A Proposal for a National Mortgage Registry: MERS Done Right

Abstract: In this Article, Professor Whitman analyzes the existing legal regime for transfers of notes and mortgages on the secondary market, and concludes that it is highly inconvenient and dysfunctional, with the result that large numbers of market participants simply did not observe its rules during the huge market run-up of the early and mid-2000s. He also considers Mortgage Electronic Registration System (MERS), which was designed to alleviate the inconveniences of repeatedly recording mortgage assignments, but concludes that it was conceptually flawed and has proven to be an inadequate response to the problem. For these reasons the legal system was ill-prepared for the avalanche of foreclosures that followed the collapse of the mortgage market in 2007, and continues to be beset by litigation and uncertainty. This Article then provides a conceptual outline for an alternative National Mortgage Registry, which would supplant the present legal system and would provide convenience, transparency, and efficiency for all market participants. He concludes with a draft of a statute that could be enacted by Congress to create such a registry. Contents I. THE TRADITIONAL MORTGAGE TRANSFER PROCESS A. Apparent Separation of Note and Mortgage B. The Uses of Recorded Mortgage Assignments 1. Prevention of Fraud by the Transferor 2. Assurance of Receiving Notice of Legal Proceedings 3. Recordation of Assignments as a Practical Necessity for Future Title Examiners 4. Recordation of Assignments as a Statutory Prerequisite to Foreclosure 5. Conclusion: What are Assignments Worth? C. Transfer of the Note D. The Cost of Following the Rules II. THE ADVENT AND FALLACIES OF MERS A. A Weak Legal Foundation B. Separation of Mortgage from Note C. Use of Multiple "Corporate Officers " D. Foreclosure in the Name of MERS E. Transparency F. Loan Tracking Accuracy III. FEATURES OF A NATIONAL MORTGAGE LOAN REGISTRY A. Federal Preemption B. What is Being Registered? C. Initial Recording of Mortgages D. Registration or Recording? E. Electronic Registration and Transfer and the Problem Of Document Authenticity F. Registration of Servicing G. Capturing the Entire Loan File H. Transparency I. Fees J. Notice of Registered Information K. A Bureaucratic Home L. The Holder in Due Course Doctrine M. Constitutionality IV. CONCLUSION. Appendix: Draft Statute ********** The law of the United States governing transfers of mortgages on the secondary market and foreclosures by secondary market investors is in a dismal state. In this Article I propose to explore those deficiencies and to present a proposal for an alternate legal regime that I believe would be far more functional and efficient. The need for such a system--a nationwide registry of mortgage ownership --has already been recognized. In its recent white paper, "The U.S. Housing Market: Current Conditions and Policy Considerations," the Federal Reserve Board commented: A final potential area for improvement in mortgage servicing would involve creating an online registry of liens. Among other problems, the current system for lien registration in many jurisdictions is antiquated, largely manual, and not reliably available in cross-jurisdictional form. Jurisdictions do not record liens in a consistent manner, and moreover, not all lien holders are required to register their liens. This lack of organization has made it difficult for regulators and policymakers to assess and address the issues raised by junior lien holders when a senior mortgage is being considered for modification. Requiring all holders of loans backed by residential real estate to register with a national lien registry would mitigate this information gap and would allow regulators, policymakers, and market participants to construct a more comprehensive picture of housing debt. …