Rockwell P. Ludden: Decoding the MERS Mortgage


Rockwell P. Ludden: Decoding the MERS Mortgage

Rockwell P. Ludden: Decoding the MERS Mortgage

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Laws are like cobwebs, which may catch small flies, but let wasps and hornets break through.

Jonathan Swift-
A Tritical Essay upon the Faculties of the Mind


A few years back, the denizens of Wall Street seized upon the idea that there was
a lot of money to be made by taking thousands of mortgage loans, mixing them together,
and baking them, so to speak, into a large pie, the many small pieces of which could then
be sold on the secondary market as mortgage-back securities.

Clearly no sensible investor would relish the possibility of her investment being
clawed back into someone’s bankruptcy estate, and so one of the first orders of business
was to safely distance each mortgage loan from whatever economic misfortune and
subsequent liability might befall the originating lender. The solution, simple in theory,
was to transfer ownership of every mortgage loan slated for the pie to a company with no
assets and no liabilities, thus making them bankruptcy remote. The key word here is
transfer—that is to say, a true sale of the mortgage by the originating lender.

In practice, however, it soon evolved into a process of mind-boggling complexity
involving multiple parties governed by multiple documents, many of which are typically
hundreds of pages in length. And it was a process that involved not simply one, but
multiple transfers of ownership—a point to bear in mind during the present discussion.
This meant that there would be more tracking to do, more assignments to draft, and more
feet on the ground at the local land office ill-equipped as it was to handle the spike in
volume. The trouble and expense would be prohibitive.

The industry response was to design, as an alternative, what turned out to be a
private and in many respects secretive registry that would, among other things, not only
track mortgage loans electronically and far more efficiently but also eliminate the need to
produce—and, for safety’s sake, record—a written assignment every time a mortgage
loan changed hands. Thus from this union of concerns there was born in the final years
of the Twentieth Century a lovechild: MERS, the Mortgage Electronic Registration
Systems, Inc. Its first objective proved fairly straightforward; the second, which is the
subject of the present discussion, would be problematic—not because the concept itself
was wrongheaded, but because of the way in which it would be carried out.

Simply put, there are flaws in the MERS model—flaws that may well call into
question not only the legality of a potentially staggering number of foreclosures but also
the integrity of an equally staggering number of titles to real property in cases where
there has been no foreclosure. But even beyond this, the opacity of the MERS model has
come to be seen by unscrupulous players within the industry as an ideal medium in which
to launder material defects in the chain of title and conceal further violations of state and
federal law. This is of course proving itself to be a risky business: that same opacity,
once understood and thus removed, is a point of entry to a trail at the end of which stands
the real person to whom such mischief ultimately owes itself—the person who gave the
order and might bear the risk of prosecution for having given it.

As we delve into the specifics, it would be useful to bear in mind that the present
discussion is based upon Massachusetts law. Massachusetts is a non-judicial foreclosure
state in which a foreclosure may be carried out privately by power of sale—though it is
absolutely clear that the power of sale may only be exercised by the person who actually
owns the mortgage or stands in the owner’s shoes.2 Massachusetts is also a title-theory
state in which an assignment of mortgage is considered to be the transfer of an interest in
land subject to the statute of frauds, and in which the mortgage doesn’t necessarily follow
the note but may be held by a different person.3 In such a case, the mortgagee is deemed
to hold the mortgage in something akin to a resulting trust for the holder of the note.4

Therefore, in order to establish ownership of the mortgage and the right to foreclose, the
number of assignments must equal the number of transfers that have taken place in any
particular case. The point has been clearly made by the Supreme Judicial Court:

(T)here must be proof that the assignment was made by a party that itself held the
mortgage. See In re Samuels, 415 B.R. 8, 20 (Bankr. D. Mass. 2009). A
foreclosing entity may provide a complete chain of assignments linking it to the
record holder of the mortgage, or a single assignment from the record holder of
the mortgage. See In re Parrish, 326 B.R. 708, 720 (Bankr. N.D. Ohio 2005) (“If
the claimant acquired the note and mortgage from the original lender or from
another party who acquired it from the original lender, the claimant can meet its
burden through evidence that traces the loan from the original lender to the
claimant”). The key in either case is that the foreclosing entity must hold the
mortgage at the time of the notice and sale in order accurately to identify itself as
the present holder in the notice and in order to have the authority to foreclose
under the power of sale (or the foreclosing entity must be one of the parties
authorized to foreclose under G. L. c. 183, § 21, and G. L. c. 244, § 14) 5

In short, we are long past a time in Massachusetts when ownership of a mortgage
could be soundly determined merely by trotting out the original mortgage contract, a lone
assignment to the person exercising the power of sale, and perhaps a foreclosure deed
spawned by that assignment. Securitization, with its system of multiple transfers, has
changed the entire dynamic of foreclosure law, and to accept these three documents alone
as prima facie proof of ownership is to force the jurisprudential foot into a shoe that has
seen its day and simply no longer fits; it is atavistic and simply wrong.


Rockwell P. Ludden, MA., JD., is an attorney with firm of Ludden Kramer Law, P.C. in Yarmouth, Massachusetts.


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One Response to “Rockwell P. Ludden: Decoding the MERS Mortgage”

  1. Nancy Fink says:

    I think this a very good article. Needing to know if the Alabama State Laws applies? Could you let me know as soon as possible. I have a court date 18th of April 2012?


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