[This post is the second in a two-part discussion of the recent case of James vs. MERS, et. al. The full text of Judge Simon’s decision can be found here. The link to Part One of my analysis can be found here. Besides the sheer joy of (metaphorically) poking my finger in the eyes of the Big Banks, this case is a breath of fresh air for several important reasons: First, it is clearly the first in-depth analysis of the MERS issues unfolding in Oregon’s state and federal courts. This is not to say prior judicial opinions were inadequate in any way – rather, the James’ excellent legal briefing placed before the Court, well-reasoned and cogent arguments showing that the MERS model is a clear violation of Oregon trust deed foreclosure law on several levels. Second, to use a cliche’ – Judge Simon clearly “gets it.” Again, this is not to say others before him did not. In fact, perhaps that is what is remarkable in this decision over the earlier McCoy and Hooker cases – Judges Alley and Panner articulated their discomfort with the how poorly the MERS model served consumers. Judge Simon’s opinion did not reveal anything about his personal comfort or discomfort with the MERS model. Rather, it was a dispassionate, objective, and welcome, dismantling of a house of cards that has survived longer than one might imagine, given the fact that it was never adopted or approved by any local or state governments. The banks did it simply because “they could.” Of course, the reason for the MERS failure is that it was premised upon several reckless assumptions that: (a) It could woo 100% of the lending industry into it’s way of thinking; (b) That no one would notice it was depriving counties of millions of dollars of recording fees; (c) That bank securitizations would go on forever; (d) There could be no such things as a mortgage crisis, a credit crisis, or foreclosure crisis; and (e) That it could out-think, out-talk, and out-maneuver, anyone that got in its way.
So, now that I got that off my chest, let’s review the rest of Judge Simon’s opinion:
Finding: The “Law or Custom Clause” May Not Expand MERS’ Role to That of a Lender.
In the pro-MERS trust deed forms used by the lending industry, they inserted a sort of safety net provision; i.e. one essentially saying that if MERS’ model as a “nominee” or “agent” of the lender somehow fails to comply with local law, that:
“Borrower understands and agrees that MERS holds only legal title to the interests granted by Borrower in this Security Instrument, but, if necessary to comply with law or custom, MERS (as nominee for Lender and Lender’s successors and assigns) has the right to exercise any or all of those interests, including, but not limited to, the right to foreclose and sell the Property; and to take any action required of Lender including, but not limited to releasing and cancelling this Security Agreement” [Underscore mine. PCQ]
Judge Mosman in the Beyer decision relied upon this “law or custom” clause to bootstrap MERS into the role of the “lender,” thus giving it a “benefit” i.e. the receipt of borrower payments. Once it could be said that MERS receives a “benefit”, it was easy to conclude that MERS was a “beneficiary” under ORS 86.705(2). And once MERS was deemed to be a “beneficiary,” it then had the power reserved to beneficiaries under the OTDA to assign the trust deed to a lender in order to initiate the foreclosure. Surprisingly, Magistrate Stewart, in the James decision, came to the same conclusion.
Unfortunately, neither Judge Mosman nor Magistrate Stewart took time to really evaluate the language and logic of the “law or custom” clause. That task was left for Judge Simon. He concluded that the reference to “those interests” [underscored above] referred only to “this Security Interest” [underscored above]. It did not refer to rights granted to the noteholder [i.e. the lender] “such as the right to receive payments due on the loan.” [Judge Simon’s conclusion is not only correct, but frankly something that should have been clear earlier, had Judge Mosman and Magistrate Stewart been called upon to analyze it. But they were not. The MERS attorneys wouldn’t bring it up, and the borrowers were representing themselves. Accordingly, it was not until Mr. and Mrs. James received competent legal counsel in preparing their objections to the F&Rs, that a judge was actually tasked with interpreting the “law and custom” clause. – PCQ]
Effect of Voiding the Law or Custom Clause in MERS Trust Deeds. It is expected that Judge Simon’s ruling will stand since it is the only rationale interpretation that can be made. MERS plainly admits that it has no involvement with the promissory note, so it should be fairly easy to conclude that the “law or custom” clause was only intended to refer to the trust deed – not the note. This is supported by a plain reading of the provision itself. And remember, MERS drafted this very clause! They had sole control over the pen. So, they must live or die by the clause they created.
