If you still think, like Shaun Donovan, that the crisis in the mortgage markets merely concerns foreclosure paperwork, you need to take a look at these two Law Review papers from Professor Christopher Lewis Peterson of the University of Utah (via). They provide, in excruciating detail, the story of MERS, short for Mortgage Electronic Registration System: the private corporation built by the mortgage lending industry, whose tool for electronically trading mortgages has thrown the entire housing market into turmoil. In the name of saving a buck, the mega-banks used this tiny company with almost no employees and entrusted it with 60 million of the nation’s mortgages on its system – 60% of all mortgages in the United States – to predictable results.

Starting in the early 1990s, the mortgage lending industry, seeking speed and the evasion of land title costs, decided to bypass the state and county registrars which would normally track and assign the title ownership of properties. Instead they created and used MERS, which operates a database to track that ownership. And they list MERS as the “mortgagee of record” with the county recorder – so that all the sales and resales and securitization of the mortgages will not result in the fees that follow the recording of mortgage assignments. Peterson explains that this saves the servicers a measly $22 a loan, which of course adds up when you consider the number of loans and trades per year.

Once again, MERS does not actually advance any loan principal to the homeowner, does not have the right to receive any payments from the borrower, and is not the actual party in interest in any foreclosure proceeding. Nevertheless, the actual mortgagee pays a fee to MERS to induce MERS to record the mortgage in MERS’s name. By eliminating the reference to an actual mortgagee or the actual assignee, MERS estimated it would save the originator an average of $22.00 per loan.

This saves the industry money in recording, but basically shields the county recorders from actually divining the owner of the loans. When a loan falls into delinquency and then foreclosure, MERS carries out the foreclosure process in their own name – despite the fact that they don’t own legal title to the mortgages on its database, and therefore lack standing to foreclose. MERS also doesn’t have the personnel (they have almost no employees) to engage in millions of these foreclosure operations or perform any of the other legal duties required of a mortgage owner. So they outsource this capacity in just about the most fraudulent manner possible, relying on the lack of public records and their role as a masked agent for the servicers.

In the wake of the subprime crisis, this decline in the informational value of the public records is already occurring. For example, in loans where MERS is listed as the mortgagee, virtually any company can show up, claim to own the note, and proceed to foreclose on a family that is in arrears. Because MERS has so many “certifying officers,” a court cannot easily verify whether the individual acting in MERS’s name is actually representing the real party in interest, given that the public records do not reveal who that party is.

Here’s more, from Peterson’s most recent paper:

To accommodate the massive amount of paperwork and litigation involved with its business model, MERSCORP simply farms out the MERS, Inc. identity to employees of mortgage servicers, originators, debt collectors, and foreclosure law firms. Instead, MERS invites financial companies to enter names of their own employees into a MERS webpage which then automatically regurgitates boilerplate “corporate resolutions” that purport to name the employees of other companies as “certifying officers” of MERS. These certifying officers also take job titles from MERS stylizing themselves as either assistant secretaries or vice presidents of the MERS, rather than the company that actually employs them. These employees of the servicers, debt collectors, and law firms sign documents pretending to be vice presidents or assistant secretaries of MERS, Inc. even though neither MERSCORP, Inc. nor MERS, Inc. pays any compensation or provides benefits to them. Astonishingly, MERS “vice presidents” are simply paralegals, customer service representatives, and foreclosure attorneys employed by other companies. MERS even sells its corporate seal to non-employees on its internet web page for $25.00 each. Ironically, MERS, Inc.—a company that pretends to own 60% of the nation’s residential mortgages—does not have any of its own employees but still purports to have “thousands” of assistant secretaries and vice presidents.

This must be one of these “financial innovations” I hear very serious people going on about.

So this is how you end up with multiple foreclosures by different servicers on the same home, or foreclosures on homes bought with cash. Basically, the servicer doing the foreclosing becomes whoever MERS wants it to be. And MERS, by standing in as the “mortgagee of record,” has made it impossible to determine the actual owner of record. Thus two centuries of land title operations in the United States have been outsourced to a shell company created by big banks so they could save a buck – and now they’re using it to forego legal processes and kick people out of their homes.

In the wake of this, you have companies like DOCX pop up, who can simply make up legal papers that then get used in court. The amount of fraud here is simply astonishing.

Tell me again that this is about notaries. The entire mortgage servicing market in the United States has, in a systematic way, become confused and muddled. If you’re the type of person given to protecting themself from the unexpected, you’ll type in wheresthenote.com into your browser, at the very least, for peace of mind. Because without that clarity, you, like every other homeowner in the United States, is exposed.

UPDATE: I should have provided the actual Law Review articles.

Foreclosure, Subprime Mortgage Lending, and the Mortgage Electronic Registration System

Two Faces: Demystifying the Mortgage Electronic Registration System’s Land Title Theory