Will the Real Party Please Stand Up: The Effects of MERS in Litigation

Thomas Owens[1]

Introduction

            In December of 2007, the United States fell into a recession and began suffering a financial crisis not seen since the Great Depression.[2]  Although there is a debate over the actual cause of the crisis, most experts trace its origin to the housing bubble created earlier in the decade.[3]  In 2009, the United States had a record number of foreclosure filings, surpassing 3.9 million.[4]  Four states, California, Florida, Arizona, and Illinois accounted for more than half of the nation’s total foreclosure filings.[5]  Nevada led the nation with over 112,000 foreclosure filings, meaning that one of every ten foreclosures happened in that state.[6]  

The key contributing factor to these numbers and the development of the housing bubble, which lead to the financial crisis, is the securitization of subprime loans.[7]  Subprime loans were pooled into mortgage backed securities (“MBS”) and then sold which made it easy for investors to fund the housing market, in turn leading to inflated home values.[8]  A majority of home loans traveled through the Mortgage Electronic Registration System (“MERS”), a system designed to track the assignment of mortgages.[9]  With houses selling for more than they were worth, banks were able to offset their risk and make loans to individuals who would otherwise not qualify.[10]   It seemed that everyone, banks and homeowners, would continue making money as long as housing prices continued to increase and borrowers continued to pay their mortgage.

            With the burst of the housing bubble, homeowners are now struggling to keep their houses.  Home values have decreased as much as 30 percent from their peak value in some locations.[11]   To make matters worse, unemployment reached as high as 9.7 percent.[12]   The current economic conditions have left desperate homeowners with two viable options: let the house go into foreclosure or file for bankruptcy.  Either way some form of litigation will occur.  The battle between distressed homeowners and banks is not a new concept and unfortunately for homeowners, the unlevel playing field favors the bank.[13]    

As the number of foreclosures increase, more and more distressed homeowners are hearing the name MERS.  This is because MERS is foreclosing on their property.   Homeowners are shocked to find that someone other than the bank is trying to take their house away. The question becomes, who is MERS and who has the authority to foreclose on the mortgage?  The process of securitizing mortgages and its use of MERS has called the ability into question.  Across the country jurisdictions are split on the issue.  Although the process of securitization of mortgages is outside the scope of this paper, and another issue itself, the process will have to be discussed to examine the issue of standing.

            This paper will discuss the current effect of MERS on the mortgage industry and comment on the varying applications of agency principles and the Uniform Commercial Code (“UCC”) to foreclosure actions and MERS in different jurisdictions.[14]  This article will argue that courts should adhere only to the UCC doctrine and that MERS should not be a party to nor allowed to initiate foreclosure litigation.  Part II will provide a high-level view of the steps taken to create a MBS and the role MERS plays in the process. Part III will define MERS and its purpose in the mortgage industry. Part IV will discuss the loan process and the difference between the note and mortgage.  Part V will touch on foreclosure actions involving MERS and discuss the application of UCC and agency principals in different jurisdictions.  Part VI will outline the complications, created by the use MERS, in determining which party has a right to foreclose on property.  Finally, Part VII provides analysis and recommendations.

                        II. Securitized Trust and the Mortgage Backed Security

            The process of securitization involves the creation and issuance of debt securities or bonds.[15]  Interest and principle are paid on the bonds and securities from cash generated by separate pools of assets.[16]  Assets typically include loans or anything on which the originator of the asset expects to receive a regular stream of payments.[17]  MBS are debts that represent claims to the cash flow from pools of mortgages.[18]  This occurs when originators of loans, usually banks, sell off mortgages that are then pooled by governmental, quais-govermental, or private entities.[19]  The entity that pools the mortgages then issues securities that give purchasers claims on the principle and interest payments made by borrowers of the pooled loans.[20]

            Typically, when loans are made the terms call for scheduled payments over a fifteen or thirty year period.[21]  Payments are amortized over that period with the balance being reduced until it is paid off.[22]  When assets are securitized, the original lender, receives a lump sum payment for the note from a purchaser, usually another bank, rather than payments spread out over time.[23]  This allows the originator to replenish their funds and make more mortgage loans.[24]  By making it easier for lenders to sell their loans on the secondary market, MBS create efficiencies in the industry that allow for lower interest rates and the availability of more credit.[25]

            MBS fueled the housing bubble by creating a greater demand for more mortgages.[26]   The securitization process was key to the existence of the secondary market and provided incentives to lending institutions to approve mortgages for homeowners who would not otherwise qualify.[27]  Since the original lending institutions would sell off the mortgages, usually to other banks, there was little risk and institutions tried to issue as many mortgages as possible.[28]  Lending institutions would make money off fees charged in the securitization process.[29]

            In 2006, the housing bubble began to crack.[30]  A leading cause was defaults in the subprime market.[31]  Although not limited to the subprime market, homeowners in this category were hit hard because they lacked such things as retirement accounts or family members from whom they could borrow money.[32]  With no equity in their homes, they were forced to default on their mortgages.[33]  The defaults lead to a reduction in the value of MBS and many lending institutions were exposed to serious risk, leading to the credit squeeze that hit the financial markets.[34]  Helping to inflate the housing bubble by making the MBS process more efficient was MERS.[35]  MERS eliminated costs associated with recording fees and reduced the time it takes to assign loans.[36] 

III. Defining the Mortgage Electronic Registration System (MERS)

            MERS is an electronic registry created in 1997 by Fannie Mae[37] and Freddie Mac[38] to track ownership interests and servicing rights of mortgages.[39]  When purchasing a home, unless the house is paid in full, the purchaser will take out a mortgage.[40]  Typically, after a mortgage is granted, the mortgage is presented to the Recorder’s Office in the county where the property is located.[41]  The recorder then notes the date, time, and collects a fee for the recording process.[42]  This process is known as “recording the mortgage.”[43]  Subsequently, if the mortgage is sold, the new interest in the mortgage must be recorded in the local records and another recording fee must be paid.[44]   

MERS was developed with the goal of reducing the number of times a mortgage must be recorded during the life of the mortgage.[45]  Specifically in mind was the number of mortgage transfers between lenders during the MBS process.[46]  With MERS, when a loan is given by a bank, MERS is either listed as the mortgagee of record on the mortgage, or the mortgage is assigned to MERS as nominee.[47]  The mortgage is then entered into the MERS system.[48]  MERS itself “does not take applications, underwrite loans, make decisions on whether to extend credit, collect mortgage payments, hold escrows for taxes and insurance, or provide any loan servicing functions whatsoever.”[49]    

