While MERS has served to illustrate the utter recklessness of the securitization industry, in that its promoters apparently believed that they could implement it nationwide and simply force state law to comply. But as the banks have found out, the law is not always so obliging.
Today, Washington State, which is a non-judical foreclosure state, gave MERS a serious setback. Its finding in Bain v. Metropolitan Mortgage, that MERS may not foreclose in Washington, is not as bad as it sounds, since MERS instructed in servicers to stop foreclosing in its name in 2011. But the reasoning of the ruling is far more damaging. And the court has opened up new grounds for litigation against MERS in Washington, in determining that it false claim to be a beneficiary under a deed of trust is a deception under the state’s Consumer Protection Act (whether that can be proven to have led to injury is a separate matter).
The case came before the Washington Supreme court because it was asked by a Federal district court to address three certifying questions:
Is MERS is a lawful beneficiary with the power to appoint trustees within the deed of trust act if it does not hold the promissory notes secured by the deeds of trust? If no, then:
What is the legal effect of Mortgage Electronic Registration Systems, Inc., acting as an unlawful beneficiary under the terms of Washington’s Deed of Trust Act? and
Can consumers claim violations of the state’s Consumer Protection Act based on MERS having incorrectly claimed it was a beneficiary of a deed of trust?
The answer to the overriding question was indeed “no”. The court’s immediate objection was straightforward. MERS claims not merely to be an electronic registry of deeds, but also to be a beneficiary of the deed of trust. However, as the court points out:
Traditionally, the “beneficiary” of a deed of trust is the lender who has loaned money to the homeowner (or other real property owner). The deed of trust protects the lender by giving the lender the power to nominate a trustee and giving that trustee the power to sell the home if the homeowner’s debt is not paid. Lenders, of course, have long been free to sell that secured debt, typically by selling the promissory note signed by the homeowner. Our deed of trust act, chapter 61.24 RCW, recognizes that the beneficiary of a deed of trust at any one time might not be the original lender. The act gives subsequent holders of the debt the benefit of the act by defining “beneficiary” broadly as “the holder of the instrument or document evidencing the obligations secured by the deed of trust.”
These days, that “instrument or document evidencing the obligations secured by the deed of trust” is a promissory note, a borrower IOU. But MERS executives have said consistently in depositions that MERS has nothing to do with the borrower notes. So under Washington law, it can’t be the beneficiary of the deed of trust and hence can’t foreclose.
The court also rejected the idea that MERS could act as an agent of the lender/noteholder:
But Moss also observed that “[w]e have repeatedly held that a prerequisite of an agency is control of the agent by the principal.” Id. at 402 (emphasis added) (citing McCarty v. King County Med. Serv. Corp., 26 Wn.2d 660, 175 P.2d 653 (1946)). While we have no reason to doubt that the lenders and their assigns control MERS, agency requires a specific principal that is accountable for the acts of its agent. If MERS is an agent, its principals in the two cases before us remain unidentified.12 MERS attempts to sidestep this portion of traditional agency law by pointing to the language in the deeds of trust that describe MERS as “acting solely as a nominee for Lender and Lender’s successors and assigns.” Doc. 131-2, at 2 (Bain deed of trust); Doc. 9-1, at 3 (Selkowitz deed of trust.); e.g., Resp. Br. of MERS at 30 (Bain). But MERS offers no authority for the implicit proposition that the lender’s nomination of MERS as a nominee rises to an agency relationship with successor noteholders.13 MERS fails to identify the entities that control and are accountable for its actions. It has not established that it is an agent for a lawful principal.
As an aside, the funniest bit of MERS’s argument was a dressed up “deadbeat borrower” pleading:
MERS argues, strenuously, that as a matter of public policy it should be allowed to act as the beneficiary of a deed of trust because “the Legislature certainly did not intend for home loans in the State of Washington to become unsecured, or to allow defaulting home loan borrowers to avoid non-judicial foreclosure, through manipulation of the defined terms in the [deed of trust] Act.”
The court was not moved and basically said it was the banks’ fault if they got themselves in the position of not being able to foreclose:
One difficulty is that it is not the plaintiffs that manipulated the terms of the act: it was whoever drafted the forms used in these cases.
