MERS, the New Model of Securitized Mortgages

Now MERS has a very ‘creative’ business model, involving lots of alleged fraud and a recent string of Supreme Court rulings against them, so you may want to read the separate page (linked above) for more information. But this article will continue to focus on securitized Mortgages in general, so just know that MERS is “an electronic tracking system designed to eliminate Assignments as mortgage servicing rights are transferred from one servicer to another. The basic concept is that MERS will be the mortgagee of record for all mortgages registered with the company.”

While this new financial model – with MERS as the generic mortgagee – made the mortgage transfer business more streamlined and profitable for the banks, it wound up leading to important legal issues…

As you can see from the flowchart image above, the Mortgage Note and the Deed of Trust/Mortgage wind up taking separate paths, simply because that was “easier” for the Banks involved. And this is the big mistake the lenders made. Neither the originating lender nor MERS are the actual owner of the loan. But, legally, only the actual owner of the loan can foreclose. A nominee can’t foreclose on behalf of a corporation, which is what MERS usually tries to do. Because neither the originating lender nor MERS actually own the loan, neither can legally foreclose on you. The process of registering loans in MERS has legally separated the loan from the collateral used to secure the loan, therefore making the loans unsecured.

According to the Missouri case of Bellistri v. Ocwen Loan Servicing LLC, ”Generally, a mortgage loan consists of a promissory note and security instrument, usually a mortgage or a deed of trust, which secures payment on the note by giving the lender the ability to foreclose on the property. Typically, the same person holds both the note and the deed of trust. In the event that the note and the deed of trust are split, the note, as a practical matter becomes unsecured. The practical effect of splitting the deed of trust from the promissory note is to make it impossible for the holder of the note to foreclose, unless the holder of the deed of trust is the agent of the holder of the note. Without the agency relationship, the person holding only the note lacks the power to foreclose in the event of default. The person holding only the deed of trust will never experience default because only the holder of the note is entitled to payment of the underlying obligation. The mortgage loan became ineffectual when the note holder did not also hold the deed of trust.”

In addition to the Note/Deed separation issue, the new securitized Mortgages model of trying to sell as many loans as possible in the shortest amount of time (with all administrative/legal processes being considered a second priority) led to many original documents being lost completely… ”Attorneys estimate that the documents belonging to as many as 50% of the mortgages made between 2001-2008 have been lost or destroyed, leading to demands by borrowers that the foreclosing party produce the note as evidence of the debt.” [*] ”It is disturbing to know that National Banks are the trustees of thousands of trusts that may be missing millions of promissory notes. This might explain why, to date, not a single National Bank has publicly disclosed the fact that they are not actually holding what may be millions of promissory notes which evidence ownership of debts supposedly owned by their respective trusts.”

Finally, when mortgage loans are securitized Mortgages and essentially turned into a stock, they are often sold to MULTIPLE trust funds. ”Here the investment banks sold the same loan repeatedly using different names and identifying data, which is bad enough. But in addition, they used the yield spread difference between the usual loan with triple-A-rated borrowers and all other borrowers to come up with ‘trading profits’. These trading profits were extracted by way of a sale of the loans to the pool in which a profit emerged because in order to cover the expected interest income expected by the investors they loaned money at twice the anticipated rate, which reduced the amount they needed to lend. Thus a $200,000 loan could be sold as many as 40 times using exotic instruments that masked the ‘sale’ and the money received from the investor might have been as much as $400,000 to fund the $200,000 loan. So the revelations of  dirty dealing at the David Stern law office are a mere distraction from the real truth: that not only were the foreclosures faulty for lack of proper documentation, they were unnecessary because the loan had been been paid down far more more than was reported to the court and the investor to whom it was owed had abandoned the claim in favor of going after the investment bank that sold the bogus mortgage bond in the first place.” [**]