Once in the system, MERS becomes the mortgagee of record for its members.[50]  The assignment of the mortgage to MERS is then recorded in the official records maintained in the county register of deeds.[51]  This is the same “recording of the mortgage” process as discussed earlier.[52]  As long as any future sale of the note “involves a member of MERS, MERS . . . continues to act as nominee for the new beneficial owner” of the mortgage.[53]  Since MERS, the “mortgagee” of record, never changes, there are no future assignments to record.[54]  By reducing the number of times a mortgage assignment must be recorded, banks that use MERS reduce the recording costs associated with the assignment.[55]  This process allows the notes, which are secured by mortgages in the MERS system, to be sold many times over to different lending institutions who pool the notes together and create the MBS.[56]  Although MERS is the “mortgagee” of record, the original lender or a subsequent party who purchases the note retains physical possession of the note.[57] 

              This provides a number of benefits to the mortgage industry.[58]  Most significant is the reduction in cost to assign mortgages.[59]  In 1999, the cost of registering a loan on MERS was $3 as opposed to the recording fees ranging between $25 and $50 per loan.[60]  Between 1997 and 2007, MERS claims to have saved the industry over 1 billion dollars, with 60 million loans registered in its system.[61]  The cost savings and speed with which notes could be transferred through the MERS system proved to be the driving force behind the explosion of MBS.[62]     

IV. Loan Process: Note v. Mortgage

            A typical mortgage loan consists of a promissory note and a security instrument.[63]  Depending on the state, the security interest is either a mortgage or deed of trust.[64]  Although there are minor differences, this paper will focus on the states that utilize the mortgage.  In mortgage states, the borrower of money is the “mortgagor” and grants a mortgage in exchange for the loan.[65]  The “mortgagee” is the lender, usually a bank, giving the loan secured by the mortgage.[66]  The mortgage provides “an interest in real estate as security for the performance of some obligation.”[67]  Without an obligation, the mortgage is worthless.[68]  In a home loan, the obligation to make the payment is the promissory note.[69]  The mortgage itself does not give the bank a right to possession of the property, only a security interest.[70]  Instead, the mortgage secures payment on the note and allows the lender to foreclose on the property if the borrower defaults.[71]  It is the mortgage, not the note, establishing the security interest in the property that is recorded in the county records.[72]  The obligation secured, the note, is sold to different lending institutions and securitized in the MBS process.  

Typically, the same person holds both the note and mortgage.[73]  When the note and mortgage are split, as in the MERS system, there becomes a question as to who can foreclose.  This is because the security interest that allows the note to be foreclosed on is the mortgage itself.[74]  If separated, the holder of only the mortgage will not be able to foreclose, because only the holder of the note is entitled to payment of the underlying obligation.[75]  Conversely, the holder of only the note has the right to be paid, but lacks the security interest in the property to foreclose.[76] Therefore, a mortgage becomes ineffectual when the holder of the note does not also hold the mortgage.[77]  The relationship between the note and mortgage has been described as “the note is the cow and the tail is the mortgage.  The cow can survive without the tail, but the tail cannot survive without the cow.”[78]  In other words, when the holder of a promissory note transfers the note, the ability to enforce moves to the new note holder; however, the assignment of the mortgage without the note has no force.[79]  When confronted with the issue of a separated note and mortgage, the courts are split on who has the ability to foreclose.  In making their determination the courts look to agency principles or the UCC. 

A.  Agency Principles

            An agency relationship is a fiduciary relationship between two parties.[80]  The relationship is established when one party, known as the principal, manifests its assent to another party, known as the agent, that the agent will act on the principal’s behalf.[81]  In the relationship, the agent is subject to the principal’s control.[82]  The agency relationship can only arise when there is manifest assent of the principal for the agent to act on their behalf, and the agent must consent to act.[83]  However, the labeling of a relationship as agency in context of industry or popular usage is not controlling. [84]

In the case of MERS, it is argued that an agency relationship exists between MERS as the agent, and the lender as the principal. The argument is that if the note and mortgage are split, the holder of the mortgage may foreclose on the note if they are an agent of the note holder.[85]  Without an agency relationship, the holder of only the note lacks the power to foreclose in the event of default.[86]  Again, the security interest that allows the note to be foreclosed on is the mortgage itself.[87]  According to the agency argument, this can be fixed if the holder of the mortgagee is a trustee or agent of the note holder.[88]  Through the terms of the assignment, a separate agreement, or other circumstances, the lender acting as a principal can assign to MERS, the agent, the ability and rights to enforce the mortgage against the note that MERS does not possess.[89]

            B. UCC Principles

            The note is a negotiable instrument governed by Article III of the UCC.[90]  Although each state has its own law on promissory notes, all have adopted a version of the UCC to govern negotiable notes. [91]  Under the UCC, a negotiable instrument is “an unconditional promise or order to pay a fixed amount of money with or without interest” that “is payable to a bearer or to order” and “payable on demand or at a definite time” with no additional act other than payment of money.[92]  The person who is owed money, for instance a lender, may “negotiate” it by endorsing it and delivering it to another lender.[93]  This allows the note to be transferred by a lender, other than the issuer, to another lender who becomes the new holder.[94]  If the note specifically names a lender to be paid, the negotiation of the note requires that it be signed by the named lender and physically delivered to the party who will receive payment.[95]  For example, think of personal a check.  If a personal check is made out to a specific person, the person who is to receive the check can endorse the check on the back and direct the payment to another person.  However, for the person to cash the check it must be in their physical possession. 

There are three ways to enforce a negotiable instrument: (1) be the holder of the instrument; (2) a non holder in possession of the instrument who has the rights of a holder or; (3) a person not in possession who is entitled to enforce the instrument pursuant to section 3-309 which covers lost, stolen, or destroyed instruments.[96]  The key concept of negotiable instruments is that to be a holder, the person must have physical possession of the negotiable instrument.[97]  A party not in possession of the negotiable instrument is not a holder and therefore cannot enforce the instrument.

 Further, negotiable instruments are transferred by delivery of possession, not by contract or assignment.[98]  Through physical delivery, the person receiving the instrument is vested with any and all rights the transferor had to enforce the instrument. [99]  However, the transferor must also indorse the instrument to make it payable to the transferee.[100]  For example, as a negotiable instrument, if a lender sells a note to another lender, the note must be endorsed by the original lender and given to the new lender to effectuate a proper transfer. If the note is not endorsed and delivered by the original lender, the new lender is not able to enforce any of the rights that were possessed by the original lender.

There are two ways to endorse a negotiable instrument.  If an endorsement specifically identifies a person to whom the instrument is to be payable it is a “special endorsement.”[101]  If the holder endorses the instrument but does not identify a person, the instrument is a “blank endorsement” (“in blank”).[102]  This distinction is important because if the instrument is endorsed in blank, any person in possession can enforce it.[103]  Again, think of a personal check. If the personal check is made out to a specific individual, only that named individual can  endorse the check and make it payable to a third person. But, if a personal check is signed and made out for just a dollar amount, without identifying who the check is payable too, anyone who physically holds the check can cash it. 

