Note Buyers take notice; a U.S. Bankruptcy Judge has now ruled MERS’s business practices are unlawful.
Heard of robo-signing, burger king kids, and attorneys promising to stop foreclosure? Well that’s all part of the MERS mortgage lending mess and it just got a lot harder than calling for a cleanup on aisle 5.
What’s the impact? L. Randall Wray, Professor of Economics, wrote this:
“United States Bankruptcy Judge Robert Grossman has ruled that MERS’s business practices are unlawful. He explicitly acknowledged that this ruling sets a precedent that has far-reaching implications for half of the mortgages in this country. MERS is dead. The banks are in big trouble. And all foreclosures should be stopped immediately while the legislative branch comes up with a solution.”
Source: For all the details including a great explanation of MERS be sure to read the full Huffington Post article at New York’s U.S. Bankruptcy Court Rules MERS’s Business Model Is Illegal.
So What Can Note Buyers Learn From MERS?
It reads like a refresher course in Note Buying 101:
- Get the original promissory note,
- Get it endorsed,
- Get an Assignment of the Mortgage or Deed of Trust
- Get the Assignment recorded in the County Records
- Make sure the chain of endorsements matches the chain of assignments, and
- Keep all the originals together in a safe place.
Well you can use these items to prove ownership, collect payments, enforce your rights, foreclose in the event of default, or defend against any claims.
In legal lingo it grants you the power of 4 magical words… Holder In Due Course.
This was common practice when I started buying notes for the insurance company in 1988. When going out on my own in 1997 I used the same note buyer criteria.
Of course not every note fits my buying parameters (and I’m not Oprah, Warren Buffet, or Mark Zuckerberg with seemingly unending supplies of funds) so some notes get referred to other investors. Most investors follow the same Note Buying 101 closing requirements… most but not all.
I can still remember the first time we got to closing on a deal being placed with outside funds only to discover the original note was lost and to my astonishment the investor said,
“That’s OK we will just have the seller sign this lost note affidavit.”
Normally a lost note means a frantic search by the seller followed by calls to the original closing or servicing agent to track down the original. As a last resort option we get the payer/buyer involved to execute a duplicate note and affidavit along with the seller’s affidavit.
But just the seller?
That was certainly easier… but not safer.
You see this investor was placing seller-financed notes into a conduit for mortgage-backed securities and it wasn’t required. Next assignments started getting executed in blank and after closing we noticed the investor wasn’t recording some assignments.
Now that sounds like 4 letters that will haunt mortgage lenders for years…. MERS
Fortunately on notes purchased in-house we followed the Note Buying 101 steps. These are the same steps taught in our Finding Cash Flow Notes training course and in articles here at Note Investor including Note Buyers Demand Original Promissory Note and Understanding Note Endorsements.
It’s safe to say that if private note buyers are still around today they are following these guidelines and have used solid legal counsel. (Author’s note: I am not an attorney so unable to give legal advice but encourage you to get some before buying notes.)
Whether note buyer, broker, or seller it is essential to know where the original note is located and keep an unbroken chain of title for smooth closings.
Editor’s Note: After publishing this article a reader shared his real life story of what can happen when investing without the original promissory note.
While the death of MERS will surely hurt the mortgage lending world the boomerang effect will be an increased need for alternative financing, note buyer services, and private investors.