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Another Potential Hidden Risk Posed by MERS?
Slade Smith

Investors who have risked trillions of dollars in MERS mortgages may see their ownership interests in those mortgages jeopardized in the event of a MERS bankruptcy, according to a law review article written by three University of California professors.

The article, entitled "All in one basket: the bankruptcy risk of a national agent-based mortgage recording system", written by law professor John Patrick Hunt and business professors Richard Stanton and Nancy Wallace, explores the risks to mortgage investors posed by a MERS bankruptcy-- a threat that the authors say is very real, given the many public and private lawsuits against MERS. 

According to the authors, the MERS business model rests on an implicit assumption that if MERS were ever to go bankrupt, the mortgages in MERS's name would not enter the MERS bankruptcy estate.  If this assumption turned out to be false, the results could be catastrophic to investors, as the bankruptcy trustee could claim those mortgages for the benefit of MERS's creditors.  Yet there is little indication that this possibility was considered when MERS was created.

The authors claim that there are "straightforward" legal arguments that this assumption is indeed false.  They say that if MERS were to enter bankruptcy, the bankruptcy trustee could bring into the bankruptcy estate any real property interests that MERS could convey to a bona fide purchaser. According to the authors, mortgages registered in MERS's name are real property interests-- in fact, MERS has claimed that it has a real property interest in MERS mortgages in many court cases.  "[A] court could properly find that MERS, Inc. could convey [its interests] to a bona fide purchaser," the authors claim. 

MERS's ability to convey real property interests is key, say the authors.  Even if MERS were determined not to be the true or beneficial owner of the mortgages, it's still possible that the mortgages could be brought into the bankruptcy, because many bankruptcy courts have ruled that "the trustee takes whatever real property interests the debtor could convey, regardless of what the debtor owns,” according to the authors.

Ironically, the authors see drawbacks in MERS's largely successful track record in litigation defending its business practice, because in these court cases MERS has had to assume a role much greater than that of a simple mortgage registry.  To successfully pursue foreclosures, MERS has had to convince the courts at various times that it has the right as an agent of the lender to do pretty much anything which the lender could do, particularly with regard to conveying mortgages.  These expansive assertions of rights and powers increase the risk that if MERS were to enter bankruptcy, MERS mortgages would enter the bankruptcy estate.

Also ironic is that MERS was created to facilitate mortgage assignments that are designed to offer mortgage investors protection from bankruptcy proceedings.  The series of assignments that transfer a mortgage from its originating lender into a "special purpose vehicle" (SPV) for securitization are intended to create "bankruptcy remoteness"-- protection for investors from lender bankruptcies or the bankruptcies of any institution along the securitization chain.  So while MERS may assist in removing one bankruptcy risk to investors, it may be creating another.

MERS is often presumed to have little in the way of assets, and lawsuits against MERS often attempt to get at the "deep pockets" of MERS's member banks.  But the idea that MERS mortgages could be attached in a MERS bankruptcy could increase the likelihood that MERS's creditors could try to force MERS itself into bankruptcy to try to get at MERS mortgages as a strategy of getting paid.

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What a twist on this mess that would be!  It IS equally interesting that "MERS" has made so many different arguments about who it is in different litigation, including MERS v Nebraska Dept of Finance to avoid licensing wherein it disavowed any interest in anything.  That certainly stands in stark contrast to claims in other litigation.   

It's my understanding that much more often than not, the member was compelled to bear the expense of litigation against a homeowner. In most of those cases,  it was the member's hired attorney making the arguments in MERS' name in defense of actions taken by the member in MERS' name.  But with all the class-action suits now, MERS most likely is incurring the costs of defense and I suppose that's getting right up there.   

But really, MERS inarguably has no interest in the debt obligation, despite the fact that millions of assignments of the collateral instrument done in MERS' name purport to assign the note as well.  Even a bk trustee with the bona fide interest powers couldn't get at the debt. But then again, a court might actually find otherwise based on the routine purported assignment of the notes, the debt obligation, by MERS.     

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