But the ruling goes further and picks at the foundations of the MERS system, and not just its role in foreclosures. Most state hew to the view of the 1867 Supreme Court decision, Carpenter v. Longan, that the mortgage cannot be separated from the note, that the mortgage is a “mere accessory” of the note and has to travel with it. The Washington Supreme court focuses on the fact that MERS inserts a new party:
As MERS itself acknowledges, its system changes “a traditional three party deed of trust [into] a four party deed of trust, wherein MERS would act as the contractually agreed upon beneficiary for the lender and its successors and assigns.” MERS Resp. Br. at 20 (Bain). As recently as 2004, learned commentators William Stoebuck and John Weaver could confidently write that “[a] general axiom of mortgage law is that obligation and mortgage cannot be split, meaning that the person who can foreclose the mortgage must be the one to whom the obligation is due.”
The court later states that it is not clear whether MERS split the note and the mortgage; if MERS really is the agent for the noteholder, it is likely no separation occurred.
The court also took a dim view of the diffused responsibilities within the MERS system:
While not before us, we note that this is the nub of this and similar litigation and has caused great concern about possible errors in foreclosures, misrepresentation, and fraud. Under the MERS system, questions of authority and accountability arise, and determining who has authority to negotiate loan modifications and who is accountable for misrepresentation and fraud becomes extraordinarily difficult. The MERS system may be inconsistent with our second objective when interpreting the deed of trust act: that “the process should provide an adequate opportunity for interested parties to prevent wrongful foreclosure.”
The Supreme Court effectively punted on the second question, which was what would be the legal effect of MERS being an unlawful beneficiary under the state’s Deed of Trust Act: “…resolution of the question before us depends on what actually occurred with the loans before us and that evidence is not in the record.”
On the final matter, of whether MERS being an unlawful beneficiary would give rise to claims under the state’s consumer protection laws, the court said it could, depending on the facts of the case:
…we answer the question with a qualified “yes,” depending on whether the homeowner can produce evidence on each element required to prove a CPA claim. The fact that MERS claims to be a beneficiary, when under a plain reading of the statute it was not, presumptively meets the deception element of a CPA action.
The Seattle Times amusingly quoted the MERS attorney complaining that the court respected the law:
Douglas Davies, the local attorney who represented MERS, said the court imposed “the literal language of a dated statute,” reaching a decision that didn’t benefit either borrowers or lenders.
“The Supreme Court has created a chaotic situation and essentially left it to a taxed legislature to come up with a solution,” Davies said in an e-mail late Thursday. “The only certainty that will come from this decision is a plethora of lawsuits that will overburden an already burden[ed] judicial system.”
Funny, the state attorney general apparently didn’t think so, since he wrote a brief supporting the borrower.
Perhaps most interesting is that MERS has taken to settling cases where it gets wind the court might rule against it, deliberately skewing the record to create the impression that its procedures and legal structure enjoy more acceptance from courts than they actually do. Given its recent conservatism, I wonder what led them to hazard a high profile loss. It might be that Washington’s deed of trust is distinctive enough that they thought they could take the chance, in that they could take the position that its implications for other states are very limited. We’ll see soon enough if that assumption is valid.
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‘Amusingly … Douglas Davies, the local attorney who represented MERS, said the court imposed “the literal language of a dated statute,”’
Otherwise known as the rule of law. Very droll.
Not to mention that “Mortgage Electronic Registration Systems, Inc.” ceased to be a legal corporation under Delaware laws in 1999. “MERSCORP, inc.” replaced this entity under its’ 1999 amendment to Articles of Incorporation. No new corporation was formed legally, as claimed by William Hultman. The trademark of “MERS” was even transferred to MERSCORP, inc in 2003.
This will be the next big bombshell, and hopefully, the death knell to this fraud artifice.
Let’s talk about re-constructing the chain of title on most mortgage where MERS was the “bridge” between the original lender and the foreclosing lender. YOU CAN’T DO IT. THAT is the biggie. Also: All MERS loans will have to foreclose judicially now, and that means a judge will be looking at these silly documents… This is a massive decision.
“in determining that it false claim to be a beneficiary under a deed of trust is a deception”
Fix this Yves.
http://publicola.com/2012/02/09/mckenna-and-obama-hype-26-billion-foreclosure-settlement-with-mega-banks/
WA state AG also just settled a case with a BofA subsidiary for $1.1 million. He is running for Governor and was on the lead team of AGs putting together the bank settlement.
