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john gault's Blog

MERS: Design or Unwitting Accomplice?
by john gault | 2011/03/24 |

A discussion of the machinations of the MERS' machine, the devolvementof its role as deed of trust placeholder, and the legally skewed actions of its members.  

john gault's Blog ::

I don't think in the final analysis it really matters if MERS intended to be a bad actor or to participate in unlawful actions by its members or not. Intent is not required as a matter of law for culpability.

The whole MERS concept is absurd. I'm not yet clear that it started out that way or devolved. I think the original idea to have members use its computer system as a data base for entries of sales of notes might not have been so tweaked and damaging had they stopped there. If there were any form of  diligence or ways to assure proper and complete entries by members, which there isn't, and most of which entries called for recordation of assignments of the deed of trust in land records when the beneficial interest in the note was transferred to a non-member like a trust had been followed, it wouldn't have been so bad, nor be indicative of actual intent.

Because the thing there is that the whole reason MERS alleged it was going to be useful to its members was to accomodate quick sales of promissory notes in the secondary market. The secondary market involves trusts and securitization, so really how did the data base accomodate anything other than ultimately hiding the owners of the notes? The assignments to non-members weren't recorded. Does this not undermine any argument that MERS was not complicit by design?

If one looks at MERS' membership rules and terms and conditions, etc. one sees that its isms are actually addressed more to servicers than anyone else. One of the big reasons I can think of for this is because the actual noteowners are not MERS' members. So what's MERS doing issuing memo's about property interests it's not even remotely connected to? Unless MERS' real corporate officers are deaf, dumb, and blind, they know these notes generally are securitized.

It appears to me MERS at some point collaborated in a scheme to allow the alleged servicers to run the show, with very little if any regard for the actual owners of the notes. Most of what I have seen of MERS' material concentrates on assignments of servicing rights and its memo's are directed toward servicers, not note owners.

Why do I say the system is absurd? For one reason because there is no governance of the voluntary entries made solely by the members into the MERS' data base. There is no diligence and can be no diligence. Entities with no real tie to someone's home can nonetheless make off with it. Might we pause a moment to consider what the big rush was to trade these notes multiple times, such a rush that recordation of the assignments in land records would thwart , even be the alleged death knoll for the business plan? It just doesn't read. In fact, it's lame.

Does this not point to intent and collusion among these players?

If ABC noteowner sells the note to XYZ, and ABC makes no (voluntary) entry in the computer data base of that sale, who would know? If XYZ sells the note into a pool but doesn't make an entry of the sale, who would know? Unfortunately, no one. "Garbage in, garbage out." Ish. There isn't even any interface with PSA's. I've actually seen one servicer tender a copy of a PSA in discovery wherein it purported to identify the subject loan only by loan amount and zip code. That same loan could have been sold into 5 trusts with that kind of 'identification', and actually,  this is true even if notes are properly identified in PSA's, REMIC's, SAMI''s, whatever. The point is, no one knows or can know if sales of notes are entered by the members or not. It's just difficult to believe that a system which could accomodate such a vast amount of shenanigans does so incidentally and not willfully.

The second reason I use the word 'absurd' is that MERS states in the deeds of trust or other collateral document that it is the nominee and also that it is the beneficiary. Which is it? If MERS had not planned to be conplicit in its members' actions, why call itself the beneficiary in the deed of trust? MERS was originally to act as a 'placeholder' to avoid recordation of the deeds of trust when sales of notes are made to members, not an intended beneficiary with any real interest in the note and deed of trust. MERS started off ostensibly as the 'nominee', and to hold that status as long as the note was owned by one member or another to obviate the need to record the changes in the land records by way of assignments of the deeds of trsut.  

This, however, gave MERS no cognizable interest in the deeds of trust - it was just a 'placeholder'. No jibberish can change that. If it had stayed the course and only acted as that placeholder for its members, not that bad, if one doesn't consider the lost revenue to recorders.

