HuffPostBusiness

L.RandallWray
ProfessorofEconomics
andResearchDirectorof
theCenterforFullEmployment
andPriceStability,University
ofMissouriKansasCity

NewYork'sU.S.BankruptcyCourtRulesMERS'sBusinessModel
IsIllegal
Posted:02/16/20114:11pmESTUpdated:05/25/20116:30pmEDT

UnitedStatesBankruptcyJudgeRobertGrossmanhasruledthatMERS's
businesspracticesareunlawful.Heexplicitlyacknowledgedthatthis
rulingsetsaprecedentthathasfarreachingimplicationsforhalfof
themortgagesinthiscountry.MERSisdead.Thebanksareinbig
trouble.Andallforeclosuresshouldbestoppedimmediatelywhilethe
legislativebranchcomesupwithasolution.
ForsomeweeksIhavebeenarguingthatMERSisperpetratingforeclosure
fraudallacrossthenation.Itsbusinessmodelmakesitimpossibleto
legallyforecloseonanymortgagedpropertyregisteredwithinitssystem
whichincludeshalfoftheoutstandingmortgagesintheUS.MERSwas
afraudfromdayone,whosepurposewastoevadepropertyrecordingfees
andtosubvertfivecenturiesofpropertylaw.Itschickenshavecome
hometoroost.
WallStreetwantedtotransformAmerica'shousingsectorintothe
world'sbiggestcasinoandneededtounderminepropertyrightstomake
iteasiertorunthescam.Thepayoffswerebiggerforlenderswhocould
inducehomeownerstotakemortgagestheycouldnotpossiblyafford.The
mortgageswerepackagedintosecuritiessoldontopatsyinvestorswho
weredefraudedbythe"repsandwarranties"falselycertifyingthe
securitiesasbackedbytopgradeloans.Infactthesecuritieswerenot
backedbymortgages,andinanycasethemortgagesweresuretogobad.
Giventhathomeownerswoulddefault,theWallStreetbanksthatserviced
themortgagesneededaforeclosuresteamrollertoquicklyandcheaply
throwfamiliesoutofthehomessothattheycouldberesoldtoserveas
purportedcollateralforyetmoregamblingbets.MERStheindustry's
creationsteppeduptotheplatetofacilitatethefraud.Thejudge
hasruledthatitspracticesareillegal.MERSandthebankslose;
investorsandhomeownerswin.
Here'sMERS'sbusinessmodelinbrief.Realestatepropertysalesand
mortgagesaresupposedtoberecordedinlocalrecordingoffices,with
feespaid.Withtheriseofsecuritization,eachmortgagemightbesold
adozentimesbeforeitcametorestasthecollateralbehindamortgage
backedsecurity(MBS),andeachofthosesaleswouldneedtobe
recorded.MERSwascreatedtobypasspublicrecording;itwouldbe
listedinthecountyrecordsasthe"mortgageeofrecord"andthe
"nominee"oftheholderofmortgage.MembersofMERScouldthentransfer
themortgagefromonetoanotherwithoutallthetroubleofchangingthe
localrecords,simplyby(voluntarily)recordingtransactionsonMERS's
registry.

