NewYork'sUSBankruptcyCourtRules

MERS'sBusinessModelIsIllegal
L.RANDALLWRAY,BENZINGA
FEB.17,2011,2:09PM

UnitedStatesBankruptcyJudgeRobertGrossmanhasruledthatMERS'sbusinesspractices
areunlawful.Heexplicitlyacknowledgedthatthisrulingsetsaprecedentthathasfarreaching
implicationsforhalfofthemortgagesinthiscountry.MERSisdead.Thebanksareinbig
trouble.Andallforeclosuresshouldbestoppedimmediatelywhilethelegislativebranchcomes
upwithasolution.

ForsomeweeksIhavebeenarguingthatMERSisperpetratingforeclosurefraudallacrossthe
nation.Itsbusinessmodelmakesitimpossibletolegallyforecloseonanymortgagedproperty
registeredwithinitssystemwhichincludeshalfoftheoutstandingmortgagesintheUS.
MERSwasafraudfromdayone,whosepurposewastoevadepropertyrecordingfeesandto
subvertfivecenturiesofpropertylaw.Itschickenshavecomehometoroost.

WallStreetwantedtotransformAmerica'shousingsectorintotheworld'sbiggestcasinoand
neededtounderminepropertyrightstomakeiteasiertorunthescam.Thepayoffswerebigger
forlenderswhocouldinducehomeownerstotakemortgagestheycouldnotpossiblyafford.
Themortgageswerepackagedintosecuritiessoldontopatsyinvestorswhoweredefraudedby
therepsandwarrantiesfalselycertifyingthesecuritiesasbackedbytopgradeloans.Infact
thesecuritieswerenotbackedbymortgages,andinanycasethemortgagesweresuretogo
bad.Giventhathomeownerswoulddefault,theWallStreetbanksthatservicedthemortgages
neededaforeclosuresteamrollertoquicklyandcheaplythrowfamiliesoutofthehomessothat
theycouldberesoldtoserveaspurportedcollateralforyetmoregamblingbets.MERSthe
industry'screationsteppeduptotheplatetofacilitatethefraud.Thejudgehasruledthatits
practicesareillegal.MERSandthebanksloseinvestorsandhomeownerswin.

Here'sMERS'sbusinessmodelinbrief.Realestatepropertysalesandmortgagesaresupposed
toberecordedinlocalrecordingoffices,withfeespaid.Withtheriseofsecuritization,each
mortgagemightbesoldadozentimesbeforeitcametorestasthecollateralbehindamortgage
backedsecurity(MBS),andeachofthosesaleswouldneedtoberecorded.MERSwascreated
tobypasspublicrecordingitwouldbelistedinthecountyrecordsasthemortgageeofrecord
andthenomineeoftheholderofmortgage.MembersofMERScouldthentransferthe
mortgagefromonetoanotherwithoutallthetroubleofchangingthelocalrecords,simplyby
(voluntarily)recordingtransactionsonMERS'sregistry.

Amortgagehastwoparts,thenoteandthesecurity(nottobeconfusedwiththeMBS)or
deedoftrustthatisusuallyjustcalledthemortgage.TheideabehindMERSwasthatthe
notewouldbetransferredfromsellertopurchaser,butthemortgagewouldbeheldby
MERS.Infact,MERSrecommendedthatthenotebeheldbythemortgageservicerto
facilitateforeclosures,butinpracticeitseemsthatthenoteswereoftenlostordestroyed
(whichiswhyallthoseBurgerKingKidswerehiredtoRobosignlostnoteaffidavits).

Ateachtransfer,thenoteandmortgagearesupposedtobeassignedtothenewownerMERS
claimedthatbecauseitwasthemortgageeofrecordandthenomineeofbothpartiesto
everytransaction,therewasnoneedtoassignthemortgageuntilforeclosure.Anditargued
thatsincetheoldadageisthatthemortgagefollowsthenoteandthatbothpartiesintended
toassignthenotes(eveniftheydidnotgetaroundtodoingit),thentheBankruptcyCourt
shouldrulethattheassignmentsdidtakeplaceinsomesortofvirtualrealitysothatthereisa
clearchainoftitlethatallowstheservicerstoforeclose.

TheJudgerejectedeveryaspectofMERS'sargument.TheCourtrejectedtheclaimthatMERS
couldbebothholderofthemortgageaswellasnomineeofthetrueowner.Italsofoundthat
mortgageeofrecordisavaguetermthatdoesnotgiveonelegalstandingasmortgagee.
Hence,atbest,MERSisonlyanominee.ItrejectedMERS'sclaimthatasnomineeitcanassign
notesormortgagesanomineehaslimitedrightsandthosemostcertainlydonotincludethe
righttotransferownershipunlessthereisspecificwritteninstructiontodoso.Inscarcely
veiledanger,theJudgewrote:

"AccordingtoMERS,theprincipal/agentrelationshipamongitselfanditsmembersiscreated
bytheMERSrulesofmembershipandtermsandconditions,aswellastheMortgageitself.
However,noneofthedocumentsexpresslycreatesanagencyrelationshiporevenmentionsthe
wordagency.MERSwouldhavethisCourtcobbletogetherthedocumentsanddraw
inferencesfromthewordscontainedinthosedocuments.

JudgeGrossmanrejectedMERS'sarguments,sayingthatmeremembershipinMERSdoesnot
provideagencyrightstoMERS,andagreeingwiththeSupremeCourtofKansasthatruled
Thepartiesappeartohavedefinedtheword[nominee]inmuchthesamewaythattheblind
menofIndianlegenddescribedanelephanttheirdescriptiondependedonwhichpartthey
weretouchingatanygiventime.
HewentontodisparageMERS'sclaimthatsinceinlegaltheorythemortgagefollowsthe
note,theCourtshouldoverlookthefactthatMERSseparatedthem.Hestoppedjustshortof
sayingthatbyseparatingthem,MERShasirretrievablydestroyedtheclearchainoftitle,
althoughhehintedthatafuturerulingcouldcometothatconclusion:

MERSarguesthatnotesandmortgagesprocessedthroughtheMERSSystemarenever
separatedbecausebeneficialownershipofthenotesandmortgagesarealwaysheldbythe
sameentity.TheCourtwillnotaddressthatissueinthisDecision,butleavesopentheissueas
towhethermortgagesprocessedthroughtheMERSsystemareproperlyperfectedandvalid
liens.SeeCarpenterv.Longan,83U.S.at274(findingthatanassignmentofthemortgage
withoutthenoteisanullity)LandmarkNat'lBankv.Kesler,216P.3d158,16667(Kan.2009)
([I]ntheeventthatamortgageloansomehowseparatesinterestsofthenoteandthedeedof
trust,withthedeedoftrustlyingwithsomeindependententity,themortgagemaybecome
unenforceable).

ThatwouldmeannotonlytheendofMERS,butalsotheendofthebanksholding
unenforceablemortgagesbecausetheywerenot,andcannotbe,perfected.MERSandthe
banksscrewedupbigtime,andthereisnodooverthereisnovalidlienontheproperty,so
ownershavegottheirhomesfreeandclear.
TherehavebeennumerouscourtrulingsagainstMERSincludingdecisionsmadebystate
supremecourts.WhatissignificantabouttheUSBankruptcyCourtofNewYork'srulingisthat
thejudgespecificallysetouttoexaminethelegalityofMERS'sbusinessmodel.Asthejudge
arguedinthedecision,TheCourtbelievesthisanalysisisnecessaryfortheprecedentialeffect
itwillhaveonothercasespendingbeforethisCourt.Inthescathingopinion,JudgeGrossman
variouslylabeledMERS'spositionsasstunninglyinconsistentwiththefacts,absurd,at
best,andnotsupportedbythelaw.Therulingisacompleterepudiationofeveryargument
MERShasmadeaboutthelegalityofitsprocedures.

WhatisparticularlyironicisthatMERSactuallyforcedthejudgetoundertaketheexamination
ofitsbusinessmodel.Thecasebeforethejudgeinvolvedaforeclosedhomeownerwhohad
alreadylostinstatecourt.ThehomeownerthenapproachedtheUSBankruptcyCourttoargue
thattheforeclosingbankdidnothavelegalstandingbecauseofMERS'sbusinesspractices.
However,bytheRookerFeldmandoctrine(orresjudicata),theUSBankruptcyCourtis
prohibitedfromlookingbehindthestatecourt'sdecisiontodeterminetheissueoflegal
standing.Hence,JudgeGrossmanruledinthebank'sfavoronthatparticularissue.

Yet,MERS'shighpricedlawyerswantedtopushtheissueandaskedfortheJudgetorulein
favorofMERS'spractices,too.SowhileMERSwonthelittlebattleoveroneforeclosedhome,it
lostthewaragainstthenation'shomeowners.TheJudgeruledagainstMERSoneverysingle
issueofimportance.AnditwasMERS'sstupidarrogancethatbroughtitdown.

AsIpredictedtwoweeksago,MERSwouldbedeadwithinweeks.JudgeGrossmanhasdriven
thefinalstakethroughitsblackheart.ThehalfofAmerica'shomeownerswhosemortgagesare
registeredatMERShavebeenhandedagetoutofjailfreecard.WallStreethasnorightto
forecloseontheirproperty.Thetidehasturned.Itwon'tbeeasy,buthomeownersinthose
stateswithjudicialforeclosuresnowhaveJudgeGrossmanontheirside.Thoseintheother
states(justoverhalf)willhaveatoughertimebecausetheycanlosetheirhomebeforethey
evergettocourt.ButthelawisstillontheirsideforeclosurebymembersofMERSistheftso
classactionlawsuitsmaybethewaytogo.

MERSisdead,butcanthebankssurvive?Therearetwoseparateissues.First,therearethe
repsandwarrantiesgivenbythemortgagesecuritizers(WallStreetinvestmentbanks)tothe
investors(pensionfunds,GSEs,PIMCO,andsoon).Wenowknowthataquartertoathirdof
themortgagesbundledtoserveasbackingforthesecuritiesdidnotmeetstatedquality.Worse,
wealsoknowthatthebanksknewthistheyhiredthirdpartiestoundertakeduediligenceto
checkquality.Thiswasnotdonetoprotecttheinvestors,rather,thepurposewastostrengthen
thebargainingpositionofthesecuritizers,whowereabletoreducethepricespaidforthe
mortgages.Now,theinvestorsaresuingthebanksforrestitutionforcingthemtocoverthe
lossesandbuybackthebadmortgagesatoriginalprice.Toaddinsulttoinjury,eventhe
NYFedissuingthem.Thatisalotlikehavingyourparentssueyoufortheirinadequate
parentaloversightofyourbehavior.

Thesecondissueisthatthemortgagesbackingthesecuritiesweresupposedtobeplacedin
Trusts(affiliatesofthesecuritizingbanks),withtheTrusteecertifyingnotonlythatthe
mortgagesmettherepsandwarrantiesbutalsothatthedocumentswereuptosnuffandsafely
lockedaway.Weknowtheywerenot.Asmentionedabove,MERStoldtheservicerstoholdthe
notes,andmanyormostofthemweredestroyedorlost.Further,thenoteswereseparated
fromthemortgagesmakingthemnullandvoid.Inanycase,theyarenotattheTrusts.This
meanstheMBSsarenotbackedbymortgages,meaningtheMBSsareunsecureddebt.MERS's
businessmodelensuresthat.So,again,thebanksmusttakebackthefraudulentsecurities
payingofftheinvestors.

WhatcanWallStreetdo?Well,IsupposethehelpwantedsignsarealreadyupatMERSand
WallStreetbanks:Needed:BurgerKingKidstoRobosignforgedquasiprofessionallooking
docs.TheproblemisthatevenwithtensofthousandsofRoboKids,WallStreetwillnotbe
abletopulloffavastcriminalconspiracyonthenecessaryscale.Thinkaboutit:60million
mortgages,eachsoldtentimes,means600milliontransactionsandassignmentsthathaveto
beforged.MERS'sdocumentationwasnotoriouslysloppy,relyingonvoluntaryrecordingby
members.TheRoboKidswouldhavetogobackthroughadecadeofrecordstomanufacturea
papertrailthatwouldconvincenowskepticaljudgesthatthereisaclearchainoftitlefromthe
firstrecordinginthepublicrecordthroughtotheforeclosure.Itain'tgoingtohappen.

TheonlyotherhopeisthatWallStreetcancallinitscampaigncontributionchipsandget
Congresstoretroactivelylegalizefraud.Thatiswhattheydointhosedictatorshipsthat
protestorsarenowbringingdownintheMiddleEast.IsWashingtonwillingtotakethatrisk,
justtopleaseitsWallStreetbenefactors?

Thecourtdocumentisavailableat:http://www.scribd.com/doc/48827432/InReAgard
48750818USBankruptcyCo....Itisterrificreading.

L.RandallWrayisaProfessorofEconomics,UniversityofMissouriKansasCity.Astudent
ofHymanMinsky,hisresearchfocusesonmonetaryandfiscalpolicyaswellas
unemploymentandjobcreation.HewritesaweeklycolumnforBenzingaeveryThursday.

HealsoblogsatNewEconomicPerspectives,andisaBrainTrusteratNewDeal2.0.Heisa
seniorscholarattheLevyEconomicsInstitute,andhasbeenavisitingprofessoratthe
UniversityofRome(LaSapienza),UNAM(MexicoCity),UniversityofParis(South),andthe
UniversityofBologna(Italy).

ReadtheoriginalarticleonBenzinga.Copyright2011.