MERS: The Mortgage Database That's Clouding Millions of Titles

On Dec. 2, the House Judiciary Committee held a hearing on the mortgage mess. Perhaps the most disturbing testimony was the written submission from Christopher Petersen, associate dean for academic affairs and law professor at the University of Utah. Petersen detailed how the banks, Fannie Mae, Freddie Mac and Ginnie Mae destroyed America's land-record system, a method of tracking property sales that's existed since colonial times. Instead, they put in place a system called "MERS" (for Mortgage Electronic Registration Systems) that's legally shaky, makes tracking mortgage-note ownership extremely hard and may be clouding the title of millions of properties.

But the MERS situation could be even worse than Petersen described to Congress: Millions of documents, including millions of foreclosure documents, may have been signed in MERS's name by people without the power to do so. A lack of authority would call into question the validity of all those documents. While the ramifications are uncertain, the bottom line is, as Petersen told me: "This issue injects yet another level of uncertainty into the already murky swamp of foreclosure nonsense."

At a minimum, the deposition of William Hultman, MERS corporate secretary and treasurer, and related documents that expose the issue reveal yet another example of the mortgage and foreclosure industry's carelessness with the rule of law.

A Shortcut System for Tracking Mortgages

MERS has one purpose: to hold and track mortgages. It's basically an incorporated database financed and maintained by its members, who represent most of the mortgage industry. The MERS database simplifies securitization and makes it much cheaper by bypassing the requirement that every change in ownership of a mortgage be recorded in the county where the mortgaged property is located.

Instead, the mortgage is recorded once, in the name of MERS, and all the other transfers are tracked on the MERS system only, or even not tracked at all. Entering data into the MERS database is optional for members: MERS Chief Executive R.K. Arnold told Congress recently that "Members tend to register only loans they plan to sell."

The loss of county recording fees can be significant. One irate Massachusetts register of deeds estimates that bypassing his county might have cost the state hundreds of thousands of dollars. MERS itself boasts of saving the "industry up to $200 million annually by creating an electronic clearinghouse for mortgage ownership rights and information."

20,000 "Certifying Officers"

MERS has no employees, so how does it do this? Basically, it doesn't. MERS's members upload and manage their own data, and whenever a MERS member wants MERS to do something for it, the member just tells a MERS "certifying officer" -- of which there are some 20,000 -- to do what the member wants it to do.

These certifying officers, who usually have a traditional corporate title like vice president or assistant secretary but specific and limited powers, don't report to anyone at MERS, much less get paid by it. Indeed, their only link to the company is a corporate resolution signed by MERS Secretary Hultman appointing them as officers of MERS.

As Arnold explained to Congress: "From inception, the concept of certifying officers has always been fundamental to the operations of MERS." Given the centrality of the concept, it's surprising how badly MERS seems to have pulled it off.

An Outdated Resolution?

The validity of Hultman appointing certifying officers comes under attack from a few different directions. First, the April 9, 1998, corporate resolution that Hultman points to as giving him the power to approve certifying officers appears to say that only member employees can be certifying officers. Indeed, MERS CEO Arnold told Congress two weeks ago that "MERS relies on specially designated employees of its members, called certifying officers."

Regardless of that apparent limitation, however, Hultman has made many attorneys at firms doing foreclosures for MERS banks, and possibly other non-MERS member employees, certifying officers.

Second, the resolution that empowers Hultman to approve certifying officers was originally adopted by an earlier corporate incarnation of MERS, and it may not have been ratified by the current one. Unless the current MERS ratified the authorizing resolution or replaced it with another, whatever power Hultman had ended no later than Jan. 1, 1999, when the current MERS came into being. An awful lot of certifying officers have been appointed since then, so it's possible the ratification did occur.

Murky Corporate Bylaws

Nonetheless, when Hultman was deposed, he said he didn't know if the current MERS ratified his appointing power. Of course, as corporate secretary he's perhaps in the best position of anyone at MERS to know. Although Hultman turned over a number of documents relating to the April 9, 1998, resolution both before and after his deposition last April, to date Hultman has not turned over evidence that the current MERS has ratified his power, according to Mark Malone, the former New Jersey assistant U.S. attorney and former New Jersey deputy attorney general who took Hultman's deposition. (After a number of years in private practice, mostly helping corporations with internal investigations, Malone now volunteers for New Jersey Legal Services' antipredatory lending project.)

A third problem with Hultman's power to appoint certifying officers is rooted in MERS's bylaws, which give only the board of directors the power to choose officers, regardless of title. Boards can't pass resolutions that violate their companies' bylaws, so even if April 9, 1998, resolution giving Hultman the power to choose certifying officers was ratified by MERS, it might be invalid anyway.

The bylaws may explain why Hultman's appointing documents each claim to be a "true copy of a Resolution duly adopted by the Board of Directors" rather than a more straightforward "by the power vested in me, I Hultman appoint..." During his deposition, Hultman conceded that despite the "true copy" language, what he's signing is the original. The board never separately passed the resolution.

So What Are the Consequences?

Malone was blunt: "What Hultman says in the resolutions he signs is false. He's not saying by the power delegated to me by the board. He's saying the board met and adopted a resolution, and what he's signing is a 'true copy' of that resolution. Which is just false -- there's no original resolution that it's a true copy of." Which, of course, raises the question: Why write the resolution the way he does, if his "power" to appoint the certifying officers complied with the bylaws?

Given that MERS had some 66 million mortgages in its system at one point, and currently has some 31 million mortgages, the number of wrongly executed documents is hard to fathom. How many foreclosures were achieved using documents these "officers" had no right to sign? How many pending foreclosures are based on fraudulent documents? The only answer is: Many.

Still, despite the scale of the issue, it may turn out to be a relatively minor problem in overall scheme of foreclosure document problems. That's because the doctrine of apparent authority might protect all the completed foreclosures. The idea behind this doctrine is essentially that the court was entitled to rely on the unchallenged representation that the person signing really was a MERS officer. After all, MERS isn't denying the signer's authority.

Nonetheless, pending foreclosures might be jeopardized as homeowners challenge the MERS-signed documents, as some are already trying to do. At this point, I'm starting to look for documents the banks and their allies actually get right.