Multnomah County to sue MERS over mortgage recording fee evasion

Chris Lowe

On Thursday the Multnomah County Commission voted unanimously to sue the Mortgage Electronic Registration System (MERS) to recover fees that the County has lost for recording documents of transactions involving trust deeds, due to MERS handling such transactions without recording them. Under Oregon's non-judicial foreclosure law, lenders and mortgage investors are required to record all changes of "beneficiaries" and trustees of such deeds. MERS skirts those requirements by purporting to be the beneficiary of trust deeds without actually owning them.

A story in The Oregonian names some basic facts, but misses the larger meaning of MERS. MERS is essentially a racket that makes it very difficult for people facing problems with their mortgages to know with whom to deal. MERS was designed to promote the securitization of mortgages that has created incentives to profit from abusive and predatory lending and was a major cause of the financial crisis of 2008. The O'sstory also fails to note that MERS transactions have recently been ruled by the Washington Supreme Court to violate Washington's similar non-judicial foreclosure law. In Oregon, lower courts have divided over the legality of MERS transactions, and the Oregon Supreme Court is supposed to rule on the question in the next few months.

Oregon's non-judicial foreclosure law was passed in 1959, providing for a streamlined process that enabled holders of trust deeds to avoid the time and expense of judicial foreclosures, as well as avoiding certain borrower rights to regain foreclosed property. Trust deeds are made by borrowers and lenders to go along with loan notes to secure loans, usually with mortgages against the property, and are administered by trustees on behalf of beneficiaries. Trustees administer the loans, sometimes by contracting out to loan servicers, and in the case of default, bring foreclosure proceedings. Until MERS, beneficiaries were commonly understood as the owners of the notes. The law requires that all changes of beneficiary or trustee be recorded in County records. The purpose of such recording is to provide clear chain of title. This protects borrowers from being foreclosed upon by parties with no right to foreclose, and it protects the title of future purchasers.

The Oregonian calls MERS "a mortgage giant," but that phrase is misleading insofar as it suggests MERS is a giant lender, like Wells Fargo or J.P. Morgan Chase or Citigroup. Actually MERS is an incorporated association of hundreds of lenders and mortgage investment companies who conspire to avoid both the fees and transparency requirements of non-judicial foreclosure laws like Oregon's. The members of MERS try to evade the law the better to pursue bundling of mortgages into pools, which are then used to back securities, whose value derives both from the income from the loans and the underlying value of the properties.

MERS avoids fees and transparency by purporting to separate the role of lender (holder of the note) from that of beneficiary. Trust deeds involving MERS identify the borrower ("trustor"), the lender, the trustee, and then say MERS is the beneficiary "as the nominee" of the lender, rather than the lender or note-owner being the beneficiary. If this means anything at all, legally, a point which is under challenge, it changes the basic and common sense meaning of "beneficiary" as recipient of the benefits of the loan. In fact MERS does not, say, receive the interest payments as income, nor take over ownership of the property if it is foreclosed. Rather it creates an obscuring cover, under which a trust deed may change hands several times, without the borrower or public officials knowing, because the transaction is never recorded with the County. Instead, at each point the new holder of the trust need "nominates" MERS as fictive nominal beneficiary.

From the County's point of view, those unrecorded transactions represent a loss of revenue. Multnomah County's prospective lawsuit apparently addresses only that part of the MERS evasions that deny it the income from recording fees. However, the abusive lending encouraged by MERS carries other costs to the County, including burdens on the Sheriff's department to administer foreclosure sales and enforce evictions, and on the County courts to handle the increasing number of lawsuits being brought due to MERS failing to provide clear chain of title under non-judicial foreclosure laws, as well as a growing shift by lenders or mortgage owners to seeking judicial foreclosure to avoid such challenges.

Even with its limited goals, insofar as the County suit brings pressure on MERS, in addition to that created by the lawsuits whose conflicting results the state Supreme Court must decide, the suit is a good thing. MERS helped to create the financial crisis, and promoted predatory lending, and abuses like robo-signing, contributing to the atmosphere of impunity that drove the abuses. Once the financial crisis created further crises in the lives of dozens of millions of people through loss of jobs, placing their mortgages under pressure, MERS created means by which lenders evaded dealing with people to enable them to stay in their homes, as they continue to do. MERS obscures relationships of accountability for blighted property when foreclosures and threatened foreclosures leave houses empty and deteriorating, neglected by far-off investment company owners that see them as abstract assets underlying securities whose trading is their main source of profit and whose risks have been hedged with swaps anyway.

Anything that weakens MERS is good. And the County needs the revenue.

However, the system remains stacked against ordinary people in crisis, whether it works through non-judicial foreclosure and MERS related shell-games, or through the judicial foreclosure process. In either case, families facing foreclosure rarely have the money for the legal support they would need to get justice, or even what the law provides for them which often is well short of justice. Programs that are supposed to provide compensation for past bad actions have strict time limits, after which people who have been victimized but don't know of the programs are out of luck. Borrowers have no statute of limitations on their debts or defaults, but their time to make claims against fraud and abuse is sharply limited. The very nature of mortgages as an all-or-nothing kind of security encourages an entire speculative industry in foreclosures, that decreases lender incentives to work out accommodations that would keep people in their homes.

