This article discusses some of the legal aspects of the Mortgage Electronic Registration Systems or “MERS” with regard to its potential legal liabilities and how these liabilities may affect related public companies.
We maintain that the potential legal liabilities faced by these companies are very large and may seriously injure their stock prices. We believe that the affiliates of MERS may be held liable for MERS violations based on various legal theories, including conspiracy, and if the courts pierce the corporate veil of MERS.
A list of some of the companies that may be affected is found at the end of this analysis.
MERS is a private non-stock Delaware member corporation that operates an electronic registry to track servicing rights and ownership of mortgage loans in the United States. MERS acts as a so-called “straw man.” MERS clouds land records as the purported owner of mortgages transferred by lenders, investors and loan servicers. MERS maintains that it eliminates the need to file assignments in the county land records with the purpose of lowering costs for lenders. This naturally reduces county recording revenues from real estate transfers.
Legal Issues Faced by MERS
Not Qualified to do Business in Most States
MERS is not qualified to business in most of the states in which it operates. The problem here is that MERS has allowed itself to be the plaintiff in many hundreds of thousands of mortgage foreclosures in states where it is not qualified to do business and therefore has no standing to sue. Most, 95% or more of these cases, were uncontested and therefore resulted in the loss of the defendants home after a telephone hearing that lasted a few minutes.
Self-Appointment of Officers
Without any explicit statutory authorization in Delaware corporate law, MERS allows MERS members to "self appoint" MERS Members' employees temporarily as an Assistant Vice President of MERS for the purpose of executing mortgage documents for MERS. MERS has thus delegated the authority of its board of directors to appoint officers to anyone who wants to be an officer. These “special officers” do not not have authority to accept service of process for MERS even though they claim to be an "officer" of MERS in having their name placed on an executed document. This is the scheme that has allowed “robo-signers” to flourish. This opens the door to overturning foreclosure and short sale cases.
Inconsistent Legal Positions
At the present time, MERS has made it clear that they do not own the mortgage note. However, between 2002 and 2009, MERS maintained in many cases at the appellate level the opposite position, that it was the right party and that it had the note. Many mortgages were foreclosed with MERS as the plaintiff between 2002 and 2009. MERS was also granting releases in mortgage refinancing.
Potential Liabilities for MERS and Affiliates
Unpaid Transfer Taxes
MERS admits it was formed to evade local transfer taxes that require the payment of a tax every time an interest in real estate is transferred.
As we all know, when real property is sold, a transfer tax is due. Real property includes not only the land or building, it includes the mortgage and any interest in the mortgage.
Property owners have resorted to various schemes to avoid these taxes, such as owning the property in a corporation. Instead of selling the property, the owner sells the stock of the corporation. As title is in the hands of the corporation before and after the sale of the stock, the property has not changed hands and no tax is due.
States have recognized that property owners were avoiding these taxes and have enacted laws to provide that when ownership changes, the change must be taxed.
If MERS is held liable for these unpaid taxes, MERS will have to pay for the taxes, the penalties, and the interest on the taxes and penalties.
Note we are not only talking about defaulted mortgages here, the taxes are due on the property whether the mortgage is in default or not.
If we estimate that the average loan is $150,000, and MERS has been used in 60 million mortgages, and the mortgages have repeatedly changed hands through simple sales as well as trading interests in loan pools, and the average recording fee not paid is $50, we would estimate easily over $500 billion in liabilities. We note that MERS affiliated lenders could also be liable for some of these taxes.
Up until 2009, MERS took the position that it was the owner of the mortgage and was named as plaintiff in foreclosure, even in many states where it was not registered to do business and therefore legally could not be a plaintiff. MERS won in these cases because the homeowner defendant did not know enough to defend themselves and did not put up a defense.
Losing a home is a very emotional loss for most people. We would expect that plaintiffs' attorney will seek out these people to sue MERS for fraud. Again, many MERS affiliates would be liable in many of these cases as well. MERS has reportedly been used in 60 million mortgage transactions, and if less then 10% have resulted in foreclosures, we would estimate as many as five million cases could be brought on these grounds although most will probably not be brought. As these houses likely had a value below the amount owed on the mortgage, damages would be for lost use, essentially rent. Awards of $100,000, including punitive damages for fraud, as well as interest and actual losses, could result in total damages of $500 billion.
Creation of Illegal Bearer Securities
MERS has also aided and abetted the creation of illegal bearer securities. Most of the mortgage notes in these cases, whether now in default or not, have resulted in notes that are written as “Pay to the order of ____________.” In other words, the name of the holder is left blank and no payee is specified. These notes then travel into the never-never land of mortgage securities. When a foreclosure case is filed, these notes are often missing.
The Internal Revenue Code Section 4701 provides for an excise tax of 1% per year of the face amount of the instrument, times the number of years to maturity. This tax is on the issuer. If there are 60 million MERS mortgages with an average value of $150,000 and an average maturity of twenty years, the excise tax would be $1.8 trillion.
Liability of MERS Affiliates
MERS and its affiliates are especially vulnerable to attacks where the corporate veil is pierced or a conspiracy is found because of the way MERS freely authorizes others to act on its behalf. As mentioned above, anyone can self appoint themselves as an officer of MERS and these officers are scarcely managed at all. In fact, it is the affiliates of MERS that are acting, not officers of MERS. MERS provides a very thin cover for its affiliates. Thus, the affiliates are likely to be named as defendants and found liable.
In terms of transfer tax liability, MERS has expressly announced that it exists to save transfer taxes. In terms of foreclosure fraud, plaintiffs have used MERS as a cover and even MERS has found that it has now had to back away from its earlier position. In terms of bearer securities, the securities were created or held by the affiliates.
Possible Total Liabilities
Adding up possible liabilities for transfer taxes, mortgage fraud, and penalties for bearer instruments, MERS and its affiliates face potential liabilities of well over $1 trillion.
Whether or not these are realized depends on the diligence of the plaintiffs in such cases and the mercy of the courts in facing a situation that could result in bankrupting many key financial institutions.
Members of MERS
According to the MERS website, the following are shareholders of MERS (the MERS shareholders that are publicly traded or publicly owned are in bold):
American Land Title Association, Bank of America, CCO Mortgage Corporation, Chase Home Mortgage Association of the Southeast, CitiMortgage, Inc., Commercial Mortgage Securities Association, Corinthian Mortgage Corporation, EverHome Mortgage Company, Fannie Mae, First American Title Insurance Corporation (NYSE:FAF), Freddie Mac, GMAC Residential Funding Corporation, Guaranty Bank, HSBC Finance Corporation, Merrill Lynch Credit Corporation, MGIC Investor Services Corporation, Mortgage Bankers Association, Nationwide Advantage Mortgage Company, PMI Mortgage Insurance Company, Stewart Title Guaranty Company, SunTrust Mortgage, Inc., United Guaranty Corporation, Washington Mutual Bank, Wells Fargo Bank, N.A., and WMC Mortgage Corporation.
Our purpose here is not to make recommendations on specific securities, but to warn of potential danger. We believe that MERS and its affiliates face large potential liabilities, many of which are not generally recognized prior to this time.
We will be providing reports and recommendations on specific companies in the near future.
Disclosure: No positions