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john gault's Blog

A Look at Foreclosure Post-MERS' Consent Order
by john gault | 2012/05/05 |

Since MERS entered the Consent Order with the U.S. Dept of the Treasury in April of  2011, its  members may no longer foreclose in MERS' name.  This material looks at how the members are dealing with this situation.  

john gault's Blog ::

"Let's start at the very beginning. A very good place to start."

"The language in the dot appears to grant MERS the right to foreclose; Millions
of foreclosures were done up until mid 2011 in MERS' name. In April
of 2011, MERS entered into a Consent Order with the Dept of the Treasury.
Thereafter, MERS issued a mandate to its members for no more foreclosures in
its name. 
MERS is named the beneficiary as nominee of the lender in the deed of trust.
What is not seen in that document, but is controlling nonetheless, is other
language in another document: the MERS' membership agreement. In that
agreement, MERS and the member agree that a member may foreclose on the
deed of trust in MERS' name if the member has possession of the note. 
Note that's two things, not one. In all the foreclosures done in MERS'
name pre-MERS' Consent Order, the member tacitly implied to MERS that
it had possession of the note.  That's it. 
End of the story as to written documentation concerning MERS which defines
foreclosure rights.

So what's wrong with this picture? 

1) The member had agreed in the membership agreement
that it would only foreclose in MERS' name if the member is in possession
of the note.  The right to enforce the note is the most dispositive issue
in a foreclosure action.  How does / did MERS know a member had a note?
How did MERS know to whom it was payable?  Based on my understanding of
their operation, MERS didn't. Apparently it was an 'honor system',  just
as entries by members of sales of notes into MERS' database is an honor

2) MERS is named the nominal beneficiary in the dot.  MERS' members
have (post-Consent Order) alleged that that status is a de facto agency.
It's my understanding there is no such thing as a de facto agency when it
comes to real property. The expression and intent of real property agency
may not be implied; it must be clearly articulated. But even so, if MERS
is an agent, than the member is the principal.  The plan was to allow
the principal / member to act in the name of the agent / MERS,  rather
like, well, a club.  Principals don't act in the name of the agent
(agents act in the name of the principal). I am at a loss to see how
this relationship can be legally justified and I'm also at a loss to
understand why it has stood for so long.

This is (one of) the largest flaws imo of the MERS model: the
principal is acting in the name of its alleged agent. Agents act
in the name of the principal and not the other way around. This legal
tenet is not peculiar to MERS - it's Agency 101. A duly appointed agent
may bind its principal; principals do not bind agents.  If the true
beneficiary were first named as such in the deed of trust, with MERS
then being appointed the agent of the beneficiary, and if MERS actually
had employees to execute documents (which would remove the straw man
issue raised below), the relationship between MERS and its members
wouldn't strike such a dissonant chord.  

3) Did the members have possession of the notes? Who's to say? The
problem with that question is its answer, which is that no one would
know. MERS had no way to assure compliance. Based on the rash of
'missing note' affidavits filed in subsequent litigation when possession
was actually challenged, it isn't unreasonable to question whether or
not those foreclosing parties actually had possession of the notes in
prior actions. 

In 2011, MERS entered the Consent Order and thereafter issued its
mandate to its members: no more foreclosures in
its name. Problem is, in addition to providing relief from the time
and expense of recording assignments in county land records, the MERS'
operation was structured around foreclosing in MERS' name. In my
opinion, it's really necessary to understand this, the basic,
original m.o., that is, the MERS' foreclosure function and what
unforeseen changes the Consent Order has has occassioned.  

"NOW WHAT TO DO?"  If the paperwork weren't done, including
the assignments of the deeds of trust and the endorsements on the
notes on their way to securitization, who is going to foreclose now
that foreclosures may not be done in MERS' name? 
Further complicating the matter is the fact that many of the entities
whose assignments and endorsements were neglected are out of business.

The "what to do" answer has been to have the members assign the dots
in MERS' name by way of the members' or even non-member MERS' officers. Some of the
members have argued that the dot follows the note, for which they assert possession, and maintain that the assignment of the deed of trust is superfluous. A deed of trust, however, unlike a note which is generally regulated by the UCC, is regulated by the statute of frauds which requires real property interests to be in writing. 
A note without a proper assignment of its collateral deed of trust is an unsecured one.  Unfortunately some investors who thought they were purchasing mortgage-backed securities find themselves with no collateral, and this unfortunate fact can only
be the result of other parties' complacency and dereliction. The
homeowner, likewise, had nothing to do with this business plan. 

