Thursday, February 3, 2011

MERS: Problems with Structure and Functioning

I've recently posted a couple of Nevada cases where a FEDERAL judge (kind of a big deal because the feds tend to be in favor of the establishment) enjoined a couple of MERS-related foreclosures.  Notwithstanding the rulings in favor of the homeowners, even that judge's analysis is imprecise and appears to be wrong (in the sense of what appellate courts would ultimately do) with respect to some features of MERS (as well as loan transfers).  Be that as it may, today I'd like to focus on MERS.

A major problem that I see with MERS is that MERS turns agency law on its head. Instead of agents acting for their principals, we have principals acting for their agent (MERS), and even principals acting for other principals, even those "principals" that no longer exist ("dead principals").

Let's say that MERS is a limited agent for the loan originator in a given transaction.  MERS might then have certain limited powers authorized by (and confined to the scope of) the limited agency.  Also, the agency would have to be "alive" at the time of MERS' actions, so that, for instance, if MERS' principal (originator) is defunct at the time of MERS' actions, those actions would be void (or at least would have to be validated in some other way) because MERS' scope of action cannot be greater than that of its (incapacitated) principal at the time.

Another thing to keep in mind is that MERS is just a computer database that "tracks" the ownership of loans through recording acts by its members.  A fox is guarding the chicken house. As one of my clients put it, MERS can be viewed as another popular real estate tool: Multiple Listing Service (MLS).  Realtors, agent-subscribers to MLS, can list their properties there, and then can modify those listings. If a different realtor (other than the one creating the listing) has access to a particular listing, that realtor can modify it. MLS itself does nothing.  Only subscriber-realtors do things (make changes to the listings, i.e. to the record).

In MERS, a member-bank can apparently modify an existing "record" to which it is not a party (i.e., in which it does not appear in any capacity). At the same time, MERS is held out as an "agent" for such modifying party (new principal).  But it is the new principal who is modifying the record (newly claimed loan owner), not the agent (MERS).  Essentially, the tail is wagging the dog!

Another way to look at this arrangement is that the new "principal" puts on the shoes of MERS and acts as a limited agent (MERS) of the "original principal" (originator). And the new principal acts so even where the old principal (originator) is defunct, bankrupt, non-existent, etc.  Thus, the industry essentially wants the MERS system to act as original principal's testamentary will(!), whereby MERS is perpetually appointed a limited agent of the original principal and survives the "death" of such original principal, and where the new principal can act as the "dead" principal's limited agent by virtue of its own membership agreement with MERS.  Principals acting for principals.  Principals acting for dead principals.  Talk about conflict of interest and fertile ground for fraud and other impropriety!

To my knowledge, such an "agency" structure of principals acting for agents and not vice versa has never been approved by any court.  Additionally, the financial industry players chose not to define the role of MERS and chose not to obtain any AG opinions or declaratory judgments with respect to the structure of MERS.  For this reason, the financial industry's arguments that MERS is valid as an "industry standard" set up by such big shots as Fannie and Freddie must fail.  If one analyzes the structure and functioning of MERS closely, it doesn't take a rocket scientists to see a number of situations where the structure cannot account for and "cure" certain breaks in the chain of transfer.

As usual, every case is unique and presents its own fact pattern and chain of transfers and purported transfers.  But one thing is certain: MERS litigation will abound for years to come and will cost its "founders" and members way more money than its saves them via evasion of recording taxes.


  1. Hi Gregory:

    Great blog. I added you to my blogroll at The Hallmark Abstract Sentinel at


  2. Excellent read. Is there a way for the home owner to audit the MERS Chain of title? And can it help in VA cases to prove fraud? Can a home owner get a court order to see the data on their house? It seems to me that transparency in Real estate is gone, intentionally and is in favor of lenders.

  3. @Anonymous:
    These are all cutting edge issues in VA. First, you can check your loan by MIN using the MERS site. I have a link to it from my main site.
    Second, you could name MERS a party to a lawsuit and serve them discovery with the complaint, to which they would have to respond within 28 days.
    The issues will be whether the information you are seeking is reasonably calculated to lead to relevant evidence.