After combining the “law or custom” ruling with Judge Simon’s conclusion that MERS may not be a beneficiary under ORS 86.705(2), it will be pretty difficult for MERS to argue that it may still (a) assign trust deeds before a non-judicial foreclosure; (b) appoint successor trustees before a non-judicial foreclosure; or (c) rely upon the single assignment argument as being legally compliant with ORS 86.735(1). Smackdown!!!
Unaddressed Issues. There were a few issues that were not addressed in the James case. This was not the result of oversight by anyone, but simply because the issues were presumably not briefed or argued. Thus, they likely were never before Judge Simon in this case.
1. Big Bank Violations of Securities Law. At page 12 of the James ruling, Judge Simon noted:
“NWMG negotiated the note to Countrywide Mortgage, which became BACHLS. FAC ¶15. An investment trust later purchased the note from BACHLS, but BACHLS continued to hold the note itself, even though it no longer held “any interest in the note or the deed of trust. FAC ¶¶16-17, 21.”
“In April 2010, Plaintiffs became delinquent on the loan. FAC ¶27. MERS assigned the trust deed to BACHLS, and BACHLS appointed RTC as the successor trustee. FAC, ¶¶27, 30.”
Riddle me this: If Countrywide [later BAC Home Loan Servicing, or “BACHLS”] securitized the James’ loan along with thousands of others, and through successive transfers of the note and trust deed, was supposed to deliver them to the Trustee or Custodian of a Real Estate Mortgage Investment Conduit or “REMIC”, how is it that (a) BACHLS “continued to hold the note itself”? and (b) MERS, who is not an agent or nominee for the Trustee, Custodian or Master Servicer of the REMIC, was able to transfer the trust deed back to BACHLS? For more analysis on this point go to my blog post, here.
There are several reasons that if this was actually occurring – and we know it was [I suspect even the Big Banks would, in a weak moment, admit as much. – PCQ] that this entire ruse of purported securitizations by the Big Banks posed major tax and securities problems.
By way of explanation: The rules governing the REMIC, known as the Pooling and Servicing Agreement or “PSA”, clearly recite the transfer of the note and trust deed or mortgage conveys “all right, title and interest” in those documents to the REMIC [i.e. no interest is retained by any of the transferring banks – PCQ]. Ergo, subject to limited exceptions, once inside the REMIC, the note and trust deed or mortgage must remain there. If foreclosure is necessary, the REMIC’s Trustee, Master Servicer or authorized subservicer, is responsible for conducting the foreclosure. But if so, we would expect one of those entities to assign the loan out for foreclosure or do it themselves. [In fact, a couple of years ago, that is what we saw in Oregon, i.e. the non-judicial foreclosure was brought in the name of the REMIC Trustee. That practice has since stopped. Why? The banks aren’t saying, but I have my suspicions: Once the REMIC Trust is formally identified in the foreclosure documents, i.e. the Notice of Default and Notice of Sale, it isn’t that difficult for a borrower to locate the PSA through Edgar. Once this happens, a borrower has a copy of the REMIC’s “rulebook,” thus making it easier to attack the authority of the foreclosing entity or its agent. Interestingly, what we see today – on its face – appears to suggest that the trust deed itself was never in the REMIC: Now, the Big Banks, courtesy of MERS, simply assign their trust deeds from the originating bank [regardless of whether that bank even exists today] to the foreclosing bank. To my knowledge, in Oregon there has been no serious judicial discussion of this sham. Either the note and trust deed are tucked securely away in the Trustee’s or Custodian’ s safe, or they are not.– PCQ]
2. How Does the MERS Business Model Work With Only 60% Membership? MERS argues that its model of electronic registration is an adequate substitute for publicly recording of their trust deed and mortgage assignments. However, what MERS and its lawyers conveniently ignore is the fact that only approximately 60% of the lending industry are actual MERS members. The moment a bank stops being a member – or never was – means that it is no longer – or never was – identified on its electronic registry. Furthermore, it is almost a certainty that non-MERS members involved in the securitization of loans, did not register their assignments on Oregon’s public records – even when conducting non-judicial foreclosures. [Remember, banks are not required to record their assignments when made – only when the trust deed is being foreclosed. – PCQ]
So how do we deal with a note and trust deed that has been held both by MERS and non-MERS members? How can one ever know who all of the assignors and assignees were? It is likely impossible. This result flows from the following: (a) Sloppy securitization [e.g. some Big Banks, such as Countrywide, aka Bank of America, never transferred their promissory notes into the REMIC trusts in the first place – PCQ] and (b) The insidious nature of the MERS system that permitted banks to ignore conventional recordkeeping, and simply register their assignments on their private system [when they felt the need to; even some member banks failed to register their assignments – PCQ].