V. Foreclosures

            Standing requirements to bring foreclosure actions vary from state to state. As a minimum, a party must have a real interest, individually or in a representative capacity, in the cause of action and the party must have a legal right or interest in the subject matter in controversy.[104]  A person without a stake in the in the controversy will lack standing.[105] Jurisdictions across the country are in conflict as to whether a foreclosure action may be initiated by MERS.   The discrepancy in opinions depends on the whether the court applies agency principles or the UCC doctrine.

 A. Jurisdictions Allowing MERS to Foreclose     

At least three jurisdictions have interpreted the boiler plate language[106] naming MERS as “nominee”[107] to establish an agency relationship and allowed MERS to initiate foreclosure proceedings.[108]  First, in a Florida state court, MERS initiated a foreclosure action as nominee for Aegis Lending Corporation.[109]  At the time, the trial court had multiple cases with MERS named individually or acting as “nominee” for Aegis.[110]  MERS testified that it had standing to foreclose on the property because the notes were transferred to them for the purposes of foreclosing[111]   Although MERS alleged that it owned the notes, it claimed that the notes “had been lost or destroyed” after they were acquired.[112]  When asked how MERS came into possession of the note, counsel for MERS stated an answer to that question was unreasonable and impossible to answer.[113]  Because the court questioned how MERS could file a complaint in the name of another corporation, the court issued an order to show cause as to why the complaint should not be dismissed.[114]  Although counsel for MERS submitted a memorandum, the trial court dismissed the action finding that MERS could never be the proper party to bring an action in foreclosure, because MERS did not own a beneficiary interest in the note.[115]  The presiding judge later dismissed twenty-eight pending cases that involved MERS.[116]

The decision of the trial court was reversed on appeal.[117]  The appellate court concluded that Florida Rules of Civil Procedure allow “an action to be prosecuted in the name of someone other than, but acting for, the real party in interest.”[118]  Further, the court stated that “standing is broader than just actual ownership of the beneficial interest in the note.”[119]  Although MERS claimed it owned both the note and mortgage, the court pointed out that the ownership and holding of the note was not before the court.[120]  Looking at the boiler plate language, the court applied agency principles and found MERS was acting as an agent for the principal Aegis. Because MERS was the agent of the Aegis, the court allowed MERS to foreclose in its own name.

Next, in Mortgage Elec. Registration Sys., Inc. v. Ventura, a Connecticut court found there was no question as to whether MERS was a proper party to bring a foreclosure action, because MERS acted solely as nominee for the lender’s successors and assigns.[121]  The court noted that plaintiff, in this case MERS, sought to foreclose the defendant’s equity of redemption and obtain legal possession of the mortgaged property.[122]  The court concluded the agency relationship created in the language of the mortgage provided MERS with standing and MERS was the proper party to bring the action[123]

Finally, in In re Sina, although not a proper issue before a Minnesota court, the court noted that MERS did have standing to commence a foreclosure proceeding against a homeowner, because there was a legal assignment of the mortgage by the holder of the note.[124]  The court found MERS had fulfilled the obligation of having a legal assignment and the assignment was duly recorded.[125]

These jurisdictions, which that have allowed MERS to foreclose in its own name, overlook that MERS is nothing more than an electronic filing system.  In each case the court based its findings only on the agency relationship between the lender and MERS.  Yet the court did not state what or how MERS had an interest in the property. This is because MERS has no interest in the property.  MERS makes no loans nor collects any mortgage payments.[126] 

B. Jurisdictions that Prohibit MERS from Foreclosing

            At least two jurisdictions have found that MERS is not a party in interest to foreclosure litigation. In Landmark Nat'l Bank v. Kesler, MERS tried to set aside a default judgment as a second lien holder on property when the first lien holder foreclosed without giving MERS notice of the sale.[127]  Under Kansas law, joinder is required only if a party claims an “interest relating to the property or transaction.”[128]  The defendant took out a second mortgage with Millennia Mortgage Corp. (“Mellinnia”) as the lender and the mortgage named MERS “solely as nominee for Lender, as hereinafter defined, and Lender's successors and assigns."[129] Subsequently, the  note was transferred to Sovereign Bank, but the transaction was not recorded in the county registry.[130]  When Landmark, holder of the first mortgage, attempted to foreclose it sent notice to the borrower and to Mellinnia.[131]  Neither MERS nor Sovereign Bank were notified and the trial court entered judgment for Landmark.[132]  Sovereign Bank then sought to set aside the judgment claiming MERS was a necessary party and by not notifying MERS, Sovereign Bank did not receive notice.[133]  The court held MERS was only a nominee and the party of record was the original lender Mellinnia.[134]

If MERS does not have an interest in the property warranting notice, it should follow that MERS has no interest in the property to bring a foreclosure action. The ruling further points out the confusion MERS can cause by trying to circumvent the recording acts.[135]  The MERS system by design eliminates the recording of new interests in the property when notes are sold to other lenders, which disguises who should have possession of the note.[136]   This goes directly against the purpose of the recording acts; to notify the public of who has an interest in the real property.[137]    It is a safe assumption that had Sovereign Bank’s ownership been recorded in the county records, notice would have been provided and the issue here may have been resolved.

Several key points come from the Landmark case.  First, the court found the boilerplate language in the second mortgage to be key in determining MERS was not a party in interest.[138]  The mortgage document stated the mortgage was made between the borrower and MERS, “solely as nominee for Lender, as hereinafter defined, and Lender's successors and assigns.”[139]  The court noted that word “nominee,” used in the boilerplate language, was not defined in the mortgage and therefore was exposed to judicial interpretation.[140]  After rejecting multiple conflicting definitions from MERS counsel,[141] the court determined that nominee “depends on the context of the relationship of the nominee and principal.”[142]

            Here the court analogized the relationship of MERS “as nominee” for the lender to that of a straw man instead of a party possessing all the rights given to the buyer.[143]  Although the court recognized that generally a mortgagee is no different from the lender, and that by statute assignment of the mortgage carries with it the debt,[144] the language used in the mortgage itself continuously referred only to the rights of the lender only, and limits “MERS to acting ‘solely’ as the nominee of the lender.”[145]  Contrast to the previous cases mentioned, agency principles in this case limited the role MERS could play in the litigation.                