But, not satisfied with that, its members, who do everything regarding assignments and foreclosures (no true MERS' officer or employee -there are NO employees fyi -actually does any of that) in the name of MERS by way of their 'straw' certifying officers, saw 'opportunuty', got bolder yet, and decided to assert that MERS actually did have an interest in the deeds of trust by being named as nominee of the beneficiary (and as beneficiary itself, simultaneously) in the deed of trust. In other words, a system originally designed allegedly to have MERS be a placeholder to obviate the need for recordation of assignments to members, somewhere along the road allowed its members to assert MERS actually had a cognizable interest in the deeds of trust /mortgages.

This allowed servicers, also parties with no real interest in the notes and deeds of trust, to foreclose in the name of MERS without having to deal with the actual ownership of the notes and deeds of trust. In other words, people who had done no or sloppy paperwork – at a minimum - avoided their duties to properly demonstrate the chain and to foreclose, by hiding behind "MERS". For years these servicers or other entities foreclosed with impunity in the name of MERS, never having to produce anything, not even evidence they were the servicer. And, again, let's not forget that MERS computer records show only that which any member bothered entering. Whether or not what was entered had any basis in reality can only be speculative. No one would know. It isn't like MERS has some records to go compare its members' entries with - it doesn't. I don't know for sure yet how this deal devolved to members foreclosing in MERS' name. But at some point MERS acquiesced. They no doubt received more fees.

So, as I understand it, as it 'devolved', when a member wanted to foreclose in MERS' name, the member was to make some kind of entry in the MERS' computer system and pay the fee. As long as the member showed as the servicer (hopefully the records should have at least shown that member as the servicer, but remember that carte blanche thing) and paid the fee, MERS did not interfere. And as I also understand it, it didn't matter who owned the note. And as I further understand it, in order to foreclose in MERS' name, the servicer was tacitly implying to "MERS" that the member was in possession of the promissory note endorsed in blank, relying on an interpretation of the UCC that possession of a 'bearer' note provided legitimate right to enforce, with which I wholeheartedly disagree. The reason the servicer had to tacitly iimply possession of the note is because the servicer had an employee who was a straw / certifying officer of MERS; this, to MERS, equated possession by MERS of the note allegedly endorsed in blank and so the gospel according to MERS said MERS could foreclose, i.e., its member could foreclose in MERS' name.

By the way,  when a note is proferred which does not have all the endorsements on it, it is not a true and correct copy of the note unless enforcement is sought by the original payee on the face of the note, because when someone other than the original payee is attempting to enforce, there is necessarily at least one endorsement.  And sometimes a note is produced with no endosements and then later, usually much, another note (copy) is produced now showing endorsments.  It's never possible for a homeowner to tell if the endorsements are actually on his or her own note because when you only see a copy, the 'back' side of the last page, the one with the endorsements, is not attached other than with a staple to the copy of the note, and could easily be the back of John Smith's note for all we know.  

The servicer may have had (but likely did not have) possession of the note, but the servicer had no interest in the note and was not really entitled to enforce it in this writer's opinion, but that's another story for another day.

MERS would have no way of knowing if the member possessed the note or not, however. If servicers actually had possession of the notes, one might ask why. Notes are supposed to be held by the custodian of the trust, properly (key word) endorsed. Many notes were not properly endorsed . That's one reason 'they' don't want to produce them, even if they COULD locate them, and this is why I opine vigorously that deed of trust trustees are not being given proper evidence of anyone's right to foreclose.** But the point here the way I see it is that MERS allowed foreclosure in its name in return for fees, with no evidence that the straw certifying officer at the servicer's actually had such possession. Fortunately, albeit extremely belatedly (years, in fact), MERS has abandoned this baloney, i.e., allowing foreclosures in its name.

This whole MERS' schematic begged abuse if it weren't just plain collusive and abusive itself, which it appears to be. Maybe the MERS' president who recently retired wanted to do some sailing, or maybe he had enough of this and the attendant exposure. Retirement won't save him, however, if MERS ever faces charges for actions taken on his watch.   

MERS started out as the 'nominee' placeholder in lieu of proper recordation. MERS, rather its members, then became emboldened further and claimed MERS was their agent. There are two forms of agency- expressed and implied. Clearly the alleged 'agency' isn't expressed in any contract. MERS deliberately avoided that word and chose 'nominee' instead. An automatic assumption that nominee = agent is errant.

