The MERS Conveyance
The heart of your mortgage – the most important clause in the entire document – is the “Transfer of Rights in the Property” clause. This is the language that creates the lender’s security interest backing the loan – it’s the sentence that allows them to foreclose if the borrower doesn’t pay.
But many Florida mortgages contain a bizarre twist – the mortgage conveyance does not go to the lender – whoever made the loan – but to another entity known as “MERS.” This strange construction – where the loan goes one way and the mortgage goes another – runs against real estate law that has existed for hundreds of years and may have serious consequences for anyone trying to enforce that mortgage.
What is MERS?
MERS is such a strange creature that courts have repeatedly had to explain exactly what it is anytime they deal with it. I’ll turn it over to the judges:
In 1993, the MERS system was created by several large participants in the real estate mortgage industry to track ownership interests in residential mortgages. Mortgage lenders and other entities, known as MERS members, subscribe to the MERS system and pay annual fees for the electronic processing and tracking of ownership and transfers of mortgages. Members contractually agree to appoint MERS to act as their common agent on all mortgages they register in the MERS system.
The initial MERS mortgage is recorded in the County Clerk’s office with “Mortgage Electronic Registration Systems, Inc.” named as the lender’s nominee or mortgagee of record on the instrument. During the lifetime of the mortgage, the beneficial ownership interest or servicing rights may be transferred among MERS members (MERS assignments), but these assignments are not publicly recorded; instead they are tracked electronically in MERS’s private system. In the MERS system, the mortgagor is notified of transfers of servicing rights pursuant to the Truth in Lending Act, but not necessarily of assignments of the beneficial interest in the mortgage.
MERS operates much the same way in Florida:
Here, MERS’s counsel explained to the trial judge at the hearing that, in these transactions, the notes are frequently transferred to MERS for the purpose of foreclosure without MERS actually obtaining the beneficial interest in the note.
The purpose of MERS is to sidestep local and state requirements that mortgage documents be placed in the public record – and also to avoid the fees that attach to such recording. As a consequence, there is little or no public record as to who actually owns the loan on your home or who might have the right to foreclose.
You’ve got a MERS in your mortgage
The mortgage contains one very specific clause that grants a lender the right to foreclosure on a defaulted loan, called the “conveyance” clause. It used to say:
This Security Instrument secures to Lender: (i) the repayment of the Loan, and all renewals, extensions and modifications of the Note; and (ii) the performance of Borrower’s covenants and agreements under this Security Instrument and the Note. For this purpose, Borrower does hereby mortgage, grant and convey to Lender, the following property…
With a MERS instrument, the last sentence is changed to read:
For this purpose, Borrower does hereby mortgage, grant and convey to MERS (solely as nominee for Lender and Lender’s successors and assigns) and to the successors and assigns of MERS, the following property…
It’s that sentence that creates a whole lot of problems. First of all, no one really knows what it means to say MERS is “solely as nominee for Lender.” That seems to invoke a bizarre legal scenario in which the borrower somehow creates an agency relationship between the Lender and MERS. To make this more clear: any mentally sound person can, with proper procedures, appoint a person to act on their behalf as an agent, and to handle their business or personal affairs. But no person can appoint an agent to act for someone else without that person’s permission. That’s what seems to be happening here.
The second problem with that MERS conveyance is that it seems to create some limited power of MERS. Unlike an agent who is fully authorized to act for the Lender, MERS is, in this case, “solely” the “nominee” for the Lender. While it’s not clear exactly what that includes, it’s clear that it does not include the type of broad, sweeping powers an agent would need to have in order to do many of the things that MERS pretends to be able to do with your mortgage – especially to assign it to someone else.
The third problem may be the biggest. Under Florida law, and the laws of many other states as well, a mortgage cannot exist without the debt it is supposed to secure. The mortgage, in other words, always follows the note. But in MERS conveyances, that doesn’t happen. The mortgage, at its inception, goes in a different direction than the debt – the note goes to the lender, but the mortgage goes to MERS. (This is commonly referred to as “bifurcation.”) It’s not clear at this point whether MERS’ status as “nominee” is enough to pretend that the lender is holding the mortgage through its supposed agent, MERS… but if it’s not, there are decades of case law that say that the mortgage conveyance to MERS may be a nullity.
Let me say that another way: it’s as if the mortgage were never created at all.
And without a mortgage, there’s no foreclosure. There’s still a note, and a debt, but the house is free and clear.
Is there life in MERS?
None of these problems with the MERS conveyance have yet been addressed by any Florida court, and it’s not yet clear how they would rule if they did. However, if you haven’t yet signed your mortgage, it’s something you need to be aware of, and if you already have a mortgage with MERS in it, you need to know that these issues exist if you ever find yourself facing a foreclosure action.