In two recent pieces I harped on the problems at MERS, the Mortgage Electronic Registration System. ("Support Representative Kaptur's Bill: Time To Shut Down Mers And To Restore The Rule Of Law" and "Shut Down MERS"). Briefly, MERS purportedly offers an alternative to paperwork, maintaining an electronic record of mortgages that are usually packaged into mortgage backed securities (MBSs). When mortgages go delinquent, MERS helps mortgage servicers foreclose on homes.
I argued that MERS was created to run multiple frauds, a topic I will discuss in more detail in part two of this series. However, one of the big puzzles of the ongoing foreclosure crisis concerns the whereabouts of the "wet ink notes" -- the IOUs signed by borrowers. In foreclosure cases across the nation, the banks have been filing "lost note affidavits", certifying that they cannot find the notes that are required to prove that they have the right to take away someone's home. In some cases, the notes miraculously appear, seemingly out of nowhere, and in others "Burger King kids" have been manufacturing them for robo-signers. By law, the notes are supposed to be at REMIC trustees, held against the MBSs sold on to investors -- and must be presented to foreclose.
The real mystery is why these trustees cannot produce the notes. I think we have finally found the smoking gun. An interested reader alerted me to MERS's instruction manual, "MERS Recommended Foreclosure Procedures -- State by State", originally written in 1999, updated in 2002 and available on MERS's website (accessed by clicking on: Recommended Foreclosure Procedures).
The first thing to note is the date. Folks, this strategy was formulated in 1999. The second thing to note is these documents demonstrate that failure to properly endorse the notes and transfer them to the REMIC trustee was not an occasional mistake, but rather was MERS's business model. As we will see, MERS planned from the get-go to defraud the counties, and the IRS, and the homeowners, and the buyers of the mortgage-backed securities.
Let me provide three very clear quotes (emphasis added) from the document, and then I will explain the implications. To demonstrate that these quotes are not slips or errant comments I am appending at the bottom a couple of dozen more quotes from the manual with virtually identical wording.
We have been advised that the named plaintiff in the foreclosure action should be both the record holder of the mortgage and the owner and holder of the promissory note. This is typically considered to be the servicer because if the promissory note is endorsed in blank and the servicer has physical custody of the note, the servicer will technically be the note holder as well as the record mortgage holder. By virtue of having its employees become certifying officers of MERS, there can be an in-house transfer of possession of the note so that MERS is considered the note holder for purposes of foreclosing the loan. Therefore, MERS is both the mortgage holder and the note holder as nominee for the current servicer. Page 62
...
Even though the servicer has physical custody of the note, custom in the mortgage industry is that the investor (Fannie Mae, Freddie Mac, Ginnie Mae or a private investor) owns the beneficial rights of the promissory note. Page 50
...
During the redemption period, MERS will be considered to be titleholder. However, at the end of the redemption period, a deed to the investor should be executed as soon as possible so that MERS remains in the chain of title for as short a time as possible. Page 54
The foreclosure manual establishes three key points that we have long suspected:
- Mortgage notes were not typically transferred to the trusts, as required by law. Further, there is no clear "chain of title" for these notes--which are actually presented for endorsement only on foreclosure (if then).
- MERS recommended that mortgage servicers retain the notes.
- MERS "deputized" employees of the servicers, pretending that these became MERS employees. This allowed the fiction that MERS had the notes so that it could foreclose.
I will discuss in part two the implications for the REMICs and the mortgage backed securities. Here I will focus only on the failure to comply with the requirement to properly endorse notes and to transfer them each time a mortgage was sold -- up to a dozen times over the course of the life of a mortgage through to foreclosure. Rather than following well-established law, MERS plainly directed mortgage servicers to retain the notes. Since most mortgage lenders and servicers are members of MERS, the plan was to pretend that transactions were "in-house", hence did not require transfers of notes or reporting of sales to the county recorders.
