Shut Down MERS

Representative Marcy Kaptur (Ohio) will introduce legislation to prohibit Fannie and Freddie from buying new mortgages that are registered by the Mortgage Electronic Registration System (MERS). She has said that “It was invented by the most powerful financial players in the country while regulators were asleep at the wheel”. That is a charitable interpretation—the regulators were actually cheerleaders for the fraud that destroyed our financial system and our economy. She is right: it is time to make amends, and shutting down MERS is a step in the right direction. Since there is virtually no activity in mortgage markets save what Fannie and Freddie are guaranteeing, her bill will undoubtedly spell the end to the fraud that MERS permits and even promotes. MERS was created to defraud county government of mortgage recording fees—to the tune of many billions of dollars. Mortgage securitizers did not want to pay a fee each time a mortgage was resold, so they created MERS. The working theory was that MERS was the legal holder of mortgages, so that resales were merely transfers among members of MERS and hence there was no need to re-record the mortgage and pay a fee to the county. MERS claims to be the mortgagee of record, holding the mortgages for its members. That also means it has the legal standing to foreclose on delinquent borrowers. There are numerous problems with this arrangement. I know that I am harping on an “inconvenient truth” that MERS and the banks wish would go away, but the scandal surrounding MERS ranks up there with the worst scandals that have come out of the current financial crisis, that is to say, these are the worst scandals in human history. Nothing less than the right of private property hangs in the balance. MERS is clearly a front, basically a post office box for fraudsters. It has no employees, and its parent MERSCORP has roughly fifty employees, according to Yves Smith (, to handle the 66 million mortgages it claims to hold. It “deputizes” member bank employees as “Vice Presidents”, empowered to sign documents and to enter data into the electronic registry. With only 50 employees to oversee the mortgage activities of virtually every lending institution in America and 60% of all mortgages in the country, it is clear that oversight of those designated to handle the mortgage documentation is at best minimal. According to R.K. Arnold, president of MERSCORP, MERS has over 20,000 signing officers—400 per employee of MERSCORP. These officers, in turn, mostly work for mortgage servicers and foreclosure specialists. According to Yves Smith, MERS claims that it is not responsible for the accuracy of any data supplied by these signing officers. In a surreal deposition, Arnold says that the system essentially acts like an “electronic handshake”, with buyer and seller mutually agreeing that a transaction has taken place. There seems to be no control, no oversight, no auditing of these “handshakes”—not surprising given that MERSCORP staffing is not sufficient to verify any of the data. Indeed, Arnold admitted in the deposition that MERS does not track transactions, and that any user could go in and “update” any data. MERCORPS appears to have no more than 16 employees working on audits and quality reviews. Yves Smith concludes that “authentication is essentially non-existent” so that MERS's operation is “a real collusion enabler” since “just about any set of transfers could be input and confirmed by two parties” (whether or not they ever occurred), so “there is nothing here which would make a chain of transfers evidentiary of anything”. In other words, just because MERS has recorded the sale of a mortgage does not indicate that the sale ever occurred. Purported owners of mortgages may not own anything. That would be an interesting piece of information to remember when one of them is trying to claim your home. And that is a big, big problem. To foreclose on a home, you've got to prove that you are the creditor—the party of interest. Foreclosers are trying to use MERS as evidence that they bought the mortgages, fair and square. But MERS is so sloppy and open to fraud that there is no reason to believe that the purported owners of the mortgages ever bought them. And it gets worse, as I have argued in previous blogs. It is not enough to own a mortgage. In 45 states you must have the wet ink signed note. MERS sought to circumvent that with electronic entries. Aside from the obvious problems with its lack of internal controls, US law has long held that notes are necessary, and that they cannot be detached from the mortgages. Ownership of a mortgage, alone, does not convey the right to foreclose. MERS does not hold the notes. Indeed, it appears that most notes were separated from the mortgages, and that the notes were never transferred with the mortgages. For all we know, most notes are still with the mortgage brokers, many of whom went bankrupt. For example, Countrywide has admitted in court that after 2004 it did not bother to convey the notes to the trusts responsible for holding the mortgages backing up securities. As Yves Smith reports, Countrywide securitized 96% of its mortgages, and a top Countrywide official has testified that it was customary for Countrywide to retain the notes of the securitized mortgages. ( That, too, is a big, big problem. Without the notes, there is nothing underlying the securities. A mortgage without a note does not give the investors in the securities standing to foreclose. In other words, as Yves Smith says, these were not “mortgage backed securities”—rather they were unsecured debt. And that means that the securities were misrepresented to investors, and must be taken back by the originating banks. We are talking about hundreds of billions of dollars of problems. And that is not the end of it. Mortgages were typically securitized and pooled in a Real Estate Mortgage Investment Conduit (REMIC) that would hold them in trust. Done properly this allowed them to take advantage of an IRS tax exemption. However, to avoid the county recording fees, MERS claimed to hold the mortgage loans so that it could allow them to be traded without paying the fees and filing the paperwork. But if MERS was holding them, how could they be in the REMIC trust? Clearly, if MERS is the mortgagee, then the REMIC cannot be holding the mortgages and notes. The IRS code is very strict—the paperwork must be conveyed to the REMIC. There must be a clear paper chain of title through the securitization and sales. Without the paperwork, the securitizations may not be legal, and could subject investors to back taxes and penalties. MERS does not have procedures in place to demonstrate a clear chain of title. It does not have the notes. It perpetrated fraud on counties when it evaded recording fees on the erroneous “theory” that it held the mortgages. It helped to perpetrate tax fraud by the REMICs. It is helping to commit foreclosure fraud, fueling the “Robo-signing” to create a chain of title to allow illegal seizure of people's homes. Representative Kaptur's bill ought to be supported. Time to shut down MERS. Oh, and happy Thanksgiving to you and yours. I have a fervent wish that we restore the rule of law to America by putting the banksters and fraudsters behind bars. Start with MERS and work our way up to the investment banksters.
L. Randall Wray is a Professor of Economics, University of Missouri—Kansas City. A student of Hyman Minsky, his research focuses on monetary and fiscal policy as well as unemployment and job creation. He writes a weekly column for Benzinga every Thursday.

He also blogs at New Economic Perspectives, and is a BrainTruster at New Deal 2.0. He is a senior scholar at the Levy Economics Institute, and has been a visiting professor at the University of Rome (La Sapienza), UNAM (Mexico City), University of Paris (South), and the University of Bologna (Italy).


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