60 Million Mortgages May Have Fatal Flaws and As A Result Are Unenforceable
Tuesday, October 20 2009 @ 09:47 AM MDT
The latest chapter in the mortgage meltdown is being written in court,
as one by one, judges are putting a halt to foreclosures. The latest
was a recent Kansas Supreme Court case. In Landmark National Bank v.
Kesler, the court held that a nominee company called MERS had no
standing to bring a foreclosure action.
Nor was Kansas the first. In August 2008, Federal Judge for the U.S.
Bankruptcy Court for the District of Nevada ruled MERS had no standing.
”Indeed, the evidence is to the contrary, the Note has been sold, and
the named nominee no longer has any interest in the Note.”
In September of 2008, A California Judge ruling against MERS concluded,
“There is no evidence before the court as to who is the present owner
of the Note. The holder of the Note must join in the motion."
March 19, 2009, the Supreme Court of Arkansas determined that MERS was
not the true beneficiary because the Note had been sold. Alabama and
Florida have made similar rulings.
In each case, the reason stems from a fundamental misstep in the
handling of Notes and Trust Deeds that runs contrary to established
court policies which require that the real parties identify themselves
to the court. Each of these cases involved MERS and, in each case, the
courts’ rationales were almost identical.
First, a little background. Over the last 40 years, mortgage lending
has evolved from a bank holding the mortgage to the mortgage being
bundled and sold as part of an investment pool, usually in the form of
As a registered security, the Note is a negotiable instrument, like
money or a cashier’s check, and under securities law that Note must be
given to the investor. In this case, mortgage backed securities, (MBS)
were bundled together in a pool and shipped to…well, we don’t really
One of the impediments to an MBS is the need to file assignments for
the beneficiaries in each county each time the mortgage is resold. And
apparently, no one holds them for very long because most have been
passed around several times.
In order to avoid the logistical nightmare of trying to maintain a
public chain of title, the biggest lenders joined MERS, Mortgage
Electronic Registration Systems, Inc.
MERS was created with the sole intent of evading the recording fees due to the county in which the security is located.
In so doing, in my opinion, they also destroyed the age-old practice of
making a public record of information concerning real property in
general, and legal interest specifically. The chain of title is a vital
record produced to resolve many a dispute.
Now, that’s gone. I believe, erased simply so they themselves, MERS,
could siphon off the recording fees for themselves. They sold their
business model to lenders as a better way to track mortgages that were
being sold and resold all over the world.
But, as there often is with a BIG IDEA, there were also unintended
consequences. Only now are they coming to light. Until MERS was
challenged in a foreclosure proceeding, no one had taken a look at the
The law, according to a Nevada Judge, is that for purposes of
foreclosure, both the Note and the Deed of Trust must be assigned. When
the Note is split from the Deed of Trust, the Note becomes unsecured. A
person holding only a Note lacks the power to foreclose because it
lacks the security.
MERS lost track of the Notes. In some cases, according to my research, they deliberately destroyed them.
Every thing was fine until the economy contracted. MERS began
foreclosing on delinquent home loans and then one day; someone said
“show me the Note.”
In reviewing the judge’s rulings in the above matters, several key points have been determined:
- MERS is not the beneficiary of the Notes
and has no skin in the game. It did not lend any money, collect any
payments or do anything more than track the sale of the securities.
- Judicial procedure requires that parties identify themselves and prove their standing.
Splitting the Note and Trust Deed leaves no party with standing to
foreclose. The true holder of the Note, the security, paid the lender
so the lender is covered. The true holder of the Note was insured by
AIG so they are covered. AIG and the banks were bailed out by
taxpayers. So, unless the American tax payer can produce a “blue-ink”
original Note, no one has standing to foreclose.
Allowing a foreclosure to proceed without the original Note places the
homeowner in double jeopardy. If the original Note were to surface, the
holder of the Note would be entitled to payment, but from whom? The
borrower is still on the hook.
MERS currently holds 50 to 60 million loans so this is
no small matter. And, just because they have lost repeatedly doesn’t
mean they will give up. They will keep right on foreclosing in hopes
that the homeowner won’t fight back and, in most cases, they won’t be
[Editor’s Note: RISMedia has been in touch with MERS for a response, which the company has not provided to date.]
George W. Mantor is known as “The Real Estate Professor” for his wealth
building formula, Lx2+(U²)xTFP=$? and consumer education efforts.
During a career that has spanned more than three decades, he has
amassed experience in new home and resale residential real estate,
resort marketing, and commercial and investment property. He is
currently the founder and president of The Associates Financial Group,
a real estate consulting firm.
Mantor can be reached at GWMantor@aol.com.