November 2012 Bar Bulletin
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November 2012 Bar Bulletin

Will MERS Go Dark? Ruling Questions System

By Magnus R. Andersson and Jennifer T. Karol


The Mortgage Electronic Registration System (MERS) is a private electronic database that tracks the transfer of beneficial interests in loan obligations. Lenders and servicing institutions pay a fee to become a member of MERS, and then can sidestep the traditional public recording system when buying and selling mortgage debt and mortgage-backed securities. Here is how it works:

1. Instead of recording a deed of trust showing the lender as the beneficiary, the deed of trust shows MERS as the beneficiary as "nominee" for the lender. MERS has no ownership interest in the loan itself.

2. The loan is assigned a permanent 18-digit number called a Mortgage Identification Number, which MERS uses to track ownership of the loan as it is sold, transferred or packaged into mortgage-backed securities.

3. No assignment of the deed of trust is recorded with the county as the loan is sold or transferred. As far as the public records are concerned, the beneficiary of the loan remains constant as MERS.

The benefit of the MERS system is that it easily and economically facilitates secondary markets in mortgage debt. Being able to avoid the traditional costs of recording transactions with the local county provides liquidity to what otherwise is a relatively illiquid asset.

However, borrowers have long complained that MERS makes it impossible to determine who actually owns or has the servicing rights for a particular mortgage loan. This is particularly problematic when the borrower defaults on the underlying loan obligation. Lack of public information about who owns or services a MERS loan makes is difficult, if not impossible in many cases, to find someone with authority to negotiate let alone approve a loan modification or other practical solution to the default.

This may all change in the years to come. The Washington Supreme Court recently issued a decision, Bain v. Metropolitan Mortgage Group, that put the enforceability of MERS deeds of trust into question.

In Bain, the Court held that MERS cannot be a lawful "beneficiary" of a deed of trust when it acts as a nominee for the lender. Washington's Deed of Trust Act defines "beneficiary" as the actual holder of the promissory note (or other obligation) secured by the deed of trust. In the typical MERS loan, MERS does not hold the promissory note. Only a beneficiary who has possession of the obligation has the legal ability to appoint trustees to proceed with nonjudicial foreclosure.

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