Tag Archives: MERS

Who Controls the Block? How States Can Regulate Tokenized Residential Real Estate

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I have posted Who Controls the Block? How States Can Regulate Tokenized Residential Real Estate to SSRN (with Bizub & Peralta). The abstract reads,

In July 2025, the City of Detroit filed a major nuisance abatement action against RealT, a fintech that had sold blockchain-based fractional interests in more than four hundred Detroit rental properties to some 22,000 investors around the world. Within a year, a court had ordered the company’s rents into escrow, the company had conceded to its investors that its “model no longer works,” and it had announced the liquidation of its portfolio  —  leaving tenants without basic services and token holders facing steep losses.

This article uses the rise and collapse of RealT, together with case studies of the other leading real estate tokenization business models, to evaluate the claims made for tokenized real estate as a new asset class for individual investors. Measured against the publicly-traded REIT, tokenization offers only one advantage to investors —  a bespoke level of diversification  —  and it does so while shedding the investor protections that registration and exchange listing provide. More fundamentally, the leading business models rest on skirting the state and local legal infrastructure of real property: recording regimes, transfer and property taxation, and homeowner and tenant protections. Like the mortgage industry’s Mortgage Electronic Registration Systems, Inc. (“MERS”) a generation ago, tokenization externalizes the costs of that end-run onto the parties least able to bear them.

Real estate tokenization is still in its infancy, and state and local governments have a window of opportunity to shape how these fintechs operate within their borders. Some have begun to use it: Maine’s first-in-the-nation statute regulating shared appreciation agreements supplies one template, and Detroit’s enforcement campaign another. This article maps the gaps that remain  —  most notably in transfer taxation and tenant protection  —  and offers an agenda for closing them before tokenization scales.

 

What To Do With MERS?

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Bloomberg BNA quoted me in More Policy Queries As MERS Racks Up Court Wins (behind a paywall). The article further discusses the case I had blogged about earlier this week.  It reads, in part,

Mortgage Electronic Registration Systems, Inc. (MERS), the keeper of a major piece of the U.S. housing market’s infrastructure, has beaten back the latest court challenge to its national tracking system, even as criticism of the company keeps coming (Montgomery County v. MERSCORP, Inc., 2015 BL 247363, 3d Cir., No. 14-cv-04315, 8/3/15). In an Aug. 3 decision, the U.S. Court of Appeals for the Third Circuit reversed a lower court ruling in favor of Nancy J. Becker, the recorder of deeds for Montgomery County, Pa., whose lawsuit claimed MERS illegally sidestepped millions of dollars in recording fees.

*     *     *

MERS has faced an array of critics, including those who say its tracking system is cloaked in secrecy. MERS disagrees, and provides a web portal for homeowners seeking information.

A host of friend-of-the-court briefs filed in the Third Circuit blasted the company, including one filed in March by law school professors who said the MERS system “has introduced unprecedented opacity and incompleteness to the record of interests in real estate.”

One of those, Brooklyn Law School Professor David Reiss, Aug. 6 raised the question whether MERS, though not a servicer, might be the subject of increased oversight.

“The problems consumers faced during the foreclosure crisis were compounded by MERS,” Reiss told Bloomberg BNA. “Those issues have not been resolved by the MERS litigation, and it would be interesting to see if the Consumer Financial Protection Bureau will seek to regulate MERS as an important player in the servicing industry. It would also be interesting to see whether state regulators will pick the ball in this area by further regulating MERS to increase transparency and procedural fairness for homeowners,” he said.

MERS Victorious

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Montgomery County, PA Courthouse

The U.S. Court of Appeals for the Third Circuit ruled in favor of MERS in Montgomery County v. MERSCORP, (August 3, 2015, No. 15-1219) (Barry, J.). MERS, for the uninitiated,

is a national electronic loan registry system that permits its members to freely transfer, among themselves, the promissory notes associated with mortgages, while MERS remains the mortgagee of record in public land records as “nominee” for the note holder and its successors and assigns. MERS facilitates the secondary market for mortgages by permitting its members to transfer the beneficial interest associated with a mortgage—that is, the right to repayment pursuant to the terms of the promissory note—to one another, recording such transfers in the MERS database to notify one another and establish priority, instead of recording such transfers as mortgage assignments in local land recording offices. It was created, in part, to reduce costs associated with the transfer of notes secured by mortgages by permitting note holders to avoid recording fees. (4, footnote omitted)

I, along with others, had filed an amicus brief in this case. The court states that

