MERS, Notes and Deeds of Trust

Quick review of Part 6: In a Deed-of-Trust, there are two parallel transactions. The land is conveyed to a Trustee to hold in trust. At the same time, a security interest is created, to which the Lender is the “beneficiary”.

This creates a host of problems: Who is the mortgagee – the Lender or MERS? How can MERS, as owner-in-title of the security interest call itself the “beneficiary” when the Lender, for the last 300 years, was the beneficiary of the deed-in-trust? In fact, how can MERS call itself the “beneficiary” when MERS is never the beneficiary – only the owner-in-title!!!

To sort out this mess, we need to take three steps to clarify the terms in use:

1) For hundreds of years, the deed-in-trust was focused on the security side of the transaction – namely, how to protect the lender. So the Lender was called the “beneficiary” of the trust because in the case of a default, the Lender received the benefit of the property. But this was always an inaccurate term. Most buyers do not default on their loans and the trustee returns the property to them once the debt is paid off! So in fact, the trustee is the owner-in-title for the benefit of the Owner- not for the benefit of the Lender! Only in the case of default did the Lender become the beneficiary!
So we need to clarify the terms:
The buyer/owner is the Current Beneficiary of the Trust. The Lender is the Future Beneficiary of the Trust.

2) But wait – does the Lender always get the property in the future? No- the Lender gets the property only in the case of default! So the Lender really is a Contingent Future Beneficiary.

3) But wait – If MERS is the “beneficiary” then does the lender have any interest whatsovever? The solution is a division of ownership, parallet to what we did for the mortgagee interest in Part 5.

The Buyer/Owner is the Current Beneficiary of the Trust.
The Lender is the Contingent Future Beneficiary of the Trust (Mortgagee) – In Equity
MERS is the Contingent Future Beneficiary of the Trust (Mortgagee) – In Title.

Buyer: Current Beneficiary Lender: Contingent Future Beneficiary-in-Equity
⇓ ⇓ ⇓ ⇓
“owner-in-title” Contingent Future

So we first distinguished between the buyer/owner as current beneficiary of the Deed-in-Trust, and the Lender – which owns a contingent future interest. Then we distinguished between ownership of the security interest “in-title” (held by MERS) and beneficial ownership of the security ownership, which is owned by the Lender. Of course, it would have been much simpler to have called the MERS the “mortgagee-in-title”, and the Lender the “mortgagee-in-equity” as we did for the lien theory model in Part 5. But the word “beneficiary” has been used for several hundred years to describe the ownership of the security interest. It is easy to understand why. The standard terminology for trusts involves the “Trustee” and the “Beneficiary”. But, as we stated above, “beneficiary” was always the wrong term because there are two transactions here: a conveyance of land (in trust) and the creation of a security interest; and therefore there are two different beneficial interests, not one. But since “beneficiary” is the term used, we might have to continue to live with it.

We have one final problem to deal with and that is:

NEXT: 8. The Note and Mortgage: What follows what?