I believe there were 2 reasons for this. One, agency comes with liability. Second, on info and belief, MERS when originally formulated perhaps had no intent or idea its members would use MERS to foreclose. MERS was just to be a placeholder in the deeds of trust to avoid recordation, right? There was no reason to allege an agency until members starting doing things, like foreclosing in MERS' name. I don't believe that MERS' "implied' agency would be found in the governing documents, no way, no how. If it is, I haven't found it yet.

"Courts may look to intent in the formation of a contract", and as stated, I find no indication of agency intent in the MERS' contract; therefore it is not likely agency is implied.   

Had MERS intended to be an 'agent,. it coud have used that word. Mostly only attorneys who practice certain areas of law, generally contract law, understand 'agency', and so far, none of those attorneys have addressed this issue to my knowledge. When we don't use info learned years ago, we have a tendancy to forget it, and apparently this applies to judges, too. That's one way to look at some adjudications, anyway..........

Which brings me to the second reason MERS is absurd. Attorneys for MERS', which are by and large the same attorneys representing the servicers in the same litigation and thus actually make the arguments for MERS, have alleged in different litigations that MERS is the nominee one day, the agent another, and the beneficiary yet another. There does seem to be real potential for conflict of interest between MERS and members who have taken certain actions in MERS' name, so it is somewhat surprising that MERS and its members are still sharing counsel.

But let's assume arguendo that MERS is an agent of its members. That makes the member its principal, right? "Agency 101". Generally, in the principal - agent relationship, it is the agent who contractually 'does things' in the name of its principal or may bind its principal. Like a listing agent on a house, say. In the 'illusion' that is MERS, it is actually the members, or principals, who act in the name of the agent! It is the members who execute assignments of deeds of trust and command foreclosure in the name of the agent, MERS. This is not a cognizable relationship. It's bass ackwards. And members are actually assigning deeds of trust to themselves by using their own employees (or foreclosure mills) slash MERS straw / certifying officers to execute the assignments in the name of MERS.

Additionally, I have seen members actually allege to be the agents of MERS, in which case


Say what?

One way or another, when members take actions in the name of MERS, THE PRINCIPAL IS ACTING IN THE NAME OF ITS ALLEGED AGENT. 


So did MERS willfully design this mockery of the law? Or was it just an unwitting accomplice?

The fat lady isn't singing on MERS' complicity by and of its initial 'plan', which is to say there are factors supporting different conclusions, but surely the writing is on the wall as to a zillion subsequent actions.

** Posted here as "Trustees, Fiduciary, and Breach of Fiduciary"


3267 words | 2485 views | 5 comments | log in or register to post a comment

Ignorant and Arrogant!

Mr. Gault,

You make the point that, "It's just difficult to believe that a system which could accomodate such a vast amount of shenanigans does so incidentally and not willfully."

I fall along the lines that MERS was created to address a real problem. And MERS being the first iteration of "financial registry" reminds me of those old video news releases where man was attempting first flight in their newly designed flying machines. Each of the contraptions failed miserably!

I also believe that in the initial concepts of MERS no one anticipated the current magnitude of foreclosures. And with the latest existing and new home sale numbers the foreclosure tsuami may be greater than we currently envision!

I'm sure MERS and its members circled the wagons when this foreclosure breakdown began and they quickly realized that some of the MERS concepts you've articulate failed at law and in common sense. But they had to act and manage so as to protect the collateral backing the financial instruments and begin the foreclosure process. In the swiftness they adopted whatever methods seemed efficient at the time. I'll guarantee you there are many regrets!! And this is not to paint over deplorable and shameful acts with another hue. If fact, some of this may have been downright llegal.

My sense is "complicit" is more along the lines of "arrogance and ignorance". Anyone who has dealt with these big lender organizations knows this underlying sense of rightousness. It's obnoxious but these big wealthy, bailed-out corporations conclude their acts are morally justifiable because, after all, they were so important they have been preserved by our government. If the carelessness and recklessness of their ways heretofore didn't cause their demise how could it be that local clerical "t" crossing and "i" dotting could conceivably impede their importance to our American system? When the President, Congress, the Federal Reserve and central banks around the world breathed life into them how could it be, in their minds, that small individual foreclosure proceedings could stand in the way of their healing?