In the document, MERS claims that its recommended procedures are "customary". In fact, there are several hundred years of "custom" that requires endorsement of notes at the time of transfer, with a clear chain of title to ensure that anyone who claims to be a creditor, and who tries to seize someone's home, has clear documentary proof of entitlement. What MERS proposes in this document is to break the chain of title, to eliminate the protection that debtors need to prevent mortgage servicers and MERS from illegally stealing their property through the use of robo-signers and the manufacture of fake documents. In other words, both law and custom were formulated to prevent the sort of foreclosure fraud that has become normal business practice -- what the MERS document calls "customary".
I do not know why MERS proposed illegal activity as a new custom. It appears that MERS wanted to keep the notes handy, held by the servicers, to speed the foreclosure process -- in other words, to run foreclosure mills. Perhaps MERS foresaw, even in 1999, a wave of foreclosures. Why else would it recommend multiple frauds (as explained in part two), urging servicers to keep the notes rather than passing them along to trustees? It now seems most likely that the fraudulent practices were recommended as a means to speed the illegal foreclosures we are now witnessing.
Remember, the servicers are the same fraudsters who are losing mortgage payments, sending foreclosure notices to the wrong homeowners, telling homeowners to skip payments so that they can qualify for modifications -- then stealing their homes, and in some cases delaying foreclosures in order to maximize late fees and penalties.
Okay, but if the servicers hold the notes, why on earth can't they find them--why do they need to file "lost note affidavits"? In a word, fraud. If they now produce the notes, it will be clear that they were not properly endorsed each time the mortgages were transferred. And they were never held by the REMIC trusts. As I will explain, that means mortgage backed securities are fraudulent and the banks are on the hook for hundreds of billions of dollars. And that the banks holding the mortgages cannot legally foreclose. That is why they are destroying the documents, and hiring robo-signers to forge new ones.
When it comes to Wall Street, things are always worse than they seem. As the reader wrote to me:
These financial institutions that defrauded homeowners, then bet against them with a stacked deck of accomplices such as MERS, mortgage servicers, foreclosure mills and others have taken predation beyond previously known levels and executed financial crimes for which they must be fully prosecuted.
Or, one might think, shot.
Here's the deal. This financial crisis is like Shrek's onion. As you peel back layer after layer of sleaze, you find that the whole damn thing is fraud. We are talking about tens of trillions of dollars of it. Tens of thousands of individuals were involved. It was thorough. It was blatant. It was even transparent, right under the noses of regulators and supervisors. It was normal business practice. It never had any fear of prosecution or punishment. Even today, it taunts the impotent administration, daring President Obama to do anything.
And it expects to win. The fraudsters have Congress in their back pocket and plan to rush through legislation to validate ex post all of their illegal activity. It is almost a foregone conclusion that Congress will pass a law early next year to legalize everything MERS and the big banks did -- lending fraud, recording fraud, tax fraud, securities fraud, and foreclosure fraud. There will be no rule of law to protect private property in the United States. Wall Street can claim any property it wants -- no proof required. That is what President Bush meant when he proclaimed a new "Ownership Society" -- as I wrote back in 2005. The plan all along was to put the bottom four deciles of Americans into permanent indebtedness while the top fraction of one percent would transfer ownership of everything to itself. So far, President Obama has stuck with the program -- overseeing the greatest wealth transfer in human history.
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Key quotes from the MERS document
According to the document, MERS's mission statement reads as follows:
What is MERS?
MERS serves two purposes. First, it is a national electronic registry for tracking servicing rights and beneficial ownership interests in mortgage loans. Second, MERS acts as nominee (a form of agent) for the servicer and beneficial owner of a mortgage loan in the public land records. MERS is designed to operate within the existing legal framework in all U.S. jurisdictions and did not require any changes to existing laws.
How is this made possible? Its members appoint MERS as the mortgagee of record on all loans that they register on the MERS System. This appointment eliminates the need for any future assignments when servicing rights are sold from one MERS Member to another. Instead of preparing a paper assignment to track the change in the county land records, all subsequent transfers are tracked electronically on the MERS System.