Thanks Yves. I’m surprised only 4 of us have responded. This was huge. Your final paragraph about Washington state deeds of trust being unique enough to Washington law that this ruling might not travel very far is unsettling. But until other states make their own decisions to go on to confuse themselves with all the fatal entanglements of allowing MERS to be an agent because there is “no law against it in this state” (in full knowledge of and in spite of this really dutiful Washington ruling), we can feel satisfied. Thanks Washington Supremes.
“I’m surprised only 4 of us have responded.” Well, its more now, but you know, this decision/answer is somewhat remote from an actual foreclosure action, so it is not entirely clear what the outcome may be. The question remains: who can foreclose where MERS is the beneficiary? Stay tuned.
I find Alex’s comments below a bit startling. He is suggesting that HP may be the responsible party in creating this property title mess.
One thing is obviously true – if MERS cannot foreclose and has and has done so using forged and fraudulent documents – and it certainly appears it has in thousands of cases, unraveling this mess is going to take years. And MERS (or perhaps HP) should pay dearly for the mess they’ve made.
DANNYBOY here to respond, making at least 5.
Been overwhelmed by financial crimes, must expand bandwidth.
ah…life as the merscrusher…its been fun…and great to see these cases finally get somewhere in non judicial states…it was fun shadow boxing with the other side on these foreclosre issues…but as I have promised in other forums, we here in florida have only flashed a boob…we aint given the full monty yet…but the election will soon pass and this fight can finally be over in the next 6 months…but…since I like to give my friends at morgan and lewis sleeplessnights…one more peeling back of the onion…(see what happens when you send a cease and desist letter to the wrong bastard…:)
is MERS a real entity or a teflon semi non profit so that EDS/HP can make tens of millions per year processing information…remember…EDS used to belong to GMAC…
who gets most of the MERS “database fee” money…
EDS…it has gotten almost all of the money since day one…not only does MERS not handle the notes…it does not handle any of the work either…it has always, from day one been EDS…so…since EDS helped design this mess and then moved forward to make sure it was pushed out across the country…
Is HP liable for tens of billions of dollars in homeowner suits if it is the true financial benificiary of the MERS system…??
who who who benefitz….
good luck
and
be well
(1) Can someone please refer me to an article or book which explains in one place how mortgages work? I find the whole story of mortgage fraud most fascinating and infuriating, but the more I read about it here (thanks Yves!) the more confused I get. I am not stupid, but this makes me feel I am.
This ruling is interesting because it raises some questions:
(2) In light of the court ruling, if someone were to stop paying their mortgage payments, who would have the authority to foreclose? I was surprised to note my credit union registered the mortgage with MERS. I think they said it would make it easier to transfer the mortgage to Fannie Mae.
(3) An acquaintance of mine has been jacked around by his mortgage holder/servicer when he tried to apply for a mortgage modification – classic symptoms included loss of paperwork, people on the phone asking for resubmissions of documentation, dragging out the process, people not returning calls, etc.
How can he use the court decision to force some action from his provider?
(4) Can local jurisdictions (e.g. county auditors) sue MERS to recover filing fees? When I contacted my county auditor about this, she didn’t know if the MERS system was legal or not – it’s a grey area.
Peter,
See the work of law professor Christopher Peterson, particularly his article on demystifying the two faces of MERS.
Thank you Supreme Court Justices for WA!!
I’ve filed two law suits against Bank of America for illegal foreclosure procedings on my house. The banking system (including all GSEs with MERS) have hit this country harder financially and much worse than any other incident except our free trade policy with China.
Most promissory notes have undergone securitization and are no longer classified as loans. Most are still unaware of this. I’m convinced that many judges have been persuaded to rule in the favor of the “bankers” in order to maintain and preserve our economy against a tidal wave of lawsuits, destroying our economy. Unfortunately this is exactly opposite of what our country needs.
