MERS, Notes and Mortgages

MERS is an acronym of Mortgage Electronic Registration Systems. The 25 main shareholders of MERS include some of the largest U.S. banks, such as BOA, WAMU, and Wells Fargo; government mortgage agencies such as Freddie Mac and Fannie Mae; and title insurance entities such as Stewart Title Guaranty Company and American Land Title Association.

MERS was created in order that there be one title holder for all mortgages that are assigned to MERS (or that MERS originates). Using the model that we generated in the previous page, we can visualize the relationship as follows:

beneficial owner or owner-in-equity
⇓ ⇓ ⇓

What does all of this mean? The Lender lent money to the buyer to buy real property and in return received the “IOU”, known as the Note, and a pledge of the property, known as the Mortgage. The lender, or any institution to whom the lender sells the note, will receive the stream of interest payments, and the principal as it is paid back. MERS simply holds “title” to the note/mortgage but does not give money or receive money In other words, to the whole world, MERS is the “named” owner; the owner “in-title”. (As in the previous page, the Custodian holds the note and mortgage documents. This might be a law office or document warehouse or the Lender itself. The servicing company might be a 3rd party, or the Lender itself.) The main point of this diagram is simply to show that the division of ownership is divided into ownership-in-title and ownership-in equity.

One of the major areas of confusion revolves around the word “ownership”. Many lawyers, judges, and even Congressmen, repeat the mistaken phrase that “MERS has bifurcated the note and mortgage”. They mean that since the Lender owns the note and MERS is the named owner of the mortgage, the note and mortgage have been split apart. This is not true. The note and mortgage cannot be split since they are an organic whole. What has been split is the ownership of the note-and-mortgage into two types of ownership: ownership in title and ownership in equity.

In order to clear up this confusion, I have coined two new phrases to reflect what MERS has done. On page 2, we learned that the mortgagor is the buyer/borrower and the mortgagee is the lender. Well, once MERS enters the picture – who is the mortgagee: the lender or MERS? Both are. The lender is the MORTGAGEE-IN-EQUITY and MERS is the MORTGAGEE-IN-TITLE:

Lender:Mortgagee-in-Equity ⇓ ⇓ ⇓

In other words, the note and mortgage are still one organic whole; they have not been split apart. What has been split is the ownership of the pledge of the property. Who makes decisions concerning the note and mortgage? Only the lender. MERS does not decide whether the lender keeps the debt or sells it. MERS does not decide who is the custodian of the documents. MERS does not decide who services the debt. MERS only holds title to the mortgage and follows the instructions of the lending institution.

What happens when one financial institution sells the debt to another institution? The note must be endorsed by the seller to the buyer. But the mortgage document does not have to be assigned since the title holder is still MERS.

Lender:Mortgagee-in-Equity#1⇒ Lender: Mortgagee-in-Equity #2
⇓ ⇓
Mortgagee-in-Title Mortgagee-in-Title

For the sake of market efficiency and transparency, MERS keeps a database showing the current lender (mortgagee-in equity), and the servicer of each mortgage. To find out this information, anyone can call MERS . What happens when the servicer is changed? Nothing in the public record; only a change of data in MERS database.

To sum up: the note and mortgage have not been split into two separate assets. They are still one asset. What has been split is the ownership of the asset into the ancient categories of ownerhip-in-title and owner-in-equity, or, as I apply those concepts to MERS: Mortgagee-in-Title and Mortgagee-In-Equity.

If we could stop here, life would be easy. However, the U.S. had two different methods for securing the debt used to purchase property: mortgages and deeds-in-trust. To understand the difference we need to first explain the two different legal theories.