[LINK] Outsourcing and Privatization
stephen at melbpc.org.au
stephen at melbpc.org.au
Sun Mar 6 22:04:27 AEDT 2011
A story regarding out-sourcing, and privatization ..
On Library Street in Reston, Va., one obscure business, the MERS
Corporation, claims to hold the title for nearly half of all the home
mortgages in America an astonishing $60 million in loans.
Never heard of MERS?
Thats fine with the mortgage banking industry as MERS is starting to
overheat and sputter. If its many detractors are correct, this private
corporation, with a full-time staff of fewer than 50 employees, could
turn out to be a huge problem for the mortgage industry.
Judges, lawmakers, lawyers and housing experts are raising piercing
questions about MERS, which stands for "Mortgage Electronic Registration
Systems", and whose private mortgage registry has all but replaced the
nations public land ownership records.
Most questions boil down to this:
How can MERS claim title to those mortgages, and foreclose on homeowners,
when it has not invested a dollar in a single loan?
And, more fundamentally: Given the evidence that many banks have cut
corners and made colossal foreclosure mistakes, does anyone know who owns
what, or owes what, to whom, anymore?
The answers have implications for all American homeowners ..
A birth certificate, a marriage license, a death certificate: these
public documents note many life milestones.
For generations of Americans, public mortgage documents, often logged in
longhand down at the county records office, provided a clear indication
But by the 1990s, the centuries-old system of land records was showing
its age. Many county clerks offices looked like something out of
Dickens, with mortgage papers stacked high. Some clerks had fallen two
years behind in recording mortgages.
For a mortgage banking industry in a hurry, this represented money lost.
Most banks no longer hold onto mortgages until loans are paid off.
Instead, they sell the loans to Wall Street, which bundles them into
investments through a process known as securitization.
MERS, industry executives hoped, would pull record-keeping into the
Internet age, even as it privatized it.
Streamlining record-keeping, the banks argued, would make mortgages more
But for the mortgage industry, MERS was mostly about speed and profits.
MERS, founded 16 years ago by Fannie Mae, Freddie Mac and big banks like
Bank of America and JPMorgan Chase, cut out the county clerks and became
the owner of record, no matter how many times loans were transferred.
MERS appears to sell loans to MERS ad infinitum.
This high-speed system made securitization easier and cheaper. But
critics say the MERS system made it far more difficult for homeowners to
contest foreclosures, as ownership was harder to ascertain.
MERS was flawed at conception, those critics say.
The bankers who midwifed its birth hired Covington & Burling, a prominent
Washington law firm, to research their proposal. Covington produced a
memo that offered assurances that MERS could operate legally nationwide.
No one, however, conducted a state-by-state study of real estate laws.
They didnt do the deep homework, said an official involved in those
discussions who spoke on condition of anonymity because he has clients
involved with MERS. So as far as anyone can tell their real theory
was: If we can get everyone on board, no judge will want to upend
something that is reasonable and sensible and would screw up 70 percent
County officials appealed to Congress, arguing that MERS was of dubious
legality. But this was the 1990s, an era of deregulation, and the
mortgage industry won.
We lost our revenue stream, and Americans lost the ability to
immediately know who owned a piece of property, said Mark Monacelli, the
St. Louis County recorder in Duluth, Minn.
And so MERS took off.
The MERS board gave its senior vice president, William Hultman, the
rather extraordinary power to deputize an unlimited number of vice
presidents and assistant secretaries drawn from the ranks of the
The nomination process was near instantaneous. A bank entered a name
into MERSs Web site, and, in a blink, MERS produced a certifying
resolution, signed by Mr. Hultman. The corporate seal was available to
those deputies for $25.
As personnel policies go, this was a touch loose.
Precisely how loose became clear when a lawyer questioned Mr. Hultman in
April 2010 in a lawsuit related to its foreclosure against an Atlantic
City cab driver.
"How many vice presidents and assistant secretaries have you appointed?"
the lawyer asked.
I dont know that number, Mr. Hultman replied.
I wouldnt even be able to tell you, right now.
In the thousands?
Each of those deputies could file loan transfers and foreclosures in
MERSs name. The goal, as with almost everything about the mortgage
business at that time, was speed. Speed meant money.
ALAN GRAYSON has seen MERSs record-keeping up close. From 2009 until
this year, he served as the United States representative for Floridas
Eighth Congressional District in the Orlando area, which was ravaged by
foreclosures. Thousands of constituents poured through his office, hoping
to fend off foreclosures. Almost all had papers bearing the MERS name.