Amortgagehastwoparts,the"note"andthe"security"(nottobe
confusedwiththeMBS)or"deedoftrust"thatisusuallyjustcalled
the"mortgage".TheideabehindMERSwasthatthe"note"wouldbe
transferredfromsellertopurchaser,butthe"mortgage"wouldbeheld
byMERS.Infact,MERSrecommendedthatthe"note"beheldbythe
mortgageservicertofacilitateforeclosures,butinpracticeitseems
thatthenoteswereoftenlostordestroyed(whichiswhyallthose
BurgerKingKidswerehiredtoRobosign"lostnoteaffidavits").
Ateachtransfer,thenoteandmortgagearesupposedtobe"assigned"to
thenewowner;MERSclaimedthatbecauseitwasthe"mortgageeof
record"andthe"nominee"ofbothpartiestoeverytransaction,there
wasnoneedtoassignthe"mortgage"untilforeclosure.Anditargued
thatsincetheoldadageisthatthe"mortgagefollowsthenote"and
thatbothpartiesintendedtoassignthenotes(eveniftheydidnotget
aroundtodoingit),thentheBankruptcyCourtshouldrulethatthe
assignmentsdidtakeplaceinsomesortof"virtualreality"sothat
thereisaclearchainoftitlethatallowstheservicerstoforeclose.
TheJudgerejectedeveryaspectofMERS'sargument.TheCourtrejected
theclaimthatMERScouldbebothholderofthemortgageaswellas
nomineeofthe"true"owner.Italsofoundthat"mortgageeofrecord"is
avaguetermthatdoesnotgiveonelegalstandingasmortgagee.Hence,
atbest,MERSisonlyanominee.ItrejectedMERS'sclaimthatas
nomineeitcanassignnotesormortgagesanomineehaslimitedrights
andthosemostcertainlydonotincludetherighttotransferownership
unlessthereisspecificwritteninstructiontodoso.Inscarcely
veiledanger,theJudgewrote:
"AccordingtoMERS,theprincipal/agentrelationshipamongitselfand
itsmembersiscreatedbytheMERSrulesofmembershipandtermsand
conditions,aswellastheMortgageitself.However,noneofthe
documentsexpresslycreatesanagencyrelationshiporevenmentionsthe
word"agency."MERSwouldhavethisCourtcobbletogetherthedocuments
anddrawinferencesfromthewordscontainedinthosedocuments."
JudgeGrossmanrejectedMERS'sarguments,sayingthatmeremembershipin
MERSdoesnotprovide"agency"rightstoMERS,andagreeingwiththe
SupremeCourtofKansasthatruled"Thepartiesappeartohavedefined
theword[nominee]inmuchthesamewaythattheblindmenofIndian
legenddescribedanelephanttheirdescriptiondependedonwhichpart
theyweretouchingatanygiventime."
HewentontodisparageMERS'sclaimthatsinceinlegaltheorythe
"mortgagefollowsthenote",theCourtshouldoverlookthefactthat
MERSseparatedthem.Hestoppedjustshortofsayingthatbyseparating
them,MERShasirretrievablydestroyedtheclearchainoftitle,
althoughhehintedthatafuturerulingcouldcometothatconclusion:
"MERSarguesthatnotesandmortgagesprocessedthroughtheMERSSystem
arenever"separated"becausebeneficialownershipofthenotesand
mortgagesarealwaysheldbythesameentity.TheCourtwillnotaddress
thatissueinthisDecision,butleavesopentheissueastowhether
mortgagesprocessedthroughtheMERSsystemareproperlyperfectedand
validliens.SeeCarpenterv.Longan,83U.S.at274(findingthatan
assignmentofthemortgagewithoutthenoteisanullity);Landmark
Nat'lBankv.Kesler,216P.3d158,16667(Kan.2009)("[I]ntheevent
thatamortgageloansomehowseparatesinterestsofthenoteandthe

deedoftrust,withthedeedoftrustlyingwithsomeindependent
entity,themortgagemaybecomeunenforceable")."
ThatwouldmeannotonlytheendofMERS,butalsotheendofthebanks
holdingunenforceablemortgagesbecausetheywerenot,andcannotbe,
"perfected".MERSandthebanksscrewedupbigtime,andthereisno"do
over"thereisnovalidlienontheproperty,soownershavegot
theirhomesfreeandclear.
TherehavebeennumerouscourtrulingsagainstMERSincluding
decisionsmadebystatesupremecourts.WhatissignificantabouttheUS
BankruptcyCourtofNewYork'srulingisthatthejudgespecificallyset
outtoexaminethelegalityofMERS'sbusinessmodel.Asthejudge
arguedinthedecision,"TheCourtbelievesthisanalysisisnecessary
fortheprecedentialeffectitwillhaveonothercasespendingbefore
thisCourt".Inthescathingopinion,JudgeGrossmanvariouslylabeled
MERS'spositionsas"stunninglyinconsistent"withthefacts,"absurd,
atbest",and"notsupportedbythelaw".Therulingisacomplete
repudiationofeveryargumentMERShasmadeaboutthelegalityofits
procedures.
WhatisparticularlyironicisthatMERSactuallyforcedthejudgeto
undertaketheexaminationofitsbusinessmodel.Thecasebeforethe
judgeinvolvedaforeclosedhomeownerwhohadalreadylostinstate
court.ThehomeownerthenapproachedtheUSBankruptcyCourttoargue
thattheforeclosingbankdidnothavelegalstandingbecauseofMERS's
businesspractices.However,bythe"RookerFeldman"doctrine(orres
judicata),theUSBankruptcyCourtisprohibitedfrom"lookingbehind"
thestatecourt'sdecisiontodeterminetheissueoflegalstanding.
Hence,JudgeGrossmanruledinthebank'sfavoronthatparticular
issue.
Yet,MERS'shighpricedlawyerswantedtopushtheissueandaskedfor
theJudgetoruleinfavorofMERS'spractices,too.SowhileMERSwon
thelittlebattleoveroneforeclosedhome,itlostthewaragainstthe
nation'shomeowners.TheJudgeruledagainstMERSoneverysingleissue
ofimportance.AnditwasMERS'sstupidarrogancethatbroughtitdown.
AsIpredictedtwoweeksago,MERSwouldbedeadwithinweeks.Judge
Grossmanhasdriventhefinalstakethroughitsblackheart.Thehalfof
America'shomeownerswhosemortgagesareregisteredatMERShavebeen
handeda"getoutofjailfree"card.WallStreethasnorightto
forecloseontheirproperty.Thetidehasturned.Itwon'tbeeasy,but
homeownersinthosestateswithjudicialforeclosuresnowhaveJudge
Grossmanontheirside.Thoseintheotherstates(justoverhalf)will
haveatoughertimebecausetheycanlosetheirhomebeforetheyever
gettocourt.Butthelawisstillontheirsideforeclosureby
membersofMERSistheftsoclassactionlawsuitsmaybethewayto
go.
MERSisdead,butcanthebankssurvive?Therearetwoseparateissues.
First,therearethe"repsandwarranties"givenbythemortgage
securitizers(WallStreetinvestmentbanks)totheinvestors(pension
funds,GSEs,PIMCO,andsoon).Wenowknowthataquartertoathirdof
themortgagesbundledtoserveasbackingforthesecuritiesdidnot
meetstatedquality.Worse,wealsoknowthatthebanksknewthis