Which brings me to legitimate question 1, one which begs an answer,
and which answer is long overdue.  Is a member' employee a
MERS' officer?  MERS has appointed over 20,000 of these officers at
its members and elsewhere. These appointees execute the assignments of the deeds of
trust from MERS to members, generally to the appointee's actual employer or to the party who has hired them in the case of a law firm employee-appointment.

Many of those active in foreclosure defense refer to these appointees by
the common parlance "straw officers". A straw man is generally defined
as "a front for somebody, someone who acts for another for the other's
questionable and even illegal activities". Is this an unfair
description of the 20,000+ officers appointed by MERS at its
members? In this particular instance, it's difficult to separate the
appointment from the reason for and the gravity of the appointment.
MERS has no employees to execute the millions of documents executed
in its name. Are member' employees the proper people to do so? Are
they MERS' Officers?
They don't work for MERS, they're not paid by MERS, they don't show
up at MERS' offices to report for work or attend meetings. Their
sole "MERS" function is to execute assignments and other documents
in MERS' name at the behest of their true employers. Does this arrangment
actually comport with the law? Whether or not it should be influential,
it can't be forgotten that we are talking about the largest and most
significant asset most of us will ever have - our homes.

Is an assignment of a deed of trust to one's employer in the name of
MERS a legitimate assignment?  Most courts are not apprised that these
assignments are self-instigated and self-executed assignments.

Since "MERS" foreclosure mandate, apparently the members have decided
it's the only thing they can do to try to establish rights under the
deeds of trust: the assignments are going right from the alleged nominal
beneficiary to the trust or loan servicer by way of servicer-employee
or law firm executions. I don't believe these assignments are legitimate.  Even if
the assignments were actually, literally, executed by MERS, there's
still plenty of room for doubt that anything would be conveyed. 
First of all, MERS has no authority to execute an assignment. Secondly,
MERS is at best a nominal beneficiary for public record and nominal
anythings have nothing to assign, having no real interest. MERS
itself has made it perfectly clear it has no real interest; MERS says
it merely holds legal title to the interest of another.
MERS might appropriately relinquish its nominee status by quit claim,
but the true beneficiary is the only one who may assign its interest.
That it isn't done strikes me as fatal to the enforcement of these
collateral instruments, a fact courts of equity grapple with daily.
However, the bottom line is that the mandates of the statute of frauds,
which regulate interests in real property, are not open to equitable
considerations, which is generally implemented only in the absence of
existing, controlling law.  
MERS' nominal status in public record didn't change the need for
assignments by the true, not nominal, beneficiary, even if
the assignments were to remain unrecorded pending the need for
enforcement or the time to get them recorded.
But, since foreclosures may not be done in MERS' name any longer,
which schematic was at the very heart of the MERS' m.o.,
and that which had to be done appears to not have been done, what
else are the members to do?

The original plan was to enforce the deed of trust by MERS' members
in its name. Now that that is no longer available, another schematic
has taken its place: the self-assignment of the collateral instrument,
the deed of trust, by members in MERS' name.

MERS' members now wish to rely on the very same legal tenets, those
found in the UCC, which they eschewed for one reason or another in their
rush to the big bucks. The provisions of the UCC, not to mention
Trust Law, which would define the real owners of these notes appear to
have been of no moment to them when dealing with loans on the way to
securitization. Was this as rampant as now reported? Hard to say, but
many, many instances of noncompliance have certainly come to light and are the topic of many lawsuits. .
These actors nonetheless rely on the UCC now, specifically
possession of bearer notes, when it allows them to take collateral.
Even if the law provides for enforcement by one in possession of a
bearer note, that possessor, in the absence of (all the) legitimate
assignments of the dot, has no more than an unsecured note.  No where
in the history of this country has one party's right to affirmative
defenses been so negated and sadly, for many homeowners, overlooked.

The real facts surrounding this securitization scheme, and I believe
that's an appropriate description,  has lead to an unprecedented
economic and moral morass in our country's history. If my assessment
of this situation is accurate, the good men and women of our judiciary
have a lot of work to do. They appear to be the last bastion, charged
with the task of sorting out and dealing with this horrendous maelstrom,
a task none of us can envy.

I don't believe the assignments currently being executed in MERS'
name are legitimate, and certainly not when they purport to assign the
promissory note, as well.  Is there another way? I don't know.
Maybe there is. Financial obligations have to be taken seriously.
No one would argue otherwise, but it's very difficult to have sympathy
for an industry which willfully operated with its eyes wide-shut
and which continues to spurn the implementation of the billions of
HAMP and other program dollars intended to help Americans retain
their homes after getting its own trillion dollar bail-out.    

Rockwell P. Ludden has written a more lengthy and detailed missive
regarding MERS, and while I don't agree with everything he opines, I
think it's worth a read. It can be found here:   




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