So the County lawsuit is a good thing that may bring in some needed revenue, and create a bit more pressure for transparency in chains of title, and just because it brings pressure on MERS as a corrupt and corrupting way of doing business. But it does not address the fundamental injustice of the situation where the banks crashed the economy, but have been allowed to get away with it with no real penalty, and indeed to profit from the misery of millions due to the crash they caused. And it does nothing to address the crisis of housing justice reflected in foreclosures, reflected in unaffordable rents, reflected in widespread homelessness, and reflected in empty housing while thousands in the County are without even decent shelter, much less real housing.

Disclaimer: I work for We Are Oregon, an advocacy and community organizing project that works with people fighting foreclosure and evictions, including a number who testified at the County hearings on Thursday. However, this article represents my personal views and does not speak for anyone but me.

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    So far MERS has successfully fought off law suits across the country. Why they are successful in this regard is beyond me since it is clear that they have avoided paying required property transfer taxes. I would like to know why the circumstances in Oregon are any different than the rest of the country.

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    You make a number of misleading or incorrect statements. Having sued MERS (and won), I don't think I could be characterized as some kind of shill for MERS.

    First, you claim that MERS makes it hard to know who the lender is. That's wrong. The issue there is that many lenders now use "servicers," or agents. Those agents are empowered to do everything a lender can do. That's not really such a novel concept -- agents represent people or companies all the time.

    Second, you raise the spector of the wrong lender foreclosing, and while there have been a few stories about that on the east coast, I haven't heard (or been involved in) any such circumstance in Oregon. That's because in many ways, MERS does actually allow precise identification of the lender and/or servicer.

    Third, find me a law that requires assignments of trust deeds to be recorded. Because I've been litigating real estate disputes for 20 years, and know of none. All you'll find is that to foreclose, every assignment has to have been recorded. That doesn't make the failure to record an assignment "against the law;" it simply means that the lender may not be able to non-judicially foreclose. Incidentally, you don't have to record a deed to property that you purchase (you'd just be foolish not to, however, as there would be no public record of you owning it).

    Fourth, and perhaps most importantly, all of this really only comes back to whether properties can be foreclosed judicially or non-judicially. Judicial foreclosures are more expensive, period. Which is one reason why lenders would prefer to avoid them. But if there is ANY equity in a home, guess who is going to lose out because of the higher cost of the foreclose?? The owner.

    So while I wouldn't say I'm a fan of MERS, or the securitiztion or mortgages, there's not a need to raise false problems, and there is a need to keep the non-judicial process working (both from a cost standpoint, and from a clogging-the-courts standpoint).

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      Jonathan, thank you for your comments. I will make a correction about "against the law" later tonight. What I am trying to get at is that it allows a lot of non-judicial foreclosures to go forward that are or should be illegal but are never challenged because those facing foreclosure don't have the resources to bring the challenge in the proper form.

      On point one, I disagree. Lenders and their agents frequently act in ways that try to induce borrowers on whom they fully intend to foreclose regardless of continued payments to make payments and say they are "working with them" but then proceed to claim "we lost the paperwork so you have to start again" and so on. People claim to be agents and then deny it, or refuse to tell borrowers for whom they are agents, or in some cases I have seen represent themselves as independent "helpers" who in fact are agents of lenders or servicers. Oregon recently passed a law to outlaw two-track negotiation, whose effectiveness is unclear, and a law requiring mediation, which lenders appear to be completely evading. If matters get to court, the chain of transactions within MERS can be uncovered legally post-facto. But in terms of borrowers trying to reach resolutions before it comes to foreclosure or without going to court, MERS absolutely obscures what is happening and who is who in many cases. In terms of documents recorded with Multnomah County, it is not uncommon to find a final transaction in which some lender who appears nowhere in the prior record assigning the deed to whatever party & trustee carries out the foreclosure, often also becoming the purchaser at the foreclosure sale.

      On point three, while my expression is wrong and will be corrected, since the whole purpose of non-judicial foreclosure law is to enable foreclosures, to say that failing to register assignments prevents foreclosure under the law, or should do makes the point I am trying to make. Part of the problem is that MERS lets lenders get away with things they should not be allowed to do. For lawyers that may not = illegal but to most people's common sense it should.

      On point four, i don't really understand it. MERS is the force causing problems with non-judicial foreclosure, by evading the law. If lenders obey the law, and register assignments, in order to foreclose, they won't have a problem. MERS encourages them not to do that. It is MERS that causes the costs and clogging problems.

      However, our bottom lines are somewhat different. For myself, I am much less concerned with keeping the foreclosure machine turning over smoothly, than with finding a fairer resolution to the problems the banks and lenders caused by crashing the economy, and finding ways to keep people in their homes rather than rewarding the bad acts of banks and lenders with speculative profits in real-estate flipping.

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        Chris: Find me a bank or lender who made "speculative profits in real-estate flipping." Because by definition, "flipping" is an owner's purchase and quick re-sale of property, keeping that "speculative" profit for himself or herself. The people making the real money on the hot real estate market, particularly on the hot refi market, were the mortgage brokers, taking five-figure fees on a deal. And while I'd admit that those brokers only made that kind of money because lenders were willing to lend, the borrowers who took advantage of those refis and pocketed cash coming out of deals, also benefitted. And now, unfortunately, the security they posted gets called to the table to pay the debt. That's a principle that is sometimes at odds with the notion that as many people as possible should own homes, but you don't reconcile that conflict by saying "and now, loans don't have to be repaid, and lenders can't utilize the only remedy available."

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    Here's some good testimony on MERS before the Niday v. GMAC decision from Keith Dubanevich....

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    And here's testimony of attorney Kelly Harpster on MERS post-Niday with some discussion about judicial v. nonjudicial foreclosure...

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