terms  of  the mortgage or  enforce  a  legal  right  against  the mortgagee  and  is unable to learn the mortgagee’s identity?

• Does the majority opinion preclude federal remedies that are otherwise available to homeowners?

• Are existing rules on negotiable instruments suitable for transfers of mortgages?

• What is the distinction between note ownership and entitlement to enforce a note?

• What is the impact of the comment to Restatement (Third) of Property (Mortgages) § 5.4 cmt a. (1997), which states, “When the right of enforcement of the note and the mortgage are split, the note becomes, as a practical matter, unsecured”?32

¶73        It seems wise, at a minimum, to call the legislature’s attention to the disparity that exists              between the recording statute and the modern-day electronic mortgage industry.

¶74  Although  the  outcome  in  the  instant  case  seems reasonable enough, I cannot join the majority opinion, whose ramifications stretch far beyond this case.

¶75        For the foregoing reasons, I write separately.

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