theyhiredthirdpartiestoundertake"duediligence"tocheckquality.
Thiswasnotdonetoprotecttheinvestors,rather,thepurposewasto
strengthenthebargainingpositionofthesecuritizers,whowereableto
reducethepricespaidforthemortgages.Now,theinvestorsaresuing
thebanksforrestitutionforcingthemtocoverthelossesandbuyback
thebadmortgagesatoriginalprice.Toaddinsulttoinjury,eventhe
NYFedissuingthem.Thatisalotlikehavingyourparentssueyoufor
theirinadequateparentaloversightofyourbehavior.
Thesecondissueisthatthemortgagesbackingthesecuritieswere
supposedtobeplacedinTrusts(affiliatesofthesecuritizingbanks),
withtheTrusteecertifyingnotonlythatthemortgagesmettherepsand
warrantiesbutalsothatthedocumentswereuptosnuffandsafely
lockedaway.Weknowtheywerenot.Asmentionedabove,MERStoldthe
servicerstoholdthenotes,andmanyormostofthemweredestroyedor
lost.Further,thenoteswereseparatedfromthemortgagesmaking
themnullandvoid.Inanycase,theyarenotattheTrusts.Thismeans
theMBSsarenotbackedbymortgages,meaningtheMBSsareunsecured
debt.MERS'sbusinessmodelensuresthat.So,again,thebanksmusttake
backthefraudulentsecuritiespayingofftheinvestors.
WhatcanWallStreetdo?Well,Isupposethe"helpwanted"signsare
alreadyupatMERSandWallStreetbanks:"Needed:BurgerKingKidsto
Robosignforgedquasiprofessionallookingdocs".Theproblemisthat
evenwithtensofthousandsofRoboKids,WallStreetwillnotbeable
topulloffavastcriminalconspiracyonthenecessaryscale.Think
aboutit:60millionmortgages,eachsoldtentimes,means600million
transactionsandassignmentsthathavetobeforged.MERS's
documentationwasnotoriouslysloppy,relyingonvoluntaryrecordingby
members.TheRoboKidswouldhavetogobackthroughadecadeofrecords
tomanufactureapapertrailthatwouldconvincenowskepticaljudges
thatthereisaclearchainoftitlefromthefirstrecordinginthe
publicrecordthroughtotheforeclosure.Itain'tgoingtohappen.
TheonlyotherhopeisthatWallStreetcancallinitscampaign
contributionchipsandgetCongresstoretroactivelylegalizefraud.
Thatiswhattheydointhosedictatorshipsthatprotestorsarenow
bringingdownintheMiddleEast.IsWashingtonwillingtotakethat
risk,justtopleaseitsWallStreetbenefactors?

ThispostoriginallyappearedatBenzinga.