The second key point came when the court recognized that the note was a negotiable instrument.[146]  The court, applying UCC principles, acknowledged that by separating the interest in the note from the mortgage, the mortgage may become unenforceable.[147]  Specifically, “the holder of the [mortgage] will never experience default because only the holder of the note is entitled to payment of the underlying obligation.”[148]  Therefore, the “mortgage loan becomes ineffectual when the note holder did not also hold the [mortgage].”[149]

            Third, the court looked to see what, if any, stake MERS would have in a in an independent foreclosure action.[150]  The court noted when counsel for MERS was asked by the trial court to show a tangible interest in the mortgage, counsel declined to do so.[151]  In fact, counsel “insisted that it did not have to show a financial or property interest.”[152]  MERS did not lend money to the borrower nor to any other party in the action.[153]  MERS was not owed and would not collect any money from the sale of the property.[154]  The court concluded that if MERS was only the mortgagee, without ownership of the note, MERS had no enforceable right.[155]

            MERS argued to the court that the system was designed to provide a cost efficient method of tracking mortgage transactions that avoided the complicated country recording acts.[156]  However, the court correctly pointed out:

[MERS] in obscuring from the public the actual ownership of a mortgage, thereby creating the opportunity for substantial abuses and prejudice to mortgagors . . . , should not be permitted to insulate [the mortgage purchaser] from the consequences of its actions in accepting a mortgage from [the original lender] that was already the subject of litigation in which [the original lender] erroneously represented that it had authority to act as mortgagee.[157]

In short, by trying to circumvent the recording statute, MERS created a system that does not notify the public of who “holds the obligation on the mortgage.”[158]

Finally, Kansas Constitution Bill of Rights provides: “All persons, for injuries suffered in person, reputation or property, shall have remedy by due course of law, and justice administered without delay."[159]   Reasoning that MERS did not demonstrate any tangible interest in the mortgage, beyond being named as mortgagor, MERS had suffered no injury and did “not qualify for protection under due process of either the United States or the Kansas Constitution.”[160]

It is important to point out that MERS denied any tangible interest in the mortgage.[161]  In Mortg. Elec. Registration Sys. v. Neb. Dep't of Banking & Fin., MERS appealed an order from the Department of Banking and Finance which declared MERS a mortgage banker.[162]  Under Nebraska law,  a mortgage broker is “any person . . . who, for compensation . . . directly or indirectly makes, originates, services, negotiates, acquires, sells, arranges for, or offers to make, originate, service, negotiate, acquire, sell, or arrange for ten or more mortgage loans in a calendar year.”[163]  The court reasoned that MERS was not a mortgage banker because “MERS does not take applications, underwrite loans, make decisions on whether to extend credit, collect mortgage payments, hold escrows for taxes and insurance, or provide any loan servicing functions whatsoever.”[164]  If the Court had found MERS to be a mortgage banker, MERS would be subject to the license and registration requirements of the Mortgage Bankers Registration and Licensing Act.[165]   By making this argument, MERS acknowledges that they have no interest in the properties they seek to foreclose. If MERS did admit to having an interest in the property, they could be subject to licensing fees, regulations, or litigation that comes along with such duties as a mortgage banker.  Yet, despite the vehement denials by MERS that it holds any interest in the property it seeks to foreclosure, MERS continues to initiate foreclosure litigation.  

            Kansas is not the only state to find against MERS.  In Mortgage Elec. Registration Sys. v. Sw Homes of Ark, MERS sought again to set aside a foreclosure on a property where MERS was named as the beneficiary acting “solely as nominee for the lender” on a second mortgage.[166]  The homeowners had executed a loan with the mortgage showing Pulaski Mortgage as the lender and MERS as the nominee for the lender.[167]  The homeowner then took out a second mortgage from Southwest Homes of Arkansas, which later sought to foreclose on the property.[168]  MERS was never served notice and when Pulaski Mortgage failed to answer, a default judgment was entered.[169]  MERS sought to set aside the foreclosure contending even though it did not service the loan in anyway, and only provided electronic tracking of the ownership interest in real property, MERS members contractually create a principle-agent relationship with the corporation giving them the authority to exercise the rights of lenders.[170]  Essentially, MERS claimed it has legal title and is a necessary party to any action regarding the title of the property.[171]  

              The court rejected the notion that once MERS became an agent on a security instrument it remained so for every MERS member who acquired ownership of the note.[172]  The court properly reasoned that an “agent is authorized to do, and to do only, what it is reasonable for him to infer that the principal desires him to do in the light of the principal's manifestation and the facts as he knows or should know them at the time he acts.”[173]  MERS was the agent of Pulaski; however, by moving to set aside the decree of foreclosure in its own name, MERS was not acting on behalf of its principal.[174]  

A possible issue not addressed by the court is that MERS is the agent, and the principal in relationship is the one that changes.  The agency relationship requires the principle to manifests assent to another.[175]  Since the principal, the lender who eventually will want to foreclose, is not known when the original relationship is established, there must be a manifestation other than the original document to show the relationship.[176]  Although a manifestation can be through written or spoken words,[177] which would most likely be satisfied by the bringing of the action, the original agreement does not include the unknown future principal, so the original language itself should not be used to show the agency relationship.

VI. Complications of MERS

In its attempt to reduce costs associated with the MBS process, MERS leaves the mortgage industry susceptible to fraud and a potential windfall recovery for lenders. Since the burst of the housing bubble in 2007, 173 banks have failed.[178]  The number of banks that failed between 2000 and 2007 totaled only twenty-three.[179]  What happens if a note, in the process of being transferred to a MBS, was in the possession of a bank that failed?  Further, what if the note during the assignment process was never delivered to the final assignee and then was lost?

            If a note was held by a bank that failed, there could be no record of the real party in interest.[180]  MERS was designed with the purpose of not having to record the interest in the note as it changed hands.[181]  Therefore, only the original lending party’s interest in the note is recorded in the county records.[182]  In this case, courts that follow agency principles are susceptible to fraud.  MERS could bring an action in its own name, claiming either MERS or its principal hold the note, and foreclose on the property without actual possession.  Of course requesting proof of the note is an easy solution, but this indicates that possession, not the agency relationship, is required for standing to foreclose. And if it is required to show possession of the note, then the UCC, not agency principles, dictate who can bring litigation and MERS should not be able to initiate foreclosure actions as the nominee for the lender.

This is not to say that MERS could never legally foreclose on party.[183]  Under general UCC principles, anyone who holds the negotiable instrument may enforce.[184]  Unfortunately for MERS, it is not set up to take physical possession of the note.[185]  However, this could be circumvented if note was endorsed in blank by the lender and the note was delivered to MERS.[186]  If MERS already possessed the mortgage, MERS would then have the ability to enforce the note and foreclose.[187]  The problem with this approach is that once the note is endorsed in blank, anyone who holds the note is entitled to payment of the instrument.[188]  Think of it as a winning lottery ticket, the person who holds the ticket is entitled to get the money.  Courts should be weary when a party offers a note endorsed in blank to show ownership.  Logic dictates that a bank would not endorse a note in blank, because the bank removes itself from entitlement.[189]  Likewise, a bank would likely not take possession of a note endorsed in blank because if lost, it has no way to show ownership.[190]  Short of fraud, it would appear that no lender would ever endorse a note in blank because it would be too risky to justify.  However, possession of a note endorsed in blank, combined with the mortgage, should be the only time MERS has standing in foreclosure litigation. 