It is a matter of simple math mixed with a dash of logic: If MERS does not have 100% membership of all lenders, then it is inevitable that non-members can never be tracked on MERS’ registry. [For a more complete discussion read my blog post here. – PCQ]
3. How can MERS’ Role as Beneficiary be Binding on Future Assignees if They are not MERS Members? One of the little noticed provisions in the pro-MERS trust deeds is the following clause, which also appeared in the James’ trust deed:
“The beneficiary of this Security Instrument is MERS (solely as nominee for Lender and Lender’s successors and assigns) and the successors and assigns of MERS.“ [Underscore mine. – PCQ]
As noted above, by most estimates, MERS membership represents only about 60% of all lenders. Yet the above-referenced clause purports to appoint MERS as the nominee for “Lender and Lender’s successors and assigns.” What happens if the entity acquiring the loan is not a MERS member? How’s that gonna work? We know that only MERS members are obliged [notice, I didn’t say “required” – PCQ] to register their assignments of the trust deed. I’m not sure what to make of this, since I don’t know of the issue being raised, but it points up the hubris of an organization that assumes everyone has become a member – and if not a member, “then By Golly they’ll be bound as if they were.”
Conclusion. What more can be said by MERS and its acolyte attorneys? How will they proceed? I will not presume to guess. The lender lobby told the Oregon Legislature this year that they were not going to submit any legislation – the sub rosa message was that they were perfectly comfortable with the legal landscape, and didn’t need any further help from the likes of Rep. Gene Whisnant, “but thanks for asking.” Within a couple of weeks following that statement, Representative Whisnant was quietly assisting the lender lobby in a gut and stuff maneuver to emasculate borrower rights during the waning days of the 2012 Legislative Session. So, if the lender lobbyists begin acting like their clients, I think the best approach is to call “Checkmate,” and leave the next move up to them.
 Wouldn’t it have been fun to be that veritable “fly on the wall” listening to the Big Banks as they sought to convince the states’ attorneys general that if they were going to pay billions of dollars in the national settlement, they should have blanket immunity for their tax and securities violations. Since most of the REMICs were created under New York trust law, New York’s Attorney General Eric T. Schneiderman was ready to jump ship on the talks if a settlement prevented him from later bringing separate securities claims against the Big Banks. It does not. And California Attorney General Kamala Harris was similarly balking at the settlement, as it is her intention to bring further claims against the Big Banks under the False Claims Act (which can potentially carry treble damages) for their securitization misdeeds. Space doesn’t permit me to elaborate here, but I’m waiting to see which Big Banks get tagged by the IRS, if and when it is found that most of the securitizations failed to comply the REMIC election rules described here. See Reuters article here.
 A major exception, of course, is those lenders who retained their own loans, rather than securitizing them. In such cases, there would be no assignments.