Once we're beyond this ignorant past, however, we have to deal with financial system securitization and its conformance with constructive notice requirements. We must build some kind of registry which allows tracking of interests in the financial instruments.

Mr. Donald Petersen, in another post wrote:

"The fact is that securitized "derivatives" (Mortgage Tranches) are NOT real property, and that sort of personal property interest has never been REQUIRED to be recorded in the public records in that they are considered to be "confidential" as to the participants.. Matters pertaining to the ownership rights of "paper" have always been the property of the Banks, the Stock Traders, and the Financial Industry. They have nothing to do with "Real Estate" per se."

It would seem to me that we need to "rethink" this entire connectivity issue of note ownership and the collateral instrument.

And I also think we're down to the very real question of whether we give operative effectiveness to foreclosure proceedings within the states or the Congress basically augments bail-out provisions by trumping any foreclosure methodology deemed contrary to the swift seizure of the collateral!

by Wyatt Bell | 2011/03/24 | log in or register to post a reply

Cut Mers some slack?

I guess what really gets me, from the hip, is the government's reaction to the 'crisis'.  And who caused the crisis?  Arguably it was Wall Street and its cronies. I remember, albeit vaguely, when discussion was under way about TARP.  I remember thinking, "NO! Don't give the money to the banks!"  Well, the money was given to the banks.  Then the banks were given more money for HAMP. Some kind of escrow account should have been set up for loan modifications instead of what turned into more carte blanche. When homeowners complained about failure to modify, the banks then audiously asserted there was no private right of action for the homeowner based on HAMP.  In other words, the banks said no, we're not modifying your loan and you have NOTHING to stand on to make us. The homeowners by and large have not benefitted from their own tax-supported funds, or manufactured currency, or whatever it was. How can this not get our goats? There are so many games being played on homeowners regarding loan modifications. Not all loans were liar loans.  (Besides that, if people charged with knowledge take advantage of idiot-sticks, those people should bear the brunt of the misdeeds.) Good and honest people are truly being impacted and manipulated by factors beyond their control.  Resolution has been placed in the hands of those with no motivation to help them.  In fact, motivation exists not to help them.  

Look, even if one espouses a view that homeowners shouldn't get a 'free' home, it's fair to say that the proper party should benefit then from the taking of that home.   I mean, aren't our own pension funds on the other end of that deal? And or but, weren't funds forked over to shore-up those accounts?Besides which, talk about 'free'....what the hey is a bail-out?

Some people believe that TARP funds have actually been removed from circulation in the United States to off-shore accounts.  If that is true, those people are not only criminials, they are traitors.

So the banks got the dough.  Some of that dough, again arguably, kept them afloat in the interest of the national if not global economy.  Some of that dough was to keep the citizenry afloat in the interest of that economy.  Mostly this is not happening.  For one thing, there are hoops to jump through not only for the borrower, but for the bank as well to modify a loan.  It'd be hard to modify a loan you don't own, right?  You can TAKE the collateral (relying on a combination of fictional tenets), but not modify. Hmmmmm.....

FNMA's website provides some alarming insight, for instance. From a cursory review, it appears the servicer or someone else has to first purchase the loan (now that's a good and interesting trick) and then when it's modified, FNMA won't take it back.  Oh, no! Portfolio lending! Isn't this what the B of A's, the Wells Fargo's, and the Aurora Loan Services got the TARP funds for? 

Borrowers were told they had to be in default for modification consideration.  I believe based on information including at FNMA's website that this was not true. People were induced to wreck their credit for no reason other than corporate greed.

One lawsuit in particular appears to articulate sound reasons banks should be held accountable for failure to modify, that HAMP created a right of action by the homeowner. I am loathe to give it any more attention because it has dodged the invariable motion to dismiss by the defendants, and I don't want to contribute to the plaintiffs dealing with 100 bank / servicer' attorneys instead of 10.  