In many foreclosures, the MERS paperwork was squirrelly, Mr. Grayson
said. With no real legal authority, he says, Fannie and the banks
eliminated the old system and replaced it with a privatized one that was
A spokeswoman for MERS declined interview requests. In an e-mail, she
noted that several state courts have ruled in MERSs favor of late. She
expressed confidence that MERSs policies complied with state laws, even
if MERSs members occasionally strayed.
At times, some MERS members have failed to follow those procedures
and/or established state foreclosure rules, the spokeswoman, Karmela
Lejarde, wrote, or to properly explain MERS and document MERS
relationships in legal pleadings.
Such cases, she said, are outliers, reflecting case-specific problems in
process, and did not repudiate the MERS business model.
MERSs legal troubles, however, arent going away. In August, the Ohio
secretary of state referred to federal prosecutors in Cleveland
accusations that notaries deputized by MERS were signing hundreds of
documents without any personal knowledge of them. The attorney general of
Massachusetts is examining a complaint by a county registrar that MERS
owes the state tens of millions of dollars in unpaid fees.
As far back as 2001, Ed Romaine, the clerk for Suffolk County, on eastern
Long Island, refused to register mortgages in MERSs name, partly because
of complaints that the companys records didnt square with public ones.
The state Court of Appeals later ruled that he had overstepped his
But Judith S. Kaye, the states chief judge at the time, filed a partial
dissent. She worried that MERS, by speeding up property transfers, was
pouring oil on the subprime fires. The MERS system, she wrote, ill
serves innocent purchasers.
I was trying to say something didnt smell right, feel right or look
right, Ms. Kaye said in a recent interview.
Little about MERS was transparent. Asked as part of a lawsuit against
MERS in September 2009 to produce minutes about the formation of the
corporation, Mr. Arnold, the former C.E.O., testified that writing was
not one of the characteristics of our meetings.
MERS officials say they conduct audits, but in testimony could not say
how often or what these measured. In 2006, Mr. Arnold stated that
original mortgage notes were held in a secure custodial facility
with stainless steel vaults. MERS, he testified, could quickly produce
every one of those files.
As for homeowners, Mr. Arnold said they could log on to the MERS system
to identify their loan servicer, who, in turn, could identify the true
owner of their mortgage note. The servicer is really the best source for
all that information, Mr. Arnold said.
The reality turns out to be a lot messier. Federal bankruptcy courts and
state courts have found that MERS and its member banks often confused and
misrepresented who owned mortgage notes. In thousands of cases, they
apparently lost or mistakenly destroyed loan documents.
The problems, at MERS and elsewhere, became so severe last fall that many
banks temporarily suspended foreclosures.
Some experts in corporate governance say the legal furor over MERS is
overstated. Others describe it as a useful corporation nearly drowning in
a flood tide of mortgage foreclosures. But not even the mortgage giant
Fannie Mae, an investor in MERS, depends on it these days.
We would never rely on it to find ownership, says Janis Smith, a Fannie
Mae spokeswoman, noting it has its own records.
Apparently with good reason. Alan M. White, a law professor at the
Valparaiso University School of Law in Indiana, last year matched MERSs
ownership records against those in the public domain.
The results were not encouraging. Fewer than 30 percent of the mortgages
had an accurate record in MERS, Mr. White says. I kind of assumed that
MERS at least kept an accurate list of current ownership. They dont.
MERS is going to make solving the foreclosure problem vastly more
THE Sarmientos are one of thousands of American families who have tried
to pierce the MERS veil.
Several years back, they bought a two-family home in the Greenpoint
section of Brooklyn for $723,000. They financed the purchase with two
mortgages from Lend America, a subprime lender that is now defunct.
But when the recession blew in, Jose Sarmiento, a chef, saw his work
hours get cut in half. He fell behind on his mortgages, and MERS later
assigned the loans to U.S. Bank as a prelude to filing a foreclosure
Then, with the help of a lawyer from South Brooklyn Legal Services, Mr.
Sarmiento began turning over some stones. He found that MERS might have
violated tax laws by waiting too long before transferring his mortgage.
He also found that MERS could not prove that it had transferred both note
and mortgage, as required by law.
One might argue that these are just legal nits. But Mr. Sarmiento, 59,
shakes his head. He is trying to work out a payment plan through the
federal government, but the roadblocks are many. Im tired; Ive been
fighting for two years already to save my house, he says. I feel like I
never know who really owns this home.
Officials at MERS appear to recognize that they are swimming in dangerous
waters. Several federal agencies are investigating MERS, and, in
response, the company recently sent a note laying out a raft of reforms.
It advised members not to foreclose in MERSs name.
It also told them to record mortgage transfers in county records, even if
state law does not require it ..
See: "MERS? It May Have Swallowed Your Loan"
By MICHAEL POWELL and GRETCHEN MORGENSON Published: March 5, 2011
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