MERS does not create or transfer beneficial interests in mortgage loans or create electronic assignments of the mortgage. What MERS does do is eliminate the need for subsequent recorded assignments altogether. The transfer process of the beneficial ownership of mortgage loans does not change with the arrival of MERS. Promissory notes still require an endorsement and delivery from the current owner to the next owner in order to change the beneficial ownership of a mortgage loan.
MERS explains the registry process as follows:
With every new loan that is registered on the MERS System, it becomes more likely that you will come in contact with a mortgage loan having MERS as the mortgage holder in the chain of title. MERS is put in this position in one of two ways: the first is by an assignment from a lender or servicer to MERS. This method is usually associated with bulk transfers of servicing. The second way is with the lender naming MERS as the mortgagee of record as nominee for itself (and its successors and assigns) in the original security instrument at the time the loan is closed. We call this second option "MOM", which stands for MERS as Original Mortgagee.
"MOM" was a significant milestone for MERS and the mortgage industry. Fannie Mae, Freddie Mac, and Ginnie Mae have each approved the use of MERS as original mortgagee as nominee for a lender on the security instrument for loans sold to them and registered on the MERS System.
In order to make MOM work, changes were made by Fannie Mae and Freddie Mac to their uniform security instruments allowing MERS to be named as the mortgagee in a nominee capacity for the lender. First, to reflect the interrelationship of the promissory note and mortgage and to ensure these two instruments are tied together properly, the recital paragraph names MERS, solely as nominee for Lender, as beneficiary. Second, it is made clear that the originating lender rather than MERS is defined as the "Lender". This change was made so that everyone understands that MERS is not involved in the loan administration process. Third, as mortgagee of record, MERS needs to have the authority to release the lien of security instrument, or if necessary, foreclose on the collateral on behalf of the lender. Such authority is provided by adding a paragraph to the security instrument informing the borrower that MERS holds only legal title to the interests granted by the borrower. It also informs the borrower that, if necessary to comply with law or custom, MERS may exercise the right to foreclose and sell the property and may take any action required of the Lender to release or cancel the security instrument.
Once MERS is named in the original security instrument or by way of an assignment, the document is then recorded in the appropriate public land records. From this point on, no subsequent assignments of the mortgage to a MERS member needs to be recorded. MERS remains in the land records, as mortgagee, throughout the life of the loan so long as servicing is not sold to a non-MERS member. All subsequent transfers of ownership in mortgage loans and servicing rights for that loan are tracked electronically between MERS members through the MERS System. This process eliminates the opportunity for a break in the chain of title.
So the basic scam is that when a loan is securitized, MERS is named as the mortgagee of record ("MOM"). Yet MERS does not hold the note. Instead, MERS pretends to hire someone in the firm that holds the note to maintain the fiction that it has got the note. Yet, it is the REMIC trustee that must hold the note to make the securities lawful. It is clear throughout the document that proper procedure is never recommended by MERS, instead, it is recommended that the servicer hold the note in almost all cases.
Here follow direct quotes from the document, as they appear but with emphasis added.
Even though the servicer has physical custody of the note, custom in the mortgage industry is that the investor (Fannie Mae, Freddie Mac, Ginnie Mae or a private investor) owns the beneficial rights to the promissory note.
If the promissory note is endorsed in blank and the servicer has physical custody of the note, the servicer will technically be the note holder as well as the record mortgage holder. By virtue of having the servicer's employees be certifying officers of MERS, there can be an in-house transfer of possession of the note so that MERS is considered the note holder for purposes of foreclosing the loan. Pg 22 MERS doc
If the promissory note is endorsed in blank and the servicer has physical custody of the note, the servicer will technically be the note holder as well as the record mortgage holder. By virtue of having its employees become certifying officers of MERS, there can be an in-house transfer of possession of the note so that MERS is considered the note holder for purposes of foreclosing the loan. Pg 34
Please Note: Fannie Mae's foreclosure regulations require an assignment from MERS to Fannie Mae in the Parish of Orleans. This means that Fannie Mae will be the foreclosing entity. This is the same requirement that exists when the servicer is the record mortgage holder.