The banks got theirs and more, but they don't want to help the homeowner still, even with 'gimme' funds that were intended to help the homeowner.

So, no, between the default swaps, the pool insurance, the bad faith, the failure of funding intended to help the polity, and the securitization issues,  I see no reason MERS should escape its participation in the biggest scam to come down the turnpike.  And of course, there's always the law to stand on.  What a concept!

These bad actors will probably escape unscathed while the plight of the average American becomes more desperate.  Just the frustration and disparity in light (or is it darkness) of an individual's ability to defend vrs the banks' is enough to give the banks a 10 mile headstart in a foot race. The American people are feeling oppressed, and rightfully so.

For the moment, I prefer to think that our own government's hand in this debacle was inadvertant, that the creators of TARP and HAMP and HAFA  meant the funds to assist the homeowner, and were not a guise for distributing more capital to Washington cronies.   

by john gault | 2011/03/24 | log in or register to post a reply

Financial Truth!

To buttress your argument, Mr. Gault, is the fact that the Commerce Department reported that U.S. corporate profits hit an all-time high in the 4th quarter of 2010 at $1.68 trillion profit!

The rub is nonfinancial companies saw profits drop $10 billion attributing all of the largest profits in history to financial firms!! Domestic profits at financial corporations increased by $57.7 billion! And General Electric with $14.2 billion pays no tax for 2010!

New home sales have fallen 82% from their 2005 peak. They just hit their all time low last month. Existing home sales have been on a downward path since expiration of the tax credit.

It's pretty obvious that foreclosure moratoriums, HAMP, TARP and other methods of saving the housing market have only rewarded the financial community. And quite handsomely at that.

Let's obligate ourselves to save the financial sector so they may, in turn, save us!!

I'll bet Bernanke and his financial commissar brethren are pouring the champagne! They're  looking in the mirror and patting themselves on the ass marveling at how wonderfully successful they've been! You can't argue with those profits!!

by Wyatt Bell | 2011/03/26 | log in or register to post a reply

Promissory Notes are Personal Property, as well

Mr Wyatt cites Mr Peterson for the proposition that derivatives are personal property and those ownership rights are or have been confidential. While I don't know where this is written, I'm no expert on derivatives that's for sure, or if it has just been by custom, one might accept this as true.  

Promissory notes are personal property, also,  and likewise don't get recorded in public records.  But deeds of trust are the collateral instruments for those personal property notes, at least the ones in issue here, and the recordation of those collateral instruments has always existed, including assignments, prior to 'MERS', i.e., public record.  The deeds of trust constitute an interest in real property, and real property interests do not get recorded at the peril of those with the interest.   For instance, Nevada has a statute which addresses unrecorded interests in real property:

NRS 111.315  Recording of conveyances and instruments: Notice to third persons.  Every conveyance of real property, and every instrument of writing setting forth an agreement to convey any real property, "or whereby any real property may be affected" (my emphasis), proved, acknowledged and certified in the manner prescribed in this chapter, to operate as notice to third persons, shall be recorded in the office of the recorder of the county in which the real property is situated or to the extent permitted by NRS 105.010 to 105.080, inclusive, in the Office of the Secretary of State, but shall be valid and binding between the parties thereto without such record.

      [24:9:1861; B § 252; BH § 2593; C § 2663; RL § 1038; NCL § 1496]—(NRS A 1995, 891)

The third persons referred to in this statute include the homeowners. I would think other states have mirror statutes. 

If derivative owners want anonymity, which I am not at all clear is the case - it seems it's others who want that anonymity for their own reasons - they might find other derivatives, investments, not investments secured by an interest in real property.  

I recognize the potential for fractional interests and the attendant paperwork, but that does not change the law nor should it be the homeowner's problem.  The homeowner didn't make that business plan. Someone altogether different did.






by john gault | 2011/03/26 | log in or register to post a reply

re Financial Truth

So much for the middle class. ......If I had only been born an ignorant, arrogant, self-serving narcissus, I could be sitting on my yacht guzzling mojitos.  

by john gault | 2011/03/26 | log in or register to post a reply
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