MERS Legislation?

John Carney, a senior editor at CNBC.com, posted an article on Friday with the headline, “Get Ready for the Great MERS Whitewash Bill.” Mr. Carney concluded: “I wouldn't be at all surprised if Congress manages to pass a bill that bails MERS out of its legal issues.” Today, Carney posted another article, “Do the Enemies of MERS Know What They Are Asking For?” In this later article, Carney argues that it is not a foregone conclusion that the courts will destroy MERS, given the practicalities involved. (This AP article discusses the costs to banks if the legal attack on MERS for avoiding the payment of local recording fees is successful.)  

One way or another, a way will be found to avoid the worst consequences to banks that the legal attacks on MERS imply. This may involve addressing some tax issues concerning the trusts underlying mortgages which have been securitized, if that is indeed a problem, as well as the more obvious legal issues surrounding foreclosures.

If legislation with retroactive applicability is deemed necessary, then there will be legislation passed with bipartisan support. Most (but probably not all) legislators with a fondness for quoting the Tenth Amendment to the Constitution would probably be silent on that point. They would effectively assent to arguments that mortgages are traded across state lines and therefore the Interstate Commerce Clause grants the Congress the power to legislate on this issue, even though real property, by its very nature, stays put. The Supremacy Clause might also be invoked by proponents as meaning any federal statute on this subject will preempt any state or local laws governing recording requirements and associated fees. (Given the amounts of money involved with these fees, California and other states might challenge the constitutionality of any such legislation to the Supreme Court, which would prove interesting.)

On the other side, many legislators usually concerned with unfair practices of banks towards consumers also would likely not oppose MERS legislation if it is deemed necessary by the Administration. They would be swayed by arguments made by the Administration and financial institutions. For example, proponents of legislation could argue that, if MERS is not granted legal certainty, then there would potentially be enormous costs to financial institutions, which could require another bailout or sink the economy into another recession.

Carney suggests that those arguing for struggling homeowners should not aim for total victory against MERS in the courts but should negotiate a global “Spitzer-style” settlement. In Carney’s words, this “would involve a trade-off of mortgage modifications in exchange for forgiving the flaws and frauds MERS allegedly enabled.” (Carney credits Trace Alloway of ft.com/Alphaville for suggesting a Spitzer-style settlement. See “The mother-of-all MERS fixes” and “The Spitzer settlement for mortgages.”)

Whatever the resolution of the legal uncertainty surrounding MERS, it is clear that those setting up MERS years ago brushed away any legal concerns. The foreclosure mess underlines the importance for the financial community to make the necessary investments to minimize legal and operational risks, rather than acting as if extreme events never happen.