            There is still a possibility of fraud however, under the principle of negotiable instruments. If a note is held by a bank that fails, what stops the original lender named in the county records from foreclosing? Under the UCC, the holder of the instrument is able to enforce.[191] As long as they can show a copy of the original note they can foreclose.  After all, its claim to the property would be substantiated since the original lender is the only party with an interest recorded.[192]

            Another scenario could occur when the physical delivery of the note does not make it through the complete chain of assignments in the MERS system. For instance, a mortgage is recorded in the county recording system with MERS as the nominee for the original lender. The note is then sold to other lenders, tracked in the MERS system, and eventually placed in a MBS.  The borrower stops making payments and the owner listed in the MERS system wants to foreclose. However, the owner listed in the MERS system does not have physical possession of the note. According to the records, the last party to have an interest in the note was the original lender. Therefore, if the original lender still had possession of the note it would have to endorse the note in blank and deliver it to the party wishing to foreclose.[193]  What if the original lender went out of business or refuses to endorse the note in blank?

The only safeguard to protect against this situation is found in section 3-309 of the UCC.[194]  It states that a person not in possession of a note may still enforce if the party seeking to enforce was “entitle to enforce the instrument when the loss of possession occurred” or “has directly or indirectly acquired ownership … from a person who was entitled to enforce… when loss of possession occurred.”[195]  However, “loss of possession…[as] the result of a transfer” or because “its whereabouts cannot be determined” will not warrant enforcement.[196]   Further, the party seeking the right to enforce must “prove the terms of the instrument and the person's right to enforce.”[197]  The court “may not” enter a judgment for a party seeking to enforce a missing instrument, unless it finds that party obligated by the instrument is protected against loss that might occur.[198] This would indicate that the last lender to purchase the note in the MBS process  might not be able to enforce it. The problem is that they would have to show they received the note from someone who was entitled to enforce. If the note never physically left the hands of the original lender, and the note was sold to multiple lenders, then the party seeking to foreclose would have a hard time showing it purchased the note from a party who was entitled to enforce it.

Although the UCC establishes a safeguard to protect those obligated by lost notes,[199] the MERS system takes away any evidence that proves the lenders right to enforce.  The protection to homeowners is the recording system.[200]  It shows who has an interest in the property.[201]  If there was a dispute as to who had the power to endorse an instrument in blank, the parties could look to the records in the local county and match up who signed the note with who had the last interest. However, with the MERS system, it cannot be determined who has the actual power to sign the note in blank.

            MERS also creates a potential windfall for lenders who do not physically deliver the note.  If an original lender sells off the note but keeps physical possession, the original lender remains entitled to foreclose on the property.[202]  This means the party with an ownership right in an instrument, the last purchaser in the MBS process, might not be the party entitled to enforce it.[203]

            In In re Kang Jin Hwang, IndyMac Federal Bank sought to foreclose on a property after assigning the mortgage to MERS and selling off the note.[204]  The note was never physically delivered.[205]  The court applied California’s version of the UCC and found even though the note had been sold, the holder had a right to enforce the note until actual delivery occurred.[206]  Therefore, if a lender sells a note, but it is not physically delivered, the original lender would still have a right to the property through possession of the note.[207]  This would create a windfall and possible incentive not to transfer the note.  The holder would be paid for a transfer of interest that never occurred and still be able to take back the property when the borrower defaults.

VI. RECOMMENDATIONS

            There are three possible solutions to the mess created by MERS.  First, apply only negotiable instrument principles under the UCC to foreclosure proceedings and disregard agency theory.  Under the UCC the holder of the note will always have standing to foreclose.[208]  This would create uniformity across jurisdictions and eliminate the courts having to decipher the vague and contradictory language used by MERS to claim its status of legal title and ability to commence litigation.  This would reduce litigation, protect homeowners from fraudulent practices, and comply with state recording acts.[209]  As every state has enacted a version of the UCC,[210] adhering to the already established principles would cost little to nothing on the legal system. Although notice to the public would still be impaired, it would force the industry to do what it purports to do; transfer the note when it is assigned.[211]  If the note is not transferred, then the party claiming the interest is exposed to the possibility of not being able to enforce.[212]  This would place the burden back on the mortgage industry to prove ownership where it belongs, not on the homeowner.

If the sole issue is a missing note, then this would be covered by the UCC.[213]  The person who was entitled to enforce the note when stolen, lost, or destroyed may still enforce.[214]  Since MERS does not receive an interest in the note, only the mortgage as an assignee, MERS should never have a claim under this provision of the UCC.[215] 

            Something to consider under this approach is the effect of strictly applying UCC principles could have on the mortgage industry.   There is a strong possibility that not all notes were actually transferred during the securitization process of MBS.  Applying this approach may leave many banks with no means to foreclose on defaulting debtors. This could allow thousands of people to keep their home, but may also be the death knell for struggling banks.  However, since the mortgage industry created the problem, it should be the mortgage industry that suffers the consequences.[216]

            Second, new legislation could be created to specifically address the issue of mortgage loans. This would require legislation that address the issues between agency and UCC principles, and should apply only to home loans, not other negotiable instruments. The legislature would have to identify, in detail, the role a computer system should play in property rights litigation and consider the effects such changes would have on the current recording system. However, if legislation were developed, with just home loans in mind, it would be best to include some sort of tracking system to ensure proper interest. This already exists with the recording acts.[217]  With the current recording system at the foundation of our property structure,[218] a mass overhaul of legislation could produce changes that cause more harm than good.

            Finally, the court could require MERS to register as a mortgage banker, subjecting them to licensing and registration requirements. For example, depending on the situation, if MERS charged any fees for holding the note, MERS could subject itself to the Truth and Lending Act.[219]  This scenario should be considered if MERS begins to claim they hold the notes endorsed in blank.   As courts begin to see more litigation involving notes endorsed in blank the question to answer should be, were the notes ever actually transferred?  If MERS is allowed to foreclose by holding a note endorsed in blank then MERS legally owns the property. And it should concern the court that an electronic registry, which lends no money and collects no payments, is able to acquire land through the legal system without paying for it. Either way, if MERS is keeping the property or actually transferring the property to one of its members, for litigation purposes it is acting as a mortgage banker, at least under Nebraska law, and should be subject to proper regulations.[220]  As MERS has so vehemently fought to avoid the label of mortgage banker and their requirements,[221] by taking such action the court would be giving an incentive for MERS to change its ways and stop bringing litigation.

VII. Conclusion

Currently there are more than 60 million mortgages in the MERS system.  It is argued that the subprime industry, fueled through MERS, caused the housing bubble to burst and sent the United States into a recession not seen since the Great Depression. As more homeowners are foreclosed on by loans containing the boilerplate language purportedly giving MERS a “nominee” status, the courts need to develop a unified way of handling MERS. 

