The brief questions and answer session addressed the problems with foreclosure. The panel identified that the main problem was political in nature as borrowers should be kept in their homes for obvious reasons. California has created several barriers for foreclosure. Furthermore, the panel reached a consensus that the one-off documentation problem was not the cause of the foreclosure crisis. Indeed, the panel highlighted the issue of uncertainty over the authorization of public records as well as the quality or lack thereof of loans.

In addition, the panel addressed whether there is a benefit to synchronizing loans. It was concluded that there is indeed a benefit and that this hasn’t been a controversial issue in most states. It has been clear that the mortgage follows the note and there is no need for mortgage assignments. However, the interpretation and application of law is changing under lenders who are trying to foreclose.

Prof Wallace, highlighted that right now there is no house price index – representing what is actually happening in the marketplace. Hence making the data incredibly expensive to obtain. Mr. Platt, however emphasized that if the goal was never to foreclose – then why not a have an unsecured loan? On being questioned on enormous costs of foreclosure and therefore need explore alternative, Platt responded that foreclosure is a rare occurrence

Prof. Nancy Wallace of the Haas School of Business, UC Berkeley gave a presentation titled Beyond the Mortgage Electronic Registration System (MERS). She explained the mortgage-securitization process as well as the mortgage supply chain. She posits that the efficiencies from the bond market working electronically have a conflict with the lien market which works on paper. This led to the hope of MERS in order to make the system more efficient.

However, MERS has led to very little transparency over how notes and liens travel down the highway because MERS shows up as the only recorded owner. Furthermore, MERS can look up a true owner but the internal database entry is not the same as the recorded assignment even within MERS. In this way, MERS does not maintain a comprehensive database.

Prof. Wallace articulates that the MERS predicament is a symptom of a recording utility that became too greedy. She put forth three alternative proposals: (1) having a more modest private utility, (2) establish a federal recording system that would accept electronic filings, and (3) invest in new infrastructure for existing land title systems to accommodate electronic recording.

She concluded by stating that there is evidence that significant damage may have already occurred in publicly available real property records. Securitized mortgage markets and the efficiencies they afford require a modern electronic and verifiable lien transfer, recording and assignment system that is consistent with the real property laws of states. Indeed, this will affect the cost of mortgage debt.

James Rhyne, Consultant and Partner at Thematix Partners, just discussed the role of information asymmetry throughout the mortgage creation process. There are two asymmetries, said Rhyne. First, homeowners are not s sufficiently informed about their real estate purchase. Investors also did not have proper information to value the later securitized bundle of mortgages. Rhyne said that these asymmetries need to be addressed both by incentivizing the production of information by those that have it and by encouraging those who need the information to become better informed. The government has been attempting to do the former through regulating what information banks must disclose both with regard to mortgages and financial products. However, says Rhyne, there has yet to be much movement in the area of encouraging consumers to become better informed.

Laurence E. Platt, nation’s leading real estate and consumer finance lawyer, gave a very precise presentation on the issues associated with title recording and transfer in the mortgage market. His address was truly a practitioner’s guide and focused on four points.

The starting point was transfer of enforceable interest. Two pieces of legal documents are relevant for the purposes of mortgage transfers – promissory note and mortgage document. While the note is an actual promise to pay, the mortgage represents an interst in real property. Both these documents are dictated entirely by state law. The Uniform Commercial Code (‘UCC’), accepted by most state jurisdictions has dealt with the transfer of note in two provisions:

a)     Article 3 – applicable when the note qualifies as a negotiable instrument. Transfer in such cases is effected by delivery – actual or constructive and endorsement.

b)    Article 9 – applicable when the note falls short from qualifying as negotiable instrument. Transfer is effected by a purchase agreement that identifies with particularity the note being transferred.

UCC has clarified that mortgage follows the note, i.e. if note is properly transferred mortgage follows. However, Mr. Platt pointed out that a series of questions remain in real property law applicable in different State jurisdictions.

Next, he attended to the Securitization document (‘Sec Doc’) creating a special, sometimes higher standard of effective transfer. The Sec Doc may impose contractual requirements that exceed the applicable state law. The question arises, what shall be the consequences of not satisfying the standard for effective transfer – whether it is legal or transