North Carolina Law Review

University of North Carolina School of Law

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Chapel Hill, NC 27514

MERS on the March: Why the Mortgage Electronic Registration System Threatens the Property Rights of Bankrupt Mortgagees

August 1, 2015

94 N.C. L. Rev. Addendum 18 (2015) 

 

With more than sixty-five percent of new mortgages and deeds of trust being registered in the Mortgage Electronic Registration System (the "MERS" system), MERSCORP Holdings, Inc. ("MERS") is a titan in the mortgage industry. MERS was founded nearly twenty years ago with an eye towards facilitating mortgage securitization. In a typical mortgage securitization transaction, an investment bank purchases and bundles a large number of mortgages from different lenders, transfers the bundled mortgages to a Special Purpose Entity ("SPE") specifically created to hold them, and then sells ownership interests or bonds secured by the mortgages to a variety of investors. Before MERS, this process was problematic due to the fact that each individual mortgage transfer needed to be recorded with the county recording office. Due to the high volume of mortgage transfers required for a single securitization transaction, the recording process was time-consuming and expensive, and it reduced the overall profitability of the transaction. MERS replaces the traditional recording process by placing its own name in the county records as mortgagee and tracking changes in the beneficial ownership of the mortgage in the MERS system. This allows the mortgage to be transferred between the original mortgagee, the investment bank, and the SPEs without making any changes in the county records. The manner in which MERS facilitates the transfer of mortgages between beneficial owners can be analogized to the way stock brokers hold legal title to stock for the benefit of the actual stockholders and execute transfers on their behalf.

 

While the MERS system greatly reduces the cost and complexity of executing mortgage-backed securitization transactions, it can create some confusion as to who technically owns the mortgage. In certain scenarios this can be problematic, such as those in which the beneficial owner files bankruptcy before MERS is able to assign the mortgage back to it. At the moment a bankruptcy petition is filed, the debtor's estate is cut off, meaning that all of its assets are placed in a bankruptcy estate for the benefit of its creditors. In most cases, the mortgage would add value to the estate because it can be sold or foreclosed on; however, if MERS has not assigned the mortgage back to its owner prior to the filing, it is unclear who is entitled to the rights that accompany the mortgage at the moment of bankruptcy. Because all property that rightfully belongs to the debtor is immediately made property of the debtor's bankruptcy estate (the pot of money from which creditors can be paid), the first question in the bankruptcy is always "what does the debtor own?" The form of assignment to and from the MERS system has complicated this question somewhat, because, arguably, MERS owns at least some interest in the mortgages registered in its name. For this reason, when the beneficial owner of a MERS-registered mortgage files bankruptcy, the debtor may find that MERS has an interest in the mortgages that the debtor may have previously believed it owned in full. This interest allows MERS to remove mortgages from the bankruptcy estate of the debtor, which will significantly diminish the value of the assets that the debtor can use to reorganize or pay off its creditors.

 

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