Even though the servicer has physical custody of the note, custom in the mortgage industry is that the investor (Fannie Mae, Freddie Mac, Ginnie Mae or a private investor) owns the beneficial rights to the promissory note.
possession of the note so that MERS is considered the note holder for purposes of foreclosing the loan. Pg 44 (Note: something was omitted here. This is exactly the way it reads on the page.)
If the promissory note is endorsed in blank and the servicer has physical custody of the note, the servicer will technically be the note holder as well as the record mortgage holder. By virtue of having the servicer's employees be certifying officers of MERS, there can be an in-house transfer of (Note: something missing here also)
MERS should remain as the titleholder for as short of time as possible. Pg 45
We have been advised that the named plaintiff in the foreclosure action should be both the record holder of the mortgage and the holder of the promissory note. This is typically considered to be the servicer because if the promissory note is endorsed in blank and the servicer has physical custody of the note, the servicer will technically be the note holder as well as the record mortgage holder. By virtue of having the servicer's employees be certifying officers of MERS, there can be an in-house transfer of possession of the note so that MERS is considered the note holder for purposes of foreclosing the loan.
Even though the servicer has physical custody of the note, custom in the mortgage industry is that the investor (Fannie Mae, Freddie Mac, Ginnie Mae or a private investor) owns the beneficial rights to the promissory note. Pg 46
Even though the servicer has physical custody of the note, custom in the mortgage industry is that the investor (Fannie Mae, Freddie Mac, Ginnie Mae or a private investor) owns the beneficial rights of the promissory note. Pg 50
During the redemption period, MERS will be considered to be titleholder. However, at the end of the redemption period, a deed to the investor should be executed as soon as possible so that MERS remains in the chain of title for as short a time as possible. Pg 54
We have been advised that the named plaintiff in the foreclosure action should be both the record holder of the mortgage and the owner and holder of the promissory note. This is typically considered to be the servicer because if the promissory note is endorsed in blank and the servicer has physical custody of the note, the servicer will technically be the note holder as well as the record mortgage holder. By virtue of having its employees become certifying officers of MERS, there can be an in-house transfer of possession of the note so that MERS is considered the note holder for purposes of foreclosing the loan. Therefore, MERS is both the mortgage holder and the note holder as nominee for the current servicer. Pg 62
Even though the servicer has physical custody of the note, custom in the mortgage industry is that the investor (Fannie Mae, Freddie Mac, Ginnie Mae or a private investor) owns the beneficial rights to the promissory note. Pg 63
Please Note: Fannie Mae's foreclosure regulations require an assignment from MERS to Fannie Mae in New Hampshire. This means that Fannie Mae will be the foreclosing entity. This is the same requirement that exists when the servicer is the record mortgage holder. Pg 66
If the promissory note is endorsed in blank and the servicer has physical custody of the note, the servicer will technically be the note holder as well as the record mortgage holder. By virtue of having the servicer's employees be certifying officers of MERS, there can be an in-house transfer of possession of the note so that MERS is considered the note holder for purposes of foreclosing the loan. Pg 68
Even though the servicer has physical custody of the note, custom in the mortgage industry is that the investor (Fannie Mae, Freddie Mac, Ginnie Mae or a private investor) owns the beneficial rights of the promissory note.
