MERS – Privatizing the Recording of Real Property Records Should Be at the Risk of its Members


I am just going to dump some information here for starters.  I may revise it over time.

I can’t remember when I first came across a court opinion referring to the Mortgage Electronic Registration Systems, Inc.  (MERS),  but it seemed inconsistent to me to permit a private system to in anyway override the public recording system developed over decades.   As I came across more references, it seemed many cases did not have anyone challenging the existence of MERS or its member-participants to take advantage of laws enacted on the assumption of use of the public recording system, but without recording their documents publicly, nor making them available to the public, while avoiding payment into the public system.

A case that bothered me is Delo v. GMAC Mortg., L.L.C., 232 Ariz. 133, 302 P.3d 658 (Ct. App. 2013).  I spoke to the attorney for Delo shortly after that opinion was filed about potential grounds for review by the state supreme court, but the delay and expense already incurred had left his client disinterested in further litigation.

The panel that heard his case seemed to not at all appreciate the purpose of the recording statutes.  As Delo’s attorney described his oral argument to me, the panel seemed to think MERS was doing the county (Arizona laws make this a county function) a favor by taking off its hands the responsibility to keep track of the information.  To the contrary, condoning the private record keeping by MERS is akin to returning to the days before uniform recording laws.  While MERS members still publicly record deeds (when they foreclose or receive a deed-in-lieu-of-foreclosure), once an initial mortgage or deed of trust (in Arizona both a mortgagee’s interest and a beneficial interest pursuant to a deed of trust are also considered interests in land) is publicly recorded identifying MERS as the nominee (a word choice apparently allowing deception about the status in which MERS acts), all following exchanges of ownership among MERS members is privately recorded only with MERS and no can tell who owns that mortgage or deed of trust interest by going to the county recorder and examining public records.

In Delo, the recorded documents identified MERS only as an agent for the interest holder.  The name of that interest holder at the time of recording was known.  That interest had been subsequently changed to be held by a different entity, identified in MERS’ private records, but not on the public record.  MERS convinced the court that the notice sent to the party shown as the interest holder on that recorded document (rather than MERS) was insufficient; that a different party actually had the interest at the time the notice was sent and that MERS was its agent, too.  The Delo opinion is arguably at odds with both agency law and the real property recording laws.  If MERS is just an agent, or nominee, then while notice to it as agent would be binding on its principal, notice to the principal still binds the principal, too, regardless of whether notice is ever given to the agent.  Putting down MERS as agent on a recorded deed of trust is acceptable, but that just means notice may be given to that principal directly or through MERS as its agent.  When that principal conveys its interest to another party, that is another transfer of an interest in land under Arizona law, and Arizona law states that such transfer must be documented by a publicly recorded instrument to have it be binding on the public.  Having MERS be agent for both parties merely gives the appearance of compliance, but MERS as agent for A is not the same as MERS as agent for B.  If nothing is placed on the public record, then MERS as agent for A remains the owner for notice purposes.  Delo reached the wrong result.

For some other Arizona appellate opinions involving MERS, see:  Steinberger v. McVey, ____, Ariz. ____, 318 P.3d 419 (Ct. App. 2014); Sitton v. Deutsche Bank Nat. Trust Co., 233 Ariz. 215, 311 P.3d 237 (Ct. App. 2013); Stauffer v. U.S. Bank Nat. Ass’n, 233 Ariz. 22, 308 P.3d 1173 (Ct. App. 2013).

MERS is the subject of much litigation and many articles.  Some courts have taken a more aggressive posture toward MERS’ efforts to privatize public records than others.  There follows some material in no particular order that provide some additional source material on MERS.  As stated above, this may be revised later. For the moment, this is just an effort to assemble some material on this topic.

Some interesting cases:  Landmark, 216 P.3d 158 (Kan.); Niday, 284 P.3d 1157 (Or.); Weingartner, 702 F. Supp. 2d 1276, 1280, 1282 (2010). (good quotes)

http://nailta.org/wp-content/uploads/2013/03/NAILTA_MERS-2.0-Position-Paper.pdf    (see pages 3-5, MERS harmful to land title industry and siphons revenue away from governmental agencies)

See R. Sweat, Probate and Property, May/June 1989 at 27:  “Race, Race-Notice and Notice Statutes: The American Recording System”; C. Pomeroy, 11 Nev. L.J. 139 (2010):  “Ending Surprise Liens On Real Property”; C. Peterson, 78 U. Cinn. L. Rev. 1359 (2010):  “Foreclosure, Subprime Mortgage Lending, and the Mortgage Electronic Registration System.”

