ROCKWELL P. LUDDEN, THE MERS MORTGAGE IN MASSACHUSETTS: GENIUS, SHELL GAME, OR INVITATION TO FRAUD?

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ROCKWELL P. LUDDEN, THE MERS MORTGAGE IN MASSACHUSETTS: GENIUS, SHELL GAME, OR INVITATION TO FRAUD?

ROCKWELL P. LUDDEN, THE MERS MORTGAGE IN MASSACHUSETTS: GENIUS, SHELL GAME, OR INVITATION TO FRAUD?

BY: ROCKWELL. P. LUDDEN

But Mousie, thou art no thy lane,
In proving foresight may be vain:
The best-laid schemes o’ mice an’ men
……………Gang aft agley,
An’ lea’e us nought but grief an’ pain,
……………For promis’d joy!

To a Mouse, Robert Burns

MERS, the Mortgage Electronic Registration Systems, was the creation of a mortgage industry
beset by a tremendous spike in the rate at which mortgage assets were being passed around on the
secondary market in an effort to reap the benefits of securitization. More transfers meant more
paperwork, more trips to an increasingly backlogged county land office, more assignments and
other mortgage-related documents to record, and of course more filing fees. Finally the industry
came up with a plan, ingenious on its face, and yet shrouded in just enough mystery to conceal a
number of assertions that are, upon closer scrutiny, decidedly untenable within the framework of
existing law. Further gaps in the system have allowed unscrupulous individuals to play fast and
loose with the foreclosure process, and although MERS has taken steps to prevent such mischief
in the future the damage already done is of potentially staggering proportion.

The mortgage industry had a number of objectives, a salient of which was the creation of
a privately run, electronic database that would be far more efficient and cost-effective in tracking
the beneficial interests in mortgage loans, servicing rights, and warehouse loans than the traditional
system of county recording offices. With today’s information technology this proved to be
a challenging but nonetheless straightforward undertaking. But there was another objective as
well, one that was far more ambitions—and problematic: to design a system that would allow
successive owners of a mortgage loan to avoid the time-consuming and costly process of having
to run to the local land office to file the necessary paperwork every time a transfer of the mortgage
took place. It is in the methodology by which this latter objective would be accomplished
that the intrigue begins.

The idea was for MERS to be set up as a member organization the members of which
would all individually agree to name MERS as the mortgagee of record in the local land office.
MERS would then track the mortgage loan electronically through its database and, because of the
agreement with its members, would remain the mortgagee of record at the local land office. Thus
the only time an assignment would be recorded would be if the mortgage loan were transferred
out of the MERS system or the actual owner of the mortgage were planning to foreclose in its
own name. This would not only save time and money but add liquidity to the secondary market
as well, thereby making mortgage assets more attractive to investors. Simply put, the goal was to
enable MERS’s designation as mortgagee in the public records to survive and persist in spite of
multiple transfers of the underlying economic obligation on the secondary market.

It was a brilliant idea—or so it seemed.

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