If the promissory note is endorsed in blank and the servicer has physical custody of the note, the servicer will technically be the note holder as well as the record mortgage holder. By virtue of having the servicer's employees be certifying officers of MERS, there can be an in-house transfer of possession of the note so that MERS is considered the note holder for purposes of foreclosing the loan. Pg 70
We have been advised that the named plaintiff in the foreclosure action should be both the record holder of the mortgage and the holder of the promissory note. This is typically considered to be the servicer because if the promissory note is endorsed in blank and the servicer has physical custody of the note, the servicer will technically be the note holder as well as the record mortgage holder. By virtue of having the servicer's employees be certifying officers of MERS, there can be an in-house transfer of possession of the note so that MERS is considered the note holder for purposes of foreclosing the loan.
Even though the servicer has physical custody of the note, custom in the mortgage industry is that the investor (Fannie Mae, Freddie Mac, Ginnie Mae or a private investor) owns the beneficial rights to the promissory note. Pg 76
Even though the servicer has physical custody of the note, custom in the mortgage industry is that the investor (Fannie Mae, Freddie Mac, Ginnie Mae or a private investor) owns the beneficial rights to the promissory note.
If the promissory note is endorsed in blank and the servicer has physical custody of the note, the servicer will technically be the note holder as well as the record mortgage holder. By virtue of having the servicer's employees be certifying officers of MERS, there can be an in-house transfer of possession of the note so that MERS is considered the note holder for purposes of foreclosing the loan. Pg 80
Please Note: Fannie Mae's foreclosure regulations require an assignment from MERS to Fannie Mae in Rhode Island. This means that Fannie Mae will be the foreclosing entity. This is the same requirement that exists when the servicer is the record mortgage holder. Pg 87
Even though the servicer has physical custody of the note, custom in the mortgage industry is that the investor (Fannie Mae, Freddie Mac, Ginnie Mae or a private investor) owns the beneficial right to the promissory note. Pg 88
We have been advised that the named plaintiff in the foreclosure action should be both the record holder of the mortgage and the holder of the promissory note. This is typically considered to be the servicer because if the promissory note is endorsed in blank and the servicer has physical custody of the note, the servicer will technically be the note holder as well as the record mortgage holder. By virtue of having the servicer's employees be certifying officers of MERS, there can be an in-house transfer of possession of the note so that MERS is considered the note holder for purposes of foreclosing the loan.
Even though the servicer has physical custody of the note, custom in the mortgage industry is that the investor (Fannie Mae, Freddie Mac, Ginnie Mae or a private investor) owns the beneficial rights to the promissory note. Pg 89
Even though the servicer has physical custody of the note, custom in the mortgage industry is that the investor (Fannie Mae, Freddie Mac, Ginnie Mae or a private investor) owns the beneficial right to the promissory note. Pg 91
MERS prefers to not take title to the property, so the Certificate of Sale should be assigned if possible. However, either option is acceptable. Pg 92
MERS should only be in the chain of title for as short of a time as possible. As soon as the eviction is completed, the deed to HUD should be recorded. Pg 94
The servicer usually has physical custody of the note at the time of the foreclosure with a blank endorsement. This makes the servicer the noteholder for the purposes of foreclosing. However, custom in the mortgage industry is that the investor (Fannie Mae, Freddie Mac, Ginnie Mae or a private investor) owns the beneficial rights to the promissory note. Pg 99
We have been advised that the named plaintiff in the foreclosure action should be both the record holder of the mortgage and the holder of the promissory note. This is typically considered to be the servicer because if the promissory note is endorsed in blank and the servicer has physical custody of the note, the servicer will technically be the note holder as well as the record mortgage holder. By virtue of having the servicer's employees be certifying officers of MERS, there can be an in-house transfer of possession of the note so that MERS is considered the note holder for purposes of foreclosing the loan.
MERS should only remain the titleholder for as short as time as possible. A subsequent deed should be executed to the investor immediately. Pg 100
Local Counsel advises that the promissory note is endorsed to the servicer prior to commencing a foreclosure so that the servicer becomes the noteholder. In order for a foreclosure to be brought in the name of MERS, the note should be endorsed to MERS so that MERS is the noteholder. Pg 102