The Sweat article is general material on the origins of recording systems.

The Pomeroy article is mainly on federal estate tax and mechanic’s liens, but has some information on the origin and purpose of public recording laws.  MERS is discussed starting around page 162.  Particularly see footnote 138 and its citation to an amicus brief arguing that MERS causes harm.  the mers-amicus-brief file (http://www.getdshirtz.com/MERS_files/MERSAmicusCharneyetal.pdf ), appears to be the Brief identified in footnote 138 of the Pomeroy Article.  That amicus brief has a number of potentially interesting cites in it and comments on the public/social policy information that becomes unavailable for use if a private recording system like MERS is allowed to displace the public record.   See pages 4-5 and 10-28.

The Peterson article also reviews some of the history of recording laws (starting around page 1363).  It is also interesting where it refers (page 1362) to MERS as a tax evasion tool. I don’t seem to have kept copies, but I think I saw some online documents regarding MERS that laid out that part of its purpose was to allow the multiple transfers of ownership of bundles of mortgages at a fraction of the cost of the recording fees if individual assignments of interests were recorded on the public system.   So, the lending industry wants to use the public recording system when it comes time to foreclose, but not pay for it in the meantime as it is trading interests back and forth.  This article has more interesting information on MERS starting at page 1368.  See text and footnote 64 on MERS ownership as “fictional.”  The author notes (page 1371) that once a loan is assigned to MERS, the public records no longer indicate who actually owns the lien.  This seems to be a problem courts ought to worry about.   The author mentions (page 1373) how lenders avoid recording fees and obscure who is foreclosing.  The imagery is interesting (page 1374) where MERS is referred to as usurping county title recording systems.  The author takes an example (page 1375) and points out how MERS may try to claim it is both principal and agent with respect to the same right.  (Part of the definition of agency is that it is a two-party agreement.)  Also interesting is the author’s hypothetical (page 1378) as to what would be the result if MERS were to file a petition for bankruptcy.  The author continues with the argument against the legitimacy of MERS holding any interest and (on page 1384, plus footnote 135) states that MERS does not own the debt or the beneficial interest in the security.  See the cases cited in footnotes on page 1385.  The hypothetical (page 1400) on debt collection/public recording laws and possible “atrophy” is interesting.  “[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.”  Page 1401.  See more discussion on page 1403 and quote from a court in footnote 223. If MERS is allowed to maintain its private system, then the author predicts the burden of reconstructing matters of questionable ownership will shift from the public records to litigation.  Page 1404.  That was one of the reasons the public recording systems developed – so that people could reliably obtain and transfer title and not have people come out of the woodwork later claiming some interest.

More miscellaneous material on MERS:

http://www.federalreserve.gov/newsevents/press/enforcement/enf20110413a12.pdf  2011 Consent Order

http://mortgageendgame.com/mo/BIDEN_LAWSUIT_OVERVIEW.pdf

http://mortgageendgame.com/mo/EXHIBIT%20287%20-%20(DELAWARE%20VS%20MERS)%20-%20(AG%20BIDEN%20CASE).pdf

Bain v. Metropolitan Mortg. Group, Inc., 175 Wn.2d 83, 285 P.3d 34 2012) (amicus brief from Bain case: http://shawnna.org/wp-content/uploads/2012/02/amicus-brief-natlconsumerlawcenter.pdf)

Jackson v. Mortgage Electronic, 770 N.W.2d 487, 490 (Minn. 2009)(“According to MERS, multiple assignments of the security instrument commonly caused confusion, delays, and chain-of-title problems.  In an effort to streamline the assignment process, MERS essentially privatized part of the mortgage recording system.”).

MERSCORP, Inc. v. Romaine, 8 N.Y. 3d 90, 104 (2006)(“If it achieves the success it envisions, the MERS system will render the public record useless by masking beneficial ownership of mortgage and eliminating records of assignments altogether.”).

