MERS: Genius, Shell Game, or Invitation to Fraud?

From Rockwell P. Ludden, Esq. of the Ludden Kramer Law firm, by way of

One of the first challenges facing the industry was to decide the capacity in which MERS would hold the mortgage. Should it do so as the mortgagee—which, in Massachusetts would be the owner of legal title to the secured property—or should it do so in a representative capacity?

Then, too, there was the question of the note itself. If MERS were to act solely on the lender’s behalf, should it have the authority to assign both the mortgage and the note, and perhaps even to
foreclose the mortgage? And what if it were to do so in its own name; might this not be yet more efficient? There were several possible roles, and each of them came with its own benefits and
shortcomings. It seemed, though, that the benefits of one tended to offset the shortcomings of another and that they might best work in combination with one another. Hence it was around this
idea of multiple roles that MERS began to take shape. It was as revolutionary as it was original, much like a shell game in which every shell conceals a pea.

The problem lies not so much with the idea itself but with the fact that every effort to place the MERS model within the framework of existing law reveals itself to be something we might have expected from Procrustes, that rascally giant of Attica given, as he was, to seizing travelers and either stretching them or cutting off their legs in order to make them fit in his iron bed. The down-side is that many courts have satisfied themselves with the fact that there is a pea to every shell and have not bothered to question the legality of the game itself; they have, in other
words, simply taken at face value the MERS model’s own profession of validity. And yet, a mere inconvenience to the industry does not entail the right to ignore well-settled principles of law and equity or the reasoned analysis by which we expect those principles to be applied. Nor does it entail the right to make an end run around a legislative and democratic process already imperiled by the opacity that pervades the MERS model in its present form.

A “continuity” made of smoke and mirrors. In the MERS model, the mortgage doesn’t pass by assignment from one owner to the next by formal assignment; in fact, it really doesn’t pass at all,
at least not in any ordinary sense that would involve time and a sequence of events. Rather, in the Mersian world there is a kind of simultaneity of time and event in which all ownerships of the
mortgage exist ab initio by virtue of the MERS membership agreement and do not have to be independently established. It is very much a framework of interrelationships in the form of a venn
diagram. Let’s say that a particular mortgage changes hands three times before it is foreclosed—which would mean a total of four owners. And let’s use a circle to represent each of the four
owners. In the MERS model, these four circles are arranged symmetrically so that each one overlaps the other three in equal measure to form a common area at the center. That common area is MERS acting, as Arnold has said, as a “common agent” with respect to that mortgage. Because each owner is already tied conceptually to the mortgage, there is no need for an assignment and MERS, in its capacity as agent, may therefore simply remain the mortgagee of record at the local land office. Indeed, the MERS model is in many ways quite elegant. But the complex and recondite nature of the thing has served well to obscure its falsity under well-settled principles of agency and contract law.

There is a point about which we must be very clear from the outset, and it is one that has been overlooked in a number of foreclosure cases: what is “common” to MERS members is the
use of MERS as their agent—not the ownership of the mortgage itself. Membership in MERS cannot and does not establish a joint ownership of the mortgage. Given the functional identity
between principal and agent and the fact that MERS is acting in a representative capacity, ownership of the mortgage must still pass from Lender A to Owner B regardless of whether or not they
happen to be using the same agent. The same principle would apply to any subsequent transfer, as, say, from Owner B to Owner C, all the way down to the foreclosing entity. There is no legal authority in Massachusetts that stands for the proposition that the mere use of a common agent serves to transfer ownership of the mortgage with regard to which the agency has been established.

Putting absurdity aside, let us nonetheless assume for argument’s sake that the opposite is true. There is yet a further problem: the MERS model, like our venn diagram, is spatial, but the twin realities of ownership and representation are both spatial and temporal; thus the MERS model is unavoidably static, while the transactional reality it seeks to control is dynamic. Stated
less abstractly, before MERS can represent Lender A with regard to the mortgage, Lender A must in fact own the mortgage. The point is elementary and applies in equal measure to all subsequent
owners: the ownership of the mortgage by the principal must precede, in time, any authority the agent may have to act with regard to that mortgage. This follows from the well-settled principle that an agent cannot do what the principal herself cannot not do.

However, the MERS model turns the reality on its head by asserting that ownership of the mortgage passes without the need
for an assignment precisely because the agency relationship was established first in time via the MERS membership agreement.

A somewhat overlapping problem is this: In the MERS model, there is again no need for a written assignment anytime the mortgage changes hands—unless the mortgage is going to be
foreclosed by someone other than Lender A or removed from the MERS system. An unavoidable side-effect of this is that Lender A remains the mortgagee of record at the local land office, albeit
with MERS acting on its behalf. In other words, the clear implication is that Lender A’s status as mortgagee at the local land office somehow survives the multiple transfers of the note that take place along the road to securitization. But MERS cannot have it both ways: the MERS model is designed in its own way to tie ownership of the mortgage to ownership of the note—which means that once Lender A has sold the note it has no further interest in the mortgage and its continuing status as mortgagee in the land office records is at best a negligent misrepresentation and at worst an act of fraud. It is also in any event a breach of the complete transparency required under G.L. c. 244, § 14.35 This “personality disorder” has a further consequence as well.

Because Lender A remains the mortgagee of record, any subsequent assignment of the mortgage must name Lender A as the grantor in order not to memorialize a discontinuity in the
chain of ownership and thus cast a cloud on the title; if Lender A (with MERS as it agent) is the mortgagee of record there cannot be an assignment from the true present owner of the mortgage,
say, Owner C. And here we meet the same conundrum: if we accept the validity of the “common agent” device by which MERS avoids the need for assignments, Lender A no longer owns the
mortgage and has nothing left to assign; thus an assignment directly from Lender A is also at best a negligent misrepresentation and at worse an act of fraud. Its failure to name the true grantor would be contrary to existing law. If the assignee happened to be a part of the mischief, it would further diminish her authority to foreclose the mortgage. Again, the assignment would violate the statutory requirement of transparency. It is upon this bedrock of sober fact that the mortgage industry and registry officials must weigh the integrity—and indeed the legality—of every recorded assignment directly from MERS as nominee for the originating lender to the foreclosing entity in a case where there have been interim owners.

There is yet another wrench in spokes of the MERS model. Even if the “common agency” mechanism could somehow allow Lender A’s role as mortgagee to survive multiple transfers of the note on the secondary market, and if, as Arnold has said, the mortgage follows the note, the agency relationship vis-à-vis the mortgage ends when the note is transferred; like Lender A’s status as mortgagee, it cannot survive the transfer. This owes itself to a few basic principles of agency law. Without an interest to assign, the agency relationship between MERS and Lender A that was established in order to act with regard to that mortgage interest necessarily ends; Lender A’s circle is in effect removed from the Venn diagram previously mentioned.

What has happened is that the purpose for which the agency relationship was created no longer exists with regard to that particular mortgage; there has been “an occurrence” the effect of
which is to terminate the agent’s authority. Once the originating lender, Lender A, has divested herself of her interest in the mortgage, she can no longer be the mortgagee and therefore MERS can no longer act as mortgagee on her behalf vis-à-vis that mortgage. Notice of the termination need not be expressly given to MERS; rather its actual authority “may terminate upon the occurrence of circumstances under which the agent should reasonably conclude the principal would no longer assent to the agent’s taking action on the principal’s behalf. If the principal has engaged the agent for a particular task, its completion is such a circumstance.”Surely, MERS, with its sophisticated tracking system, is presumptively aware of any termination.

The persistence of MERS as Lender A’s agent in the public record in effect accomplished with smoke and mirrors—and it conjures a host of evils. Yes, every MERS member establishes
its own agency relationship with MERS. But immediately upon transfer of the mortgage from
Lender A the agency relationship between MERS Lender A ends. The agency between MERS
and Owner B is in fact a new and distinct agency relationship—and, given the functional identity
between principal and agent, a new and distinct “MERS” as well. Again, in the absence of a
valid assignment, the status of MERS as the mortgagee in the public records becomes a misrepresentation
of material fact at the very instant the mortgage is assigned by Lender A, and from that
point on the mortgage industry is, in effect, using a ghost to do its bidding—and one of dubious
character at that. Only the name “MERS” remains; the “continuity” is a chimera, an illusion, the
purpose of which is to make an end run around the need for a formal assignment. It has also
served as a red herring, distracting courts from the sober fact that the role of MERS as a “common
agent,” for all of its theoretical elegance and self-proclaimed validity, simply cannot in its
present form be fit into the framework of existing law without inflicting collateral damage upon
the very principles of fairness and transparency on which that framework has been built over
many years and through many efforts and sacrifices.

What this all boils down to it this: in order for MERS to remain the mortgagee of record
at the local land office without fraudulently misrepresenting itself as such three things must occur.
First, since an assignment of mortgage is a conveyance of an interest in land that requires a writing
signed by the grantor,41 there must in fact be an assignment of the mortgage from Lender A to
Owner B. If the public record indicates that the mortgage is being held by MERS on behalf of
Lender A, the assignment must be from MERS on behalf of Lender A. Second, the assignment
must make clear that the mortgage will be held by MERS in its capacity as agent for Owner B;
that is, it must say something to the effect that “MERS, solely as nominee for Lender A, hereby
transfers its interest in the mortgage to MERS, solely as nominee for Owner B.” This distinction
is not an easy one to draw, but it is essential to knowing the substance of the transaction. And
third, to avoid discontinuity in the land office records and allow for proof of ownership in the
event of foreclosure, the assignment must be recorded. The same would apply to a subsequent
transfer from Owner B, and so forth all along the chain of ownership.

That’s only a few excerpts up to page 14 and there are a total of 42.

Mers Paper

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