Posting for

Tuesday, November 3, 1998

by: Bob Duffin

rduffin@firstam.com

and: Sharon Horstkamp

sharonh@mersinc.org

MERS/ESCROW AND CLOSING/TITLE UNDERWRITING

Bob Duffin writes:

I just read an article in the September - October issue of Title News regarding Mers (Mortgage Electronic Registration System). The article indicated that Mers would be the mortgagee on the mortgage we would be insuring out of a closing. Query, since Mers is not "involved in the transaction" who is our insured? Presuming Mers would be the insured for the purpose of the transaction, in what capacity will they be acting? If they are a nominee for the actual lender, will they be required to register in each state under the various fiduciary or trust laws for us to insure the mortgage lien priority. Or rather, can there be a question of the validity of the mortgage on a state by state basis relating to the authority of Mers or Mers involvement in the transaction since they will not be involved in the funding?

In addition, under the scenario who will be filing or entitled to file a claim under the policy?

Another article indicates that Mers has filed foreclosures in various states. If someone files a defense related to the validity to the lien of the mortgage based upon Mers "involvement" or lack thereof (consideration), I would think it very difficult to deny coverage since we are aware of the various issues surrounding the transaction when we insure. On the other hand, maybe Mers is a methodology whereby no title insurance will be necessary.

Reply: Bite your tongue! For the benefit of Savants not familiar with MERS, it is the new corporation formed to become the nominal mortgagee on recorded mortgages (or nominal beneficiary under recorded deeds of trust)--which will then keep track of the true mortgagee/beneficiary, and all assignees thereof off-record. The idea is to eliminate the need for mortgage assignees to record notices of assignment to protect their interests--and to facilitate purchase and sale of mortgages in the secondary market. As more lenders participate in MERS--escrow and closing folk will more and more be contacting MERS to identify who to contact for payoff information.

Bob, I forwarded your questions to MERS via e-mail--and here is their reply through corporate counsel Sharon Horstkamp:

Your 10/27/98 e-mail was forwarded to me. I appreciate anything that you can do to help get the correct information about MERS to your (Savants).

The article that your in-house counsel from Illinois was referring to is the first of many that will appear in Title News. Since the inception of MERS, the title industry has been a part of MERS. First American Title Insurance is a shareholder of MERS and has been a source of guidance to us. Also, ALTA is one of our three largest shareholders and has a seat on our Board of Directors.

This article talked about MERS being named the mortgagee on the mortgage. We call this MOM for short which stands for MERS as Original Mortgagee as nominee for the originating lender, its successors and assigns. During the process of gaining approval for MOM, we asked Cliff Morgan, SVP/Underwriting Director at First American, his opinion on what, if any changes, were necessary to title policies. He responded that First American is willing to name either or both MERS and the originating lender - the lender's closing instructions need only to identify who First American is to insure. The insured will be the originating lender, its successors and assigns with the recommendation that MERS be named an additional insured.

Extensive legal research by the law firm of Covington & Burling (DC) was part of the process of Fannie Mae and Freddie Mac's approval of MOM. The research concluded that a court would not hold that a loan is unsecured or that the validity of a mortgage is subject to challenge with MERS as original mortgagee as nominee. There is no requirement under the UCC that the secured party identified in the security instrument be a principal rather than an agent.

MERS has obtained all state licenses and has qualified to conduct business in all fifty states and the District of Columbia where such licensing and/or qualification is required by law for an entity serving as mortgagee of record, solely as nominee, in an administrative capacity, for the beneficial owner.

A mortgagor should be estopped to deny the validity of the mortgage given the fact that the mortgagor executed a mortgage at the closing of its loan which expressly identifies MERS as mortgagee on behalf of the noteholder.

If you or any of your in-house counsels have any other questions or comments, please forward them to me. There will be another article about MERS in the November/December issue of Title News.

Thank you,

Sharon McGann Horstkamp

Corporate Counsel

**********

Following up on our posting for Tuesday, 11/3/98, Robbie Dimon (Atlanta) writes:

Query as to subsequent assignees. If a loan is assigned five times and we are asked to issue an endorsement to lender #5, what evidence will we be able to obtain that lender #5 is the holder of the mortgage? Will assignments still be done but just housed in MERS or is MERS just going to allow member lenders to make these changes electronically?

Reply to Robbie: I expect lenders will continue to take assignments of mortgages and deeds of trust--but these transactions will be registered with MERS and the practice of recording notice of assignment docs with local county recorders will go by the wayside. We should be able to rely on MERS for advice as to identity of the last assignee (unless --and this is unlikely--a later assignment should show up in county records). I don't think MERS will store assignment docs--it will instead register them "electronically."

Not all lenders now participate in MERS, and even if MERS is very successful and most lenders sign on I think we should expect some lenders and/or investors in mortgages may remain outside the system. So I suppose it's possible an assignment may take place which will not be registered with MERS. But if an assignee's interest is not registered with MERS, and is not otherwise a matter of public record, we should always be safe dealing with the last assignee identified by MERS. (I say that it's unlikely an assignment will not be registered with MERS, but instead will be evidenced by a recorded notice of assignment, because the major institutional lenders and investors who play in the secondary mortgage market will probably all participate in MERS.)

Note that part of the MERS modus operandi calls for each participating lender/investor to identify a "certifying officer"--a real person with whom MERS and other outside parties may deal in connection with assignments and payoffs--a "contact person," if you will. So we should always have the name of someone to verify information obtained from MERS. The role of the certifying officer is described in the September-October edition of Title News which prompted Bob Duffin's e-mail on this subject. To view these articles from Title News, just click on the URL below. The article about the "certifying officer" is on page 2.