Who is this MERS character?

You see the term “MERS” on a lot of mortgages, and deeds of trust. Ever wonder who that is and what they do? Well, last year the Arkansas Supreme Court issued a ruling on exactly that question. (Here is their website)

The case is Mortgage Electronic Retirement System, Inc. v. Southwest Homes of Arkansas. The basics are that in 2003 a couple borrowed from Pulaski Mortgage (now Iberia Bank Mortgage) to buy a house, and gave Pulaski a deed of trust, with the trustee being a Mr. East, and MERS listed as the “Beneficiary” acting “solely as nominee for the Lenders, and its successors and assigns”. The second page said “the Borrower understands and agrees that MERS holds only legal title to the interests granted by the Borrower and further that MERS as nominee of Lender has the right to exercise all rights of the Lender including foreclosure.”

In 2006, the couple borrowed from Southwest and gave a second mortgage to them. You know how this ends, they default. So Southwest forecloses and names “MERS (Pulaski Mortgage)”, the borrowers, and the county tax collector. Pulaski Mortgage gets served, but MERS doesn’t. Neither Pulaski nor MERS files an answer, and at the foreclosure sale Southwest takes it back and the Pulaski Mortgage loan is now unsecured.

Obviously, MERS is not pleased with this, as Pulaski almost certainly sold the debt and it’s probably on its second or third owner by now. So MERS appeals the judgment, arguing it was a necessary party and should have been served. If it’s not, then MERS has a real problem because one of the reason it exists is to prevent this very thing.

The court first addresses the question of who or what MERS is and what do they do. They initially discuss what MERS does NOT do. It doesn’t service the loan, it doesn’t oversee payments in any way, or in any way administer the loan. What MERS is, according to its pleadings, is provide electronic tracking of ownership interests in residential property security instruments. It was apparently developed by “the real estate finance industry” to help facilitate the sale of instruments on the secondary market. Their own story is here. We’ve all heard about all those mortgages that were sliced and diced up and sold to investors, right? Basically, MERS was created to protect the interests of all those buyers no matter how far downstream from the original lender. You could trade these mortgages and deeds of trust at will, but you didn’t have to go down to the local county courthouse every time to file an assignment of that mortgage. So when Pulaski sells to J.P. Morgan, and they sell to Goldman, and they sell to CalPers, and on and on, MERS remains the nominee and keeps track for everyone without all the paperwork. And they get paid by everyone who is a member of MERS to perform this service.

So the question is – is MERS entitled to notice as a result of all it does? MERS says yes, it’s an agent of ANY member, no matter who currently owns the, in this case, deed of trust. The court disagrees, however, saying even if it was an agent of Pulaski Mortgage, Pulaski Mortgage was served – don’t need the agent if we have the principal. Moreover, the Court found, MERS had no authority to actually ACT on Pulaski’s behalf. It appears the Court thought they were simply a placeholder, and were not going to give them any more authority based on their lending documents.

MERS didn’t stop with the principal-agent theory, though. It also claimed to hold a property interest as it had legal title with respect to the rights conveyed by the borrower to the lender. The Court rejects this as well, noting that in Arkansas the title rests with the Trustee in a deed of trust – Mr. East. He has all the powers MERS claims in this case. Moreover, MERS had no right to act even if payments weren’t made. It didn’t even track payments. The lender, Pulaski Mortgage, is the beneficiary of the deed of trust.

Finally, the Court notes that Arkansas is a recording state, which means if you want to prove you own something to the world, you better have it recorded in the circuit clerk’s office. According to what was filed, MERS was only the agent, and Pulaski was its principal. No other lender had filed an assignment of Pulaski’s mortgage, so “permitting an agent such as MERS to step in and act without a recorded lender directing its action would wreak havoc on notice in this state.”

Long and short, MERS is a placeholder, and in Arkansas they aren’t going to get any more rights without some additional documentation. Which is very bad news for MERS members. This case came down last year, so I’m going to try and find out how MERS has responded.

It will be interesting to see how this effects cases where MERS is seeking to foreclose on a mortgage or deed of trust, now that the Court has essentially said that it has no legal standing. A quick Google of “MERS and Arkansas” will bring up a number of anti-foreclosure sites where this cases is cited as a real victory for borrowers and references to cases in other states with similar rulings.