Although both agency and UCC principles have flaws, applying the UCC would be more beneficial to homeowners.  If the courts strictly applied UCC principles in conjunction with the interest found in the recording records, the industry would be more apt to correct the issue themselves.  Lenders would be quick to implement changes if they could no longer rely on an electronic database to establish their legal interests.  To the contrary, continuing to allow agency principles creates no incentive for change.  MERS has created an efficient and affordable way to transfer the assignments of notes, saving the industry over a billion dollars.[222]  As long as the courts are willing to allow MERS to imitative litigation, the monetary incentives will keep the industry status quo.

[1] J.D. Candidate, 2010, Barry University Dwayne O. Andreas School of Law; B.S. 2001, East Carolina University.

[2] Robert J. Samuelson, How This Crisis Is Different, Wash. Post, March 18, 2008, available at http://www.washingtonpost.com/wp-dyn/content/article/2008/03/17/AR2008031702150.html; Bob Willis, U.S. Recession Worst Since Great Depression, Revised Data Show, http://www.bloomberg.com/apps/news?pid=2060 1087&sid=aNivTjr852TI (last visited Feb. 10, 2010).

[3] Manauv Tanneeru, How a “Perfect Storm” Led to The Economic Crisis, http://www.cnn.com/2009/US/01/29/eco nomic.crisis.explainer/index.html (last visited Feb. 10, 2010).

[4] Press Release, RealtyTrac Staff, REALTYTRAC® YEAR-END REPORT SHOWS RECORD 2.8 MILLION U.S. PROP. WITH FORECLOSURE FILINGS IN 2009 (Jan. 14, 2010), available at http://www.realtytrac.com/content management/pressrelease.aspx?channelid=9&accnt=0&itemid=8333.

[5] Id.

[6] Id.

[7] Samuelson, supra note 2.

[8] Manav Tanneeru, How a ‘Perfect Storm’ Led to the Economic Crisis, Jan. 29, 2009, available at http://www.cnn. com/ 2009/US/01/29/economic.crisis.explainer/index.html.

[9] See Mike McIntire, Tracking Loans Through a Firm That holds Millions, N.Y. Times, Apr. 24,  2009, at B1 (stating MERS holds 60 million mortgages in their system.).

[10] Dean Baker, The Housing Bubble and The Financial Crisis, Real-World Economics Review, May 20, 2008, at 78.

[11] Henry Blodget, House Prices Finally Approaching Fair Value, Business Insider April 19, 2009, http://www.business insider.com/henry-blodget-housing-market-2009-4.

[12] National Unemployment Rates, 2008-2010,  National Conference of State Legislatures, http://www.ncsl.org/?t abid=13307 (last visited Mar. 11, 2010).

[13] Gretchen Morgenson, If Lenders Say “Dog Ate Your Mortgage”, N.Y. Times, Oct. 25, 2009, at BU1.

[14] Although this paper will focus on foreclosure proceedings, the principles discussed are applicable to bankruptcy proceedings.

[15] Protecting Homeowners: Preventing Abuse Lending While Preserving Access to Credit: Hearing Before the Subcomm. On Financial Institutions & Consumer Credit, 108th Cong. 61 (2003) [hereinafter Hearings] (Statement of Cameron Cowan, Esq.).

[16] Id.

[17] Id. at 62.

[18] Mortgage Backed Securities, U.S. Securities and Exchange Commission, http://www.sec.gov/answers/mortgage securities.htm (last visited Feb. 12, 2010).

[19] Id.

[20] Id.

[21] Basics of Fannie Mae MBS, Fannie Mae, http://www.fanniemae.com/mbs/mbsbasics/index.jhtml (last visited Feb. 12, 2010).

[22] Id.

[23] Hearings, supra note 14, at 62.

[24] Basics of Fannie Mae MBS, supra note 20.

[25] Hearings, supra note 14, at 62.

[26] John Carney, JP Morgan Blew It on the Housing Bubble, Too, Business Insider, Oct. 14, 2009, http://www.busin essinsider.com/jp-morgan-called-concern-over-housing-bubble-excessive-2009-10.

[27] Dean Baker, The Housing Bubble and the Financial Crisis, Real-World Economics Review, May 20, 2008, at 78.

[28] Id.

[29] Id.

[30] Id. at 79.

[31] Id.

[32]Id.

[33] Baker, supra note 26, at 79.

[34] Id.

[35] See Mike McIntire, Tracking Loans Through a Firm That holds Millions, N.Y. Times, Apr. 24,  2009, at B1 (stating MERS holds 60 million mortgages in their system.)..

[36] Id.

[37] Federal National Mortgage Administration (Fannie Mae) is a government sponsored entity that buys and sells mortgages in the secondary market. Together with Freddie Mac, the two entities permit banks to swap mortgages for mortgage backed securities. Claire Hill, Securitization: A Low-Cost Sweetener for Lemons, 74 Wash. U. L. Q. 1061, 1119, 1124 (1996).

[38] Federal Home Loan Mortgage Corporation (Freddie Mac) is a government sponsored entity that buys and sells mortgages in the secondary market. Together with Fannie Mae, the two entities permit banks to swap mortgages for mortgage backed securities. Id.

[39]  See Gretchen Morgenson, The Mortgage Machine Backfire, N.Y. Times, Sep. 26, 2009, at BU1; Mortg. Elec. Registration Sys. v. Neb. Dep't of Banking & Fin., 270 Neb. 529, 530 (2005).

[40]  See infra Part IV (discussing mortgage).

[41] Edward H Rabin, Fundamentals of Modern Real Property Law 1009 (The Foundation Press, 2d ed. 1982).

[42] Id.

[43] Joseph William Singer, Property Law: Rules, Policies, and Practices 903 (Aspen Publishers, 3d ed. 2002).  By recording the mortgage there is a public record of the transactions affecting title to the land. This provides individuals purchasing real property security that they will in fact own an interest in the property they are purchasing.  Every state has enacted “recording statutes” that require public records of transactions that affect title to land. Id.

[44] Rabin, supra note 40, at 1009.

[45] Andrew Lipton, Mortgage Electronic Registration System, Inc. (MERS): Its Impact on The Credit Quality of First Mortgage Jumbo MBS Transactions, Moody’s Investors Service Structure Fin. Special, April 30, 1999, at 2. 

[46] Id. 

[47] Id.; “Nominee” is defined as “a person designated to act in place of anther, usu. In a very limited way.” Black’s Law Dictionary 1149 (9th ed. 2009).  

[48] Lipton, supra note 44, at 2.

[49] Neb. Dep't of Banking & Fin., 270 Neb. at 534.

[50] Neb. Dep't of Banking & Fin., 270 Neb. at 530; “Members” consist of  mortgage lenders who apply to be members of MERS.  For those lenders who are members, MERS is the mortgagee of record.  Id. at 532.

[51] Id.