These bankers and all behind this dastardly system need to be brought to justice and hung for treason. The good American people are resilient and would easily be able rebound from the crippled destructive thieving banking system if the justice system would only uphold the state constitutions and common law. Fractional banking allowing bankers to lend what they don’t own, at its root is criminal and the largest contributor to all the problems we see emerging in this financial crisis. I tell you the Federal Reserve Bank is the center piece in this criminal design. Although the Federal Reserve is above reproach as it is exempt from an external audit. My main question is why are the servicers allowed to foreclose even after they have been paid in full from the taxpayers via FNMA? The answer is the elephant in the room.
Sam I think that you make a salient observation that many judges probably believe that they are protecting the economy by ruling in favor of the mortgage industry. But it is not just judges. I am an young attorney in the title insurance industry (a rarity), and I have studied MERS since the robosigning scandal broke in late 2010. It never ceases to amaze me how many of the more senior people in my industry and the mortgage services industry, a lot of them lawyers, truly believe that the legal attacks on MERS are a conspiracy by deadbeat borrowers to get out of paying back their loans. They believe this in the face of a trove of evidence that the MERS model was a half-baked wet dream of the lending community of the late 90’s and 2000’s that prized profit in the secondary mortgage market over creating reliable mortgage contracts. The MERS model was built on untested legal theories that seemed to work well during the housing bubble when borrowers had no real reason to question how it actually functioned. But now that millions of bubble-era mortgages have turned out to be toxic crap, and an unanticipated tsunami of foreclosures are in the pipeline, borrwers are exercising their right under the law to raise foreclosure defenses–exposing the scary possibility that MERS was built upon a legal foundation of sand. There are many people in the industry that have their reputations all wrapped up in the creation of MERS. It wasn’t long ago that MERS was lauded as a triumph of legal wizardry that revolutionized a old fashioned system that was built upon 300+ years well-settled law. Hubris. Unfortunately, the mentality today by the movers and shakers in the financial world is that MERS has become too big to fail, just like many of our largest banks. We cannot forget that our current financial crisis is rooted in toxic mortgages, and as long as these mortgages remain in the foreclosure process, they still have life. Foreclosure is merely the last stage of the mortgage sausage-making machine, and serious threats to our economy exist as long as these mortgages are still “in play.” Laboring over the legality of MERS slows down the foreclosures and delays putting the mortgage nightmare behind us. So I see how the temptation must be very real to buy into the fallacy that whitwashing problems with MERS will preserve the real estate market and the economy at large. However, the only thing that will truly restore confidence to the marketplace is the rule of law and good faith dealing. Hopefully the Washington Supreme Court decision will be a small step in that direction.
Ask you elected represenatives as to why they guaranteed fnma’s mbss (first implied and now explicit).
The reps & warrants not only protect fnma, but also the borrowers against the mischief of servicers.After all, you elected represenative are supposed to protect their constituents first…..then the gses.
“Elephant in the room………”
Ask you elected represenatives as to why they guaranteed fnma’s mbss (first implied and now explicit).
The reps & warrants not only protect fnma, but also the borrowers against the mischief of servicers.After all, you elected represenative are supposed to protect their constituents first…..then the gses.
Reply
Read more at http://www.nakedcapitalism.com/2012/08/washington-supreme-court-issues-mers-smackdown.html#ufGkXdEapsmC86S7.99
Wow. My attorney submitted the exact same argument back in 3/10. The Superior Court Judge who heard the case dismissed it. And, yes, he also threw me out of my home of 21 years. Can’t wait to review the cases filed in response to this decision.
Thank you, Jake, for the reference. It’s about a 50 page paper available as a pdf from here:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1684729
There is a note in the decision in which the foreclosee (Bain) alleges she was the victim of serious abuses (misrepresentation, fraudulent mortgage transfers, nondisclosure of loan docs etc.). She is suing in federal court and the judge asked the state court to clear up issues under state law so the lawsuit could proceed. I will now attempt to answer my own questions:
(2)If someone stops making their mortgage payment, the note holder most probably has grounds to foreclose.
(3)The problems people have with negotiating loan mods may be because it’s difficult, due to MERS, to find the actual owner of the note. And the agencies servicing the note aren’t wanting to make it any easier. If the effects of this lawsuit make it more difficult for MERS-registered companies to foreclose then they might find it in their interests to be more direct.
(4) Yes. I am not a lawyer but if the Supreme Court found that the MERS pretension that it owns the mortgage is fraudulent, maybe the counties could even use the Consumer Protection Act in the public’s behalf to recover fees.