AdvisoryonRisksinMortgageBackedSecuritiesDependentonMERS

SEIUCapitalStewardshipProgram February2011 GarySteinberg,SEIUCapitalStewardshipProgram gary.steinberg@seiu.org2027307409

Contact:

To: PensionFundTrustees,Staff,InterestedParties From:SEIUCapitalStewardshipProgram RECOMMENDATION SEIUCapitalStewardshipProgramrecommendsthatpensionfundsadoptapolicyprohibitingtheir investmentmanagersfrompurchasingsecuritiesdependentonMERS/MortgageElectronic RegistrationSystem. DISCUSSION Weareprovidingthisinformationtohelpfundsavoidinvestmentsinpotentiallydefectivemortgage backedsecurities(MBS)includingproductswheremostoftheunderlyingmortgagesmaynot actuallybeownedbytheseller.Thespecificrisksdiscussedinthismemooccurinsecurities dependentonanewmortgagerecordingsystem:MERS/MortgageElectronicRegistrationSystem. i MERSwasdesignedbythemortgagebankingindustryandincludesabout60%ofU.S.residential mortgages.MERSwasdevelopedtohelpgrowthemortgagebackedsecurityindustrybyavoidingthe timeandcostsrequiredtorecordtransactionsusingtraditionalcountylevelsystems.MERStypically filesonceatthecountyleveltogetamortgageintoitssystem,andthenskipscountylevelrecording foradditionaltransactions. TheMERSbusinessmodelandcorporatestructure ii ,includingbypassingthecountysystems,create risksthatsecuritiesdependentonMERSmaybesubjecttolegalchallengestoestablishownership (includingchainoftitle)and/orrecovermoniesimportantforfundinglocalgovernmentservices. Recentdevelopmentsthatillustratetheserisksinclude: LegaldecisionsincludingstatesupremecourtsinArkansas,Kansas,Maine;Missouricourtof appeals;NYFederalBankruptcyCourt iii havefoundinindividualforeclosureandbankruptcy casesthatsecurityagreementsdependentonMERSarelegallyvoid,includingMERSlackslegal standingtoforecloseortransfermortgages.Applyingtheseprecedentstopooledsecurities wouldmeaninvestorsboughtunsecuredloansand/orloansnotactuallyownedbytheseller. CongresshasconsideredlegislationToprohibitFannieMae,FreddieMac,andGinnieMaefrom owningorguaranteeinganymortgagethatisassignedtotheMortgageElectronicRegistration SystemsorforwhichMERSisthemortgageeofrecord.(H.R.6460TransparencyandSecurity inMortgageRegistrationAct.) LawsuitshavebeenfiledagainstMERSonbehalfofcountygovernmentrecordingoffices.The suitsseekrecoveryoffeesandpaymentofdamagesbasedonfalseclaimsand/orunjust enrichment.OnesuitallegesthatMERSowesCaliforniaapotential$60billionto$120billion. (Mortgagedatabase'smurkylegalstatusaddsanotherwrinkletoforeclosuremess,LATimes 102110)

 ItisalsoworthnotingthatthefailureofMERS(andthebanksandothercorporationswhichareits members)toprovideadefinitive,transparent,readilyavailablerecordofwhoactuallyownsa mortgagecreateslargerisksforindividualhomeowners.Peopleseekingtorenegotiatetheir mortgageorenforcetheirlegalrightsduringforeclosure,forexample,maybepreventedfromdoing sobecausethisinformationisnotavailabletothematatimeofcriticalneed.Inadditionto protectingtheirinvestments,pensionfundsmaywanttoavoidsupportingtheMERSbusinessmodel toavoidharmingtheinterestsofindividualfundparticipantsandtheircommunities. Thankyouforyourattentiontothisinformation,andpleaseletusknowifwecanbeoffurther assistance. Attachments: 1.HowthemortgageclearinghouseMERSbecameavillainintheforeclosuremess,Washington Post1111 2.TestimonyofChristopherL.Peterson,AssociateDeanforAcademicAffairsandProfessorofLaw, UniversityofUtah,S.J.QuinneyCollegeofLawbeforetheUSHouseofRepresentativesCommittee ontheJudiciary,hearingonForeclosedJustice:CausesandEffectsoftheForeclosureCrisis.

MortgageElectronicRegistrationSystemorMERS.Accordingtoitswebsite:MERSisaninnovative processthatsimplifiesthewaymortgageownershipandservicingrightsareoriginated,soldand tracked.Createdbytherealestateindustry,MERSeliminatestheneedtoprepareandrecord assignmentswhentradingresidentialandcommercialmortgageloans.And:MERSactsas nomineeinthecountylandrecordsforthelenderandservicer.AnyloanregisteredontheMERS SystemisinoculatedagainstfutureassignmentsbecauseMERSremainsthenominalmortgageeno matterhowmanytimesservicingistraded.TheMERSprocessincludesMortgageElectronic RegistrationSystems,Inc.,acorporationwhosemembersareothercorporationsinthemortgage industry;andtheaffiliatedMerscorpwhichmaintainsthedatabaseofmortgagesandloans. ii ProblemswithMERSincludethatitmustmakefalsestatementsindocumentsinordertoexecute itsbusinessmodel.Forexample,perendnoteone,MERStakesthelegallyproblematicpositionof claimingtosimultaneouslyown(orpretendtoown)amortgagewhilealsoactingasanagentforthe actualowner.AnumberofcourtshavefoundthatinfactMERSisnotadeedoftrustmortgageeor beneficiary.Anotherexample:MERSroutinelydesignatespeopleemployedandpaidbyother corporationsnotMERSasMERSvicepresidentsinordertoprocessmoretransactionsand attempttosatisfystatelawsregardingwhoislegallyauthorizedtosigndocuments.Designating thesepeopleasVPsisdonebycompletingaformdownloadedfromtheMERSwebsite,andhas beenamajorfactorintherobosignerproblem. iii CourtCases: a.Arkansas.MortgageElec.RegistrationSystem,Inc.v.SouthwestHomesofArkansas,2009Ark. 152,301S.W.3d1(Ark.2009); b.Kansas.LandmarkNat.Bankv.Kesler,216P3d158,169(Kan.2009); c.Maine.MERS,Inc.v.Saunders,Slipop.2010ME79(August12,2010); d.Missouri.Bellistriv.OcwenLoanServicing,LLC,284S.W.3d619(Mo.App.ED.,2009) e.NewYork.InreAgard,1077338,U.S.BankruptcyCourt,EasternDistrictofNYCentralIslip. JudgeRobertE.Grossman:MERSspositionthatitcanbeboththemortgageeandanagentofthe mortgageeisabsurd,atbest.Bloomberg21411:MerscorpLacksRighttoTransferMortgages