[52] Lipton, supra note 44, at 3;  This satisfies the recording statutes of the state where mortgage is recorded.  Every state has enacted “recording statutes” that require public records of transactions that affect title to land. SINGER, supra note 43, at 903.

[53] In re Mitchell, No. BK-S-07-16226, 2009 WL 1044368,  at *2 (Bankr. D. Nev. 2009).

[54] Lipton, supra note 44, at 3.

[55] Id.

[56] Id.

[57] Neb. Dep't of Banking & Fin., 270 Neb. at 530. 

[58] Lipton, supra note 106, at 2. 

[59] Id.

[60] Id.

[61] McIntire, supra note 9.

[62] See id.

[63] Bellistri v. Ocwen Loan Servicing, LLC, 284 S.W.3d 619, 623 (Mo. Ct. App 2009).

[64]  Under a deed of trust there are three parties to the transaction. First the trustor, who owns the property that is conveyed trustee; Second, the trustee who hold the obligation owed to the beneficiary; Third, the beneficiary. The Supreme Court has ruled that the function and purpose of mortgages and deeds of trust are identical. In practical effect the deed of trust is a lien on the property. Aviel v. Ng, 161 Cal. App. 4th 809, 816 (Ct. App. 2008).

[65] Landmark Nat’l Bank v. Kesler, 40 Kan. App. 2d. 325, 326 (Ct. App. 2008).

[66] Id.

[67] Restatement (Third) of Prop.: Mortgages § 1.1 cmt. (1997).

[68] Id.

[69] Id.

[70] Restatement (Third) of Prop.: Mortgages § 4.1(a) (1997).

[71] Id.; Generally, a mortgage will contain an acceleration clause, which calls for the repayment of the loan in full if the purchaser defaults on the payment. When a borrower defaults, the bank is able to enforce the acceleration clause and foreclose on the property. 55 Am. Jur. 2d Mortgages § 436 (201).

[72] Rabin, supra note 40, at 1009.

[73] Bellistri, 284 S.W.3d at 623.

[74] Restatement (Third) of Prop.: Mortgages § 1.1 cmt. (1997).

[75] Id.

[76] Restatement (Third) of Prop.: Mortgages § 5.4 cmt. (e) (1997).

[77] Bellistri, 284 S.W. 3d at 624.

[78] Best Fertilizers of Ariz., Inc. v. Burns, 571 P.2d 675, 676 (Ariz. Ct. App. 1977).

[79] George v. Surkamp, 336 Mo. 1, 10 (1934).

[80] Restatement (Third) of Agency §1.01 (2006).

[81] Id.

[82] Id.

[83] § 1.02.

[84] Id.

[85] Restatement (Third) of Prop.: Mortgages § 5.4 cmt. e (1997).

[86] Id.

[87] Restatement (Third) of Prop.: Mortgages § 1.1 cmt. (1997).

[88] Restatement (Third) of Prop.:  Mortgages § 5.4 cmt. e (1997).

[89] Id.

[90] In re Kang Jin Hwang, 396 B.R. 757, 762 (Bankr. C.D. Cal 2008).

[91] Id.

[92] U.C.C. § 3-104(a) (2005).

[93] U.C.C. § 3-201 (2005).

[94] § 3-201(a); “Holder” is person who has legal possession of a negotiable instrument and is entitled to receive payment on it Black’s Law Dictionary 800 (9th ed. 2009).

[95] § 3-201(b); If the negotiable instrument is payable to an identified person, the negotiation requires transfer of possession of the instrument and its endorsement by the indentified person. Id.

[96] U.C.C. § 3-301 (2005).

[97] U.C.C. § 1-201(21) (2004).

[98] In re Kang Jin Hwang, 396 B.R. at 763.

[99] U.C.C. § 3-203(b) (2005).

[100] U.C.C. § 3-205(a) (2005).

[101] Id.

[102] § 3-205(b).

[103]In re Kang Jin Hwang,  396 B.R. at 763.

[104] 51 Am. Jur. 2d Parties § 34 (2010).

[105] Id.

[106] MERS is recorded on the mortgage in one of two ways. MERS is named as a nominee through assignment, or MERS is recorded as nominee on the original mortgagee. Lipton, supra note 44, at 3.  Typically, the language used in the mortgage with regard to MERS is “solely as nominee for lender . . . and lenders successors and assigns” or some variation. Landmark Nat'l Bank v. Kesler, 289 Kan. 528, 530 (2009).  According to MERS, it acts “as nominee in the county land records for the lender and servicer.” About MERS, available at http://www.mersinc.org/about/index.aspx.

[107] “Nominee” is defined as “ a person designated to act in place of anther, usu. In a very limited way.” Black’s Law Dictionary 1149 (9^th ed. 2009).

[108] Mortgage Elec. Registration Sys. v. Azize, 965 So. 2d 151, 152 (Fla. 2d DCA 2007) (finding standing is broader than actual ownership of beneficial interest of note); Mortgage Elec. Registration Sys., Inc. v. Ventura, CV054003168S, 2006 Conn. Super. LEXIS 1154, at *2 (Super. Ct. 2006) (finding language in mortgage created agency relationship).

[109] Azize, 965 So. 2d at 152. 

[110] Id. at 153.

[111] Id. at 153; The complaint did not provide the circumstances by which MERS came into possession of the note. Only that MERS was the holder and owner of the note. Id. at 152.   Pleading MERS as the holder of the note is a violation of MER rules. MERS Rules, supra note 131, at R. 8 § 2(c),

[112]Id. at 152;  Reestablishment of a note that has been lost or destroyed can occur if the person seeking to enforce the instrument was entitled to enforce the instrument when lost; when the party directly or indirectly acquired ownership from a person entitled to enforce the instrument when lost; when the lost of the instrument was not the result of a transfer by person; or because the instrument was destroyed. U.C.C. § 3-309(a).

[113] McIntire, supra note 9.

[114] Azize, 965 So. 2d at 153.

[115] Id.

[116] McIntire, supra note 9.

[117] Azize, 965 So. 2d at 154.

[118] Fla. R. Civ. P. 1.210(a).

[119] Azize, 965 So. 2d at 153.

[120]Id. at 154.

[121] Mortgage Elec. Registration Sys., Inc. v. Ventura, CV054003168S,  2006 Conn. Super. LEXIS 1154, at *2 (Super. Ct. 2006).

[122] Id.

[123] Id. at *3.

[124] In re Sina, A06-200, 2006 Minn. App. Unpub. LEXIS 1094, at *4 (Ct. App. 2006).

[125] Id. at *4,*5.

[126] Neb. Dep't of Banking & Fin., 270 Neb. at 534.

[127] 289 Kan. at 543 (2009). 

[128] Id. at 534.

[129] Id. at 530.

[130] Id.

[131] Id. at 530.

[132] Landmark Nat'l Bank, 289 Kan. at 530.

