Imagine the following law school exam question asked in a property law class in 1994, prior to securitization, when the laws of Missouri were substantially the same as they are today regarding real estate transaction recording, foreclosures and unlawful detainer proceedings:

Joe buys a house from Bank A. Bank A and Joe are about to execute a Deed of Trust and a Note. In a couple years Bank A will probably want to sell the mortgage to Bank B. The President of Bank B will someday want to sell the mortgage to Bank C. Banks A, B and C come to your law office and ask whether you have any advise as to how to transfer the mortgage, today, and in the future, properly and expeditiously, keeping in mind that if Joe doesn’t pay his mortgage, a bank might need to foreclose. Please assume that you practice law in Missouri.

Hypothetical Student Answer in 1994:

I would propose a new bank-friendly system because of the hassle and expense of repeatedly transferring mortgages. Up till now, each bank needs to make sure that it follows Article 3 and Article 9, along with the laws of Missouri. This requires careful assigning of the note and the deed of trust, and recording these at the local recorder of deeds office every time one bank transfers a mortgage to a new bank. My new proposed system does away with the hassle and expense. There will be serious disadvantages to the homeowners—it will probably cause many homeowners to lose their homes—but the question assumes that I represent only the banks, so homeowners will need to fend for themselves.

Instead of transferring mortgages and title to property the old way, Banks A, B & C should create a “nominee” to serve as a private clearinghouse for determining title–Let’s call this new system “MERS”). There’s no need to ask the Legislature to pass any laws to create MERS—I’d recommend that the banks unilaterally change Missouri recording laws. They have great power over legislators, including the power to nullify long-standing laws; no legislator is going to get in their way.

In the scheme I’m proposing, MERS won’t need to have any employees or duties. Whenever a bank wants to do anything regarding title, they merely need to designate one of their OWN employees to be a “Vice President” of MERS. My scheme envisions tens of thousands of MERS “vice presidents,” none of whom are actually employed by MERS.

The first sale only needs to indicate that the “Grantee” is “MERS.” Then the banks can wheel and deal that mortgage among themselves without any public notice of what actually owns the mortgage. If a member of the public wants to know who really owns the mortgage, MERS doesn’t need to tell them, because it will be a private company. In other words, no bank will ever need to file any assignment of the Deed of Trust with the Recorder of Deeds. No paperwork will ever needs to be publicly filed with a Recorder of Deeds, unless a bank decides to foreclose on Joe, then that bank just needs to whip up an “Appointment of Successor Trustee,” making sure that some person with a prestigious title (make it a “Vice President” of MERS!) signs it and asserts that everything on that document is true (it doesn’t matter if that information is false—the banks can make up anything they want on this form).

Under my scheme, the Recorder of Deeds Office will no longer have accurate records regarding ownership of mortgages. The good news is that the banks will save a ton of money, and they will be able to securitize the mortgages. The bad news is that the Recorder of Deeds records will no longer be meaningful and many Recorder of Deeds employees could get laid off (maybe they can get hired by banks and become “Vice Presidents” of MERS!

Because the banks will be circumventing the quaint old duties of the Recorder of Deeds, the banks will save a ton of money that would have gone to filing fees. The original promissory note will no longer relevant to anything—under my scheme, it can be stored anywhere at all, or even lost or destroyed. That original note will not be needed even if a bank decides to foreclose on Joe. The banks will huddle to decide among themselves who has ownership of the note, and this need not be documented in any publicly available way.

If a bank decides to kick Joe out of his house through an unlawful detainer action, there won’t be any need to prove that the bank kicking our a home-owner has standing or that the bank is the real party in interest—the court will presume that whatever bank filed the suit has standing, without any evidence at all. If the homeowner challenges standing of the suing bank, it is my prediction that courts will wave their hands in quiet desperation and inform the homeowner that he or she is delving into irrelevant topics.

Whenever a bank decides to foreclose, they can ask their own attorneys to serve as the Trustees. Although some quaint old laws purport to require trustees to protect the interests of Joe too, there is no worry of a conflict anymore because in an unlawful detainer case, there is nothing to decide—there is no evidence to consider in an unlawful detainer case other than how much Joe owes as back rent multiplied by two. There is nothing for a Trustee to do other than to follow the banks’ directives—if a trustee doesn’t like doing this . . . well, there are a lot of OTHER people who would be happy to serve as trustee, following the bank’s instructions and make a nice fee in the process. If a homeowner tries to assert a counterclaim in an unlawful detainer case, I predict that a court will strike those as irrelevant; it is NOT relevant to Joe being kicked out of his house that he was cheated by a bank or anyone else in connection with his mortgage. Unbelievable, but I do think that this proposed scheme will hold together because . . . well . . . my clients are big banks and the homeowners are little homeowners. To make sure this system keeps working smoothly, however, I’d recommend that the banks keep giving a steady stream of hefty campaign contributions to friendly members of Congress. This is the advice I would give to the banks.

Law Professor Response:

This is an outrageously ignorant, disgraceful and unethical approach. You get an “F” in this course and you are hereby kicked out of law school.

[Note: MERS was actually founded in 1995, and all of the above has come to pass, contributing substantially to the foreclosure crisis and to the collapse of the U.S. economy]