Thursday, February 17, 2011

Fannie Mae, Freddie Mac, and MERS

Given the legal questions about the validity of assigning mortgages to and immobilizing them at MERS while the promissory notes continue to be transferred among MERS members and may be put into a trust backing a security, one wonders why the Federal Housing Finance Agency continues to permit Fannie Mae and Freddie Mac to use this system. After all, if it turns out that the GSEs cannot foreclose on property, the losses assumed by the taxpayers will be all that much greater.

Fannie Mae and Freddie Mac are now sending out letters notifying borrowers that they have bought their mortgages. The Fannie Mae letter states: "The transfer of ownership of your mortgage loan has not been publicly recorded." The Freddie Mac letter has similar language. (Fannie Mae and Freddie Mac are sending these letters in voluntary compliance with the 2009 amendments to the Truth in Lending Act. See Fannie Mae's explanation here.)

There currently is a set of confusing decisions about MERS, many with differing facts, and some by federal bankruptcy judges and others by state judges or justices. No one knows where this will end up, but there appears to be a growing willingness of judges to opine that MERS does not work, even if it does hold half the home mortgages (but not the notes) in the U.S. For example, in the Agard case discussed in the previous post, Judge Grossman writes:

"The Court recognizes that an adverse ruling regarding MERS's authority to assign mortgages or act on behalf of its member/lenders could have a significant impact on MERS and upon the lenders which do business with MERS throughout the United States.  However, the Court must resolve the instant matter by applying the laws as they exist today.  It is up to the legislative branch, if it chooses, to amend the current statutes to confer upon MERS the requisite authority to assign mortgages under its current business practices.  MERS and its partners made the decision to create and operate under a business model that was designed in large part to avoid the requirements of the traditional mortgage recording process.  This Court does not accept the argument that because MERS may be involved with 50% of all residential mortgages in the country, that is reason enough for this Court to turn a blind eye to the fact that this process does not comply with the law."

While Judge Grossman invites the "legislative branch" to remedy the issue, it is not clear whether he means the legislature of New York State or the U.S. Congress. There is a constitutional issue about whether the federal government has authority in this area.

It may turn out that MERS ultimately prevails or, at least, prevails in most states, but that is far from certain. In the meantime, one hopes that the Federal Housing Finance Agency, the Treasury Department, and the other regulators of the Financial Stability Oversight Council created by the Dodd-Frank Act are looking at this issue. If they believe that it is all right for Fannie Mae and Freddie Mac, as well as major mortgage lenders, to continue to use MERS, I hope this is based on a careful legal analysis. They should not be relying on the belief that MERS must be legal because this small outfit holds such a large share of outstanding mortgages.

One gets the impression that this issue is being dismissed without the careful legal analysis it requires. I hope that impression is wrong.

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