[133] Id.

[134] Id. at 543.

[135] Id.

[136] In re Mitchell, No. BK-S-07-16226, 2009 WL 1044368,  at *2 (Bankr. D. Nev. 2009).

[137] Corwin W. Johnson, Purpose and Scope of Recoding Statutes, 27 Iowa L. Rev. 231, 231 (1967).

[138] Landmark Nat'l Bank, 289 Kan. at 536, 537.

[139] Id. 289 Kan. at 530.

[140] Id. at 538.

[141] Counsel provided multiple definitions for  term nominee: (1) MERS holds the mortgage in “street name… client the bank and other banks transfer these mortgages and rely on MERS to provide them with notice of foreclosures and what not”; (2) that nominee “is the mortgagee and is holding the mortgage for somebody else”; (3) a nominee “is more like a trustee or more like a corporation, a trustee that has multiple beneficiaries. Now a nominee's relationship is not a trust but if you have multiple beneficiaries you don't serve one of the beneficiaries you serve the trustee of the trust. You serve the agent of the corporation.”  Id.

[142] Id. at 539.

[143] Id.

[144] The assignment of any mortgage as herein provided shall carry with it the debt thereby secured. Kan. Stat. Ann. § 58-2323 (2009);  Assignee of mortgage as collateral must take possession of note and perfect under UCC. Army National Bank v. Equity Developers, Inc., 245 Kan. 3, (1989).

[145]Landmark Nat'l Bank, 289 Kan. at 539, 540.

[146] Id.

[147] Id.

[148] Id. (quoting Bellistri v. Ocwen Loan Servicing, LLC, 284 S.W.3d 619, 623 (Mo. Ct. App 2009)).

[149] Id.

[150] Landmark Nat'l Bank, 289 Kan. at 541.

[151] Id.

[152] Id.

[153] Id.

[154] Id.

[155] Landmark Nat'l Bank, 289 Kan. at 541.

[156] Id. at 542, 543.

[157] Id.  at 543.

[158] Id.

[159] Kan. Const. B. of R. § 18. 

[160] Landmark Nat'l Bank, 289 Kan. at 545.

[161] Id. at 542;  In this case MERS admits they do not have an interest in the property they seek to foreclose.

[162] 270 Neb. at 530.

[163]  Neb. Rev. Stat. § 45-702(15) (2009).

[164] Neb. Dep't of Banking & Fin., 270 Neb. at 534.

[165] Id. at 530.

[166] Sw. Homes of Ark., No. 08-1299, 2009 Ark. 152, at *1 (2009).

[167]Id. at *2.

[168] Id.

[169] Id. at *2.

[170] Id. at *3.

[171] Id.

[172] Sw. Homes of Ark., 2009 Ark. at *3.

[173] Id. at *5.

[174] Id. 

[175] Restatement (Third) of Agency §1.01 (2006).

[176] “[A]gency relationship arises only when the elements stated in §1.01. are present. Whether a realtionshp is characterized as agency in an agreement between parties or in the context of industry or popular usage is not controlling.”  Restatement (Third) of Agency §1.02 (2006).

[177] §1.03.

[178] Failed Bank List, Federal Deposit Insurance Company, http://www.webcitation.org/5mrFV7b3r (last visited Mar. 1, 2010).

[179] Id.

[180] MERS records the mortgage in its name as nominee for the original lender and their assignees. Lipton, supra note 44, at 2.

[181] Id.

[182] Id. (purpose of MERS is to cut down the need for more than one recordation of assignment).

[183] In Mortgage Elec. Registration Sys., Inc. v. Coakley, MERS had standing to foreclose in its own name because MERS held the note endorsed “in blank.”  Since the note is a negotiable instrument and MERS was the holder, the foreclosure action taken in the name of MERS was appropriate.  838 N.Y.S.2d 622, 623 (App. Div. 2007).

[184] U.C.C. § 1-201(21); U.C.C § 3-201(b); U.C.C. § 3-301.

[185] Lipton, supra note 44, at 2, 3 (MERS is only the nominee and should not appear on any loan documents).

[186] U.C.C. § 3-205(b) (defining blank endorsement).

[187] U.C.C. § 1-201(21); U.C.C § 3-201(b); U.C.C. § 3-301;  U.C.C. § 3-205(b).

[188] U.C.C. § 3-301.

[189]  When endorsed “in blank” the owner is not specified and whoever holds the instrument may enforce. See U.C.C. § 3-205(b); U.C.C. § 3-301.

[190] See U.C.C. § 3-205(b); U.C.C. § 3-301.

[191]Id.

[192] Lipton, supra note 44, at 2.

[193] U.C.C. § 3-205 (discussing process of blank endorsement).

[194] U.C.C. § 3-309 (enforcement of lost, destroyed, or stolen instrument).

[195] § 3-309(a)(1)(A)-(B).

[196] § 3-309(a)(3).

[197] § 3-309(b).

[198] Id.

[199]  The party seeking to enforce the note must prove the terms of the note, right to enforce and the court “may not” enter a judgment for a party seeking to enforce a missing instrument, unless it finds that party obligated by the instrument is protected against loss that might occur. § 3-309(b).

[200] Johnson, supra note 137, at 231. One objective of the recording system is to provide admissible evidence of title in litigation. Id.

[201] Id.

[202] U.C.C. § 3-203 n.1; 396 B.R. at 763.

[203] 396 B.R. at 764.

[204] Id. at 760-61.

[205] Id. at 761.

[206] Id. at 764.  

[207] U.C.C. § 3-301.

[208] U.C.C. § 3-301.

[209] Johnson, supra note 137, at 231 (recording acts established to show ownership and who had an interest).

[210] In re Kang Jin Hwang, 396 B.R at 762.

[211]  MERS records only the mortgage in the county records and tracks assignment of the note in the MERS system. Lipton, supra note 44, at 2.

[212] Only the holder may enforce. U.C.C. § 3-301.

[213] U.C.C. § 3-309.

[214] Id.

[215] Lipton, supra note 44, at 2.

[216] The MERS system was created by Fannie Mae and Freddie Mac as an electronic registry to hold beneficial interest and reduce costs.  Lipton, supra note 44, at 2.

[217] 14 Powell on Real Property § 82.01(1)(a) (Michael Allen Wolf, ed., 2009).

[218] Id.

[219] Escher v. Decision One Mortg. Co., LLC, 369 B.R. 862,863(Bankr. E.D. Pa 2007); If MERS does actually own legal title, as it claims it does by assignment, it could be liable for the original lender’s violations under the Truth in Lending Act. 15 U.S.C. § 1641 (2006).

[220] Under Nebraska law a mortgage broker is one who acquires loans. Neb. Rev. Stat.  § 45-702(15) (2009).

[221] Neb. Dep't of Banking & Fin., 270 Neb. at 531.

[222] McIntire, supra note 9.