In re Dobie, No. 10-11296-MM13 (filed April 14, 2011), 2011 WL 1465559 at *7 n. 15, (Bankr. S.D. Cal.) (“[C]ircumventing the public recordation system is, in fact, the purpose for which the MERS system was created. Creation of a private system, however, is not enforceable to the extent that it departs from California law.”).

http://mortgageendgame.com/mo/Obrien_PressRelease1-18-12.pdf  press release of Massachusetts Register of Deeds

http://www.ritholtz.com/blog/2013/04/states-fight-back-against-mers-mortgage-fraud/

Some general material on public real property recording laws (geared toward Arizona and its statutes):

            A.    Real Property Recording System.

Until the establishment of the system of recording conveyances, it was extremely difficult for any man who purchased property to ascertain whether or not he had in fact secured a good title.  In many cases innocent purchasers who had made the utmost effort to determine whether there were outstanding incumbrances, and who had in all good faith and sincerity paid a full consideration for the property, lost it on account of hidden equities of which they had neither knowledge, nor means of obtaining it.  This condition, which was bad enough in the early days of the English and American law when conveyances were comparatively rare, grew intolerable as the complexity and frequency of such transactions increased, and the various recording acts were passed for the express purpose of providing a place and a method by which an intending purchaser could safely determine just what kind of a title he was in fact securing.  Such statutes are now found in practically every state of the Union, and there has grown up, not only in the bar, but among the general laity, the profound conviction that, if the public records show a clear title in a grantor, the prospective purchaser may safely buy the property, unless he has notice of such facts as would at least put him on inquiry.  That such an interpretation of the recording acts is beneficial in the long run to all honest owners or prospective owners of real property is obvious.  If the law provides a place where any man who owns an interest in real estate can give notice of it to all the world with the assurance that his rights will be protected thereby, and a prospective purchaser, on the other hand, can with equal safety investigate, and be confident that no rights not disclosed therein are valid against him in the absence of his knowledge thereof, we can hardly imagine a more beneficial institution.  We think, therefore, that we should construe the recording acts so as to afford the greatest possible protection to the man who in good faith endeavors to comply with them.

Phoenix Title & Trust Co. v. Old Dominion Co., 31 Ariz. 324, 334-35, 253 P. 435, 438-39 (1927) (emphasis added).[1]

Real property interests are required to be recorded.  A.R.S §§ 33-411, 33-412.[2]  The real property recording system is intended to provide a source of information that the public may safely rely on with respect to any interest claimed in real property.  The object of the recording system is to require the public to act with the presumption that recorded instruments exist and are genuine.  Lewis v. State, 32 Ariz. 182, 256 P. 1048 (1927).  An interested party “has the right to presume that public records speak the truth and to act thereon in all matters affected by instruments required by law to be recorded.”  Newman v. Fidelity Sav. & Loan Ass’n, 14 Ariz. 354, 357, 128 P. 53, 54 (1912).

An unrecorded interest is invalid except as between the parties to an instrument and subsequent purchasers with actual notice of it; as to the rest of the world, the unrecorded interest is void.  “All bargains, sales and other conveyances whatever of lands . . . shall be void as to creditors and subsequent purchasers for valuable consideration without notice unless they are acknowledged and recorded in the office of the County Recorder as required by law.”  A.R.S. § 33-412(A) (emphasis added).  “Unrecorded instruments, as between the parties and their heirs, and as to all subsequent purchasers with notice thereof, or without valuable consideration, shall be valid and binding.”  A.R.S. § 33-412(B).


[1]   See also City of Lakewood v. Mavromatis, 817 P.2d 90, 94 (Colo. 1991) (recording systems permit one to “rely on the condition of title as it appears of record”); First Nat. Bank v. Paris, 358 Ill. 378, 385, 193 N.E. 207, 210 (1934) (purpose “to give notice to the public of the incumbrances against real estate, priority, and ownership . . . and the public has a right to rely on and be protected by such record”); Brace v. Superior Land Co., 65 Wash. 681, 688, 118 P. 910, 913 (1911) (purpose includes “doing away with secret liens and hidden equities”); First Nat. Bank v. First Interstate Bank, 774 P.2d 645, 652 (Wyo. 1989) (“reliable notice” is a basic principle underlying recording systems).

[2]   Generally, previously recorded liens have priority over later recorded liens. See Continental Lighting & Contracting, Inc. v. Premier Grading & Utilities, LLC, 227 Ariz. 382, 385, ¶ 9, 258 P.3d 200, 203 (Ct. App. 2011); Lamb Excavation, 208 Ariz. at 480, 95 P.3d at 544.

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