October 20, 2010
Recording Acts, MERS, and the Foreclosure Crisis
I haven't posted lately for a very good reason -- I've been distracted by the recording acts, the residential foreclosure crisis, and the Mortgage Electronic Recording System (MERS). I've been fascinated by the news articles making vague and mysterious references to lender affidavits which are taking the place of missing "paperwork." Some of the missing paperwork, no doubt, is evidence (in the form of a mortgage assignment) that the foreclosing lender actually owns the debt that it is attempting to foreclose. Presumably, if one is in the business of lending and purchasing debt, keeping good records about what debt one actually owns would be a fairly fundamental concept. I am constantly surprised that in reality it isn't that simple.
MERS, a private, parallel recording system owned by and for the benefit of the mortgage industry, has been .... I think the right word here is "interfering" ... with the American land title system since 1995. Basically, lenders become dues-paying members of MERS then record an original mortgage with MERS named as the lender's "nominee" or "mortgagee of record." But MERS never actually owns the debt -- it is just an agent. Apply this legal fiction to state mortgage law and hilarity, or possible a foreclosure debacle, ensues. Christopher Peterson (Utah) has written a very thorough article on the subject which was published this summer in the University of Cincinnati Law Review or can be found on SSRN here: "Foreclosure, Subprime Mortgage Lending, and the Mortgage Electronic Registration System".
So, I've been spending my free time learning more about the foreclosure moratorium and writing a short essay that I hope to publish in an online law review. In my essay, I argue that this whole mess demonstrates that the time has come to replace our local land title recording system with a single federal online system organized around the kind of searching technology that we take for granted on our smartphones. If anyone has any advice on submitting to an online journal, please let me know.
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The question is what comes first, Technology or the Law? It has to be the law. IMO
Posted by: BJ Lister | Oct 20, 2010 1:25:56 PM
Tanya makes some good points. An article in today's NY Times references the affidavits, but the focus is not the mortgage, but the note! Apparently, many lenders can't come up with a paper copy of the note with the borrower's signature on it. So, the recording system is a major issue, and MERS is the disaster that many of us feared it would be, but if the "system" is going to adapt to lender's current practices, we also are going to have to deal with centuries of precedent on promissory notes, and the UCC.
Posted by: Jim Durham | Oct 21, 2010 8:35:25 AM
I disagree with the idea of a Federal system; but then I work in a small county and like our deed room just fine. Nevertheless, I do think more discussion on how we can improve our land records, even if I am a curmudgeon and don't agree with the final result, is an altogether positive thing.
I did want to comment on the missing 'paperwork.' I have had to deal with this sort of thing in some cases concerning debt assignment. While not mortgage cases, some of the same rules will likely still apply.
The biggest thing that these affidavits try to do is overcome the best evidence rule. A number of states have some form of best evidence rule that, in essence, requires a written original or valid copy of a document who's contents are at issue in the case.
A contract assignment in a case involving unpaid debt is material in a case and, therefore, the contents of that assignment are at issue. Therefore, under the best evidence rule there must be some written evidence of assignment.
But there's more -- this evidence must reasonably identify what is being assigned. Often lenders will execute omnibus assignments that do not list the accounts. While this might work in some cases (such as the wholesale assignment of all debt obligations held by one party to another party), this won't work in many others.
Many of these assignments reference "schedules" or "exhibits" or some other additional material. This is the material that tends to get lost.
Therefore, you have affidavits attempting to overcome the best evidence rule's requirement that the assignment, schedule and exhibits and all, be produced. They often don't do a good job of this because they seek to use the business records exception to overcome their missing files.
The business records exception, however, only overcomes hearsay objections -- not best evidence rule objections.
Still, many judges don't know the intimate details of these rules of evidence. Further, many judges want to just see these dockets move along. Therefore, objections to inadequacies in the record for failure to meet the best evidence rule are often ignored.
In the end the burden is on the purchaser of a debt to keep their records straight. Losing the record of their purchase shouldn't be forgiven just because someone believe the homeowner/mortgagee should have paid their debt.
Posted by: John Nelson | Oct 21, 2010 11:07:58 AM
Is MERS a disaster because it is a problem on its face, or is it a disaster because the banks don't do good record keeping?
I think, logically and in theory, MERS can work. Practice, however, has left us with poor record keeping and banks unwilling to pay what's necessary to have foreclosures handled properly.
There are enough out of work lawyers you'd think there was folks to do this. I mean, foreclosure practice can get complicated, but it's not rocket science. It's a smattering of basic, Bar-required law: contract, property, secure transactions, and a bit of evidence.
My hope is bank stop trying to do these on the cheap and put the resources and legal power in hiring attorneys able to truly handle these cases. Money and competence isn't the only problem, too -- the power to deal is often not given to the bank's agents.
It's a lousy way to practice law.
Posted by: John Nelson | Oct 22, 2010 3:44:28 AM
Thanks for the comments!
BJ -- I totally agree. But when technological advances can help us improve the law, I think that we should update the law to make the best use of technology. Using a crude indexing system when we have the capacity to employ sophisticated searching methods doesn't help anyone who relies on the land title system.
Jim -- Thanks for the reference to that article. I have seen some of these affidavits that state that they can't find the note, the mortgage, or any proof of assignment. Land title improvements can obviously only help out with the docs that are intended to be recorded. But there is a totally separate question of how forgiving the legal system ought to be to lenders who apparently made little effort to keep promissory notes.
John -- I too love the local offices, especially the ones that still have the large leather-bound books with transcribed deeds. I'm a genealogist in my spare time, so I spend a lot of time going through those old books. That being said, I still contend that historical system just doesn't work with the modern real estate industry. I'm not a litigator, so I appreciate your insight on the evidence rules.
Posted by: Tanya Marsh | Oct 22, 2010 6:51:32 AM
John, as to your second post -- I think that MERS is a disaster for a couple of reasons. First, it is opaque where the public land title system is transparent. So I can't get into MERS to see the chain of assignments for the debt on my own home. Second, I think that keeping land title records straight is an essential governmental responsibility, and allowing a private, for-profit enterprise to keep the records is problematic, particularly if that enterprise that has a vested interest. Third, MERS states that it has "saved" industry $2.4 billion since inception. That is $2.4 billion that hasn't gone to local government to help run the system "for the rest of us." Fourth, the lack of transparency has enabled the lenders to hide fairly stunning levels of lax record keeping. If they were required to record assignments in the county records, perhaps they would have kept better track of all the loan docs.
Overall, I think that one of the essential problems here is the lenders' failure to adequately staff their operations. They outsourced origination to mortgage brokers and relied heavily on automated systems. This obviously contributed to shoddy underwriting. When mortgages began to fail, they did not respond by adequately staffing their modification departments. Now they are failing to staff their foreclosure processes. I suspect that most of these loan documents aren't actually "lost," they just don't want to invest the time to find and organize them. And frankly, if the courts let them foreclose without forcing them to find the original documents, what incentive do they have to spend the additional resources to track them down?
Posted by: Tanya Marsh | Oct 22, 2010 7:02:48 AM