We acknowledge the arguments of the Recorder and her amici contending that MERS has a harmful impact on homeowners, title professionals, local land records, and various public programs supported in part by the fees collected by Pennsylvania’s recorders of deeds. In this appeal, however, we are not called upon to evaluate how MERS impacts various constituencies or to adjudicate whether MERS is good or bad. Just as the Seventh Circuit observed in Union County, while the Recorder is critical of MERS in several respects, “[her] appeal claims only that MERSCORP is violating [state law] by failing to record its transfer of mortgage debts, thus depriving the county governments of recording fees. That claim—the only one before us—has no merit.” 735 F.3d at 734-35. (13)

MERS has had a lot of success in cases like this, but the fact remains that it was implemented in a flawed fashion with little to no input from a broad range of constituencies. Regulators and legislators should pay renewed attention to MERS to ensure that the ownership and servicing of residential mortgages are tracked in a way that protects consumers from abusive behavior by sophisticated mortgage market players who rely on opaque mechanisms like MERS.

What Is To Be Done with Mortgage Servicers?

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The Office of the Comptroller of the Currency has found that EverBank; HSBC Bank USA, N.A.; JPMorgan Chase Bank, N.A.; Santander Bank, National Association; U.S. Bank National Association; and Wells Fargo Bank, N.A. have not met all of the requirements of consent orders they had entered into because of deficiencies in how they dealt with foreclosure servicing. The details of these deficiencies are pretty bad.

The OCC recently issued amended consent orders with these banks. The amended orders restrict certain business activities that they conduct. The restrictions include limitations on:

  • acquisition of residential mortgage servicing or residential mortgage servicing rights (does not apply to servicing associated with new originations or refinancings by the banks or contracts for new originations by the banks);
  • new contracts for the bank to perform residential mortgage servicing for other parties;
  • outsourcing or sub-servicing of new residential mortgage servicing activities to other parties;
  • off-shoring new residential mortgage servicing activities; and
  • new appointments of senior officers responsible for residential mortgage servicing or residential mortgage servicing risk management and compliance.

HSBC had the most deficiencies of the six:  it did not make 45 of the 98 changes it had agreed to over the last few years. I was particularly interested in the portion of the consent orders that relate to MERS. The HSBC consent order states:

(1) The Bank shall implement its Revised Action Plan and ensure appropriate controls and oversight of the Bank’s activities with respect to the Mortgage Electronic Registration System (“MERS”) and compliance with MERSCORPS’s membership rules, terms, and conditions (“MERS Requirements”), include, at a minimum:

(a) processes to ensure that all mortgage assignments and endorsements with respect to mortgage loans serviced or owned by the Bank out of MERS’ name are executed only by a certifying officer authorized by MERS and approved by the Bank;

(b) processes to ensure that all other actions that may be taken by MERS certifying officers (with respect to mortgage loans serviced or owned by the Bank) are executed by a certifying officer authorized by MERS and approved by the Bank;

(c) processes to ensure that the Bank maintains up-to-date corporate resolutions from MERS for all Bank employees and third-parties who are certifying officers authorized by MERS, and up-to-date lists of MERS certifying officers;

(d) processes to ensure compliance with all MERS Requirements and with the requirements of the MERS Corporate Resolution Management System (“CRMS”);

(e) processes to ensure the accuracy and reliability of data reported to MERSCORP and MERS, including monthly system-to-system reconciliations for all MERS mandatory reporting fields, and daily capture of all rejects/warnings reports associated with registrations, transfers, and status updates on open-item aging reports. Unresolved items must be maintained on open-item aging reports and tracked until resolution. The Bank shall determine and report whether the foreclosures for loans serviced by the Bank that are currently pending in MERS’ name are accurate and how many are listed in error, and describe how and by when the data on the MERSCORP system will be corrected; and

(f) an appropriate MERS quality assurance workplan, which clearly describes all tests, test frequency, sampling methods, responsible parties, and the expected process for open- item follow-up, and includes an annual independent test of the control structure of the system-to- system reconciliation process, the reject/warning error correction process, and adherence to the Bank’s MERS Plan.

(2) The Bank shall include MERS and MERSCORP in its third-party vendor management process, which shall include a detailed analysis of potential vulnerabilities, including information security, business continuity, and vendor viability assessments.

These should all be easy enough for a financial institution to achieve as they relate to basic corporate practices (e.g., properly certifying officers); basic data management practices (e.g., system-to-system reconciliations); and basic third-party vendor practices (e.g., analyzing potential vulnerabilities of vendors).

It is hard to imagine why these well-funded and well-staffed enterprises are having such a hard time fixing their servicing operations. We often talk about governments as being too poorly run to handle reform of complex operations, but it appears that large banks face the same kinds of problems.

I am not sure what the takeaway is in terms of reform, but it does seem that homeowners need protection from companies that can’t reform themselves while they are under stringent consent orders with their primary regulator for years and years.

Wednesday’s Academic Roundup

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LawProfs in MERS Litigation

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The Legal Services Center of Harvard Law School (through Max Weinstein et al.); Melanie Leslie, Benjamin N. Cardozo School of Law; Joseph William Singer, Harvard Law School; Rebecca Tushnet, Georgetown University Law Center and I filed an amicus brief in County of Montgomery Recorder v. MERSCorp Inc, et al. (3rd Cir. No. 14-4315). The brief argues,

MERS represents a major departure from and grave disruption of recording practices in counties such as Montgomery County, Pennsylvania, that have traditionally ensured the orderly transfer of real property across the country. Prior to MERS, records of real property interests were public, transparent, and provided a secure foundation upon which the American economy could grow. MERS is a privately run recording system created to reduce costs for large investment banks, the “sell-side” of the mortgage industry, which is largely inaccessible to the public. MERS is recorded as the mortgage holder in traditional county records, as a “nominee” for the holder of the mortgage note. Meanwhile, the promissory note secured by the mortgage is pooled, securitized, and transferred multiple times, but MERS does not require that its members enter these transfers into its database. MERS is a system that is “grafted” onto the traditional recording system and could not exist without it, but it usurps the function of county recorders and eviscerates the system recorders are charged with maintaining.

The MERS system was modeled after the Depository Trust Company (DTC), an institution created to hold corporate and municipal securities, but, unlike the DTC, MERS has no statutory basis, nor is it regulated by the SEC. MERS’s lack of statutory grounding and oversight means that it has neither legal authority nor public accountability. By allowing its members to transfer mortgages from MERS to themselves without any evidence of ownership, MERS dispensed with the traditional requirement that purported assignees prove their relationship to the mortgagee of record with a complete chain of mortgage assignments, in order to foreclose. MERS thereby eliminated the rules that protected the rights of mortgage holders and homeowners. Surveys, government audits, reporting by public media, and court cases from across the country have revealed that MERS’s records are inaccurate, incomplete, and unreliable. Moreover, because MERS does not allow public access to its records, the full extent of its system’s destruction of chains of title and the clarity of entitlements to real property is not yet known.

Electronic and paper recording systems alike can contain errors and inconsistencies. Electronic systems have the potential to increase the accessibility and accuracy of public records, but MERS has not done this. Rather, by making recording of mortgage assignments voluntary, and cloaking its system in secrecy, it has introduced unprecedented and perhaps irreparable levels of opacity, inaccuracy, and incompleteness, wreaking havoc on the local title recording systems that have existed in America since colonial times. (2-3)

Mortgage Assignment Mayhem

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Judge Drain issued a biting Memorandum of Decision on Debtor’s Objection to Claim of Wells Fargo Bank, NA in the case In re Carrsow-Franklin (No. 10-20010, Jan. 29, 2015). The Court granted the debtor’s claim objection “on the basis that Wells Fargo is not the holder or owner of the note and beneficiary of the deed of trust upon which the claim is based and therefore lacks standing to assert the claim.” (1)

This blog, and many other venues, have documented the Alice in Wonderland world of mortgage assignments in which something is true because the the foreclosing party, like the Red Queen herself, says it is.

Judge Drain adds to the evidence with ALLCAPS, a touch I can’t remember seeing in another judicial opinion that I have blogged about:

Because Wells Fargo does not rely on the Assignment of Mortgage to prove its claim, the foregoing evidence is helpful to the Debtor only indirectly, insofar as it goes to show that the blank indorsement, upon which Wells Fargo is relying, was forged. Nevertheless it does show a general willingness and practice on Wells Fargo’s part to create documentary evidence, after‐the‐fact, when enforcing its claims, WHICH IS EXTRAORDINARY. (17-18, emphasis in the original, footnote omitted)

In retrospect, legal historians will be shocked by the lending industry’s practices which seemed to ignore the law in favor of convenience. MERS, and the practices which arose from it, was an attempt to circumvent clunky laws in favor of efficiency. For many years, many judges went along with this regime. Since the foreclosure crisis began, however, more and more judges are engaging in a more rigorous analysis of the documents in a particular case and the applicable law governing mortgage notes and foreclosures. When these judges find that a transaction does not comply with the relevant law, it is incumbent upon them to deny the relief sought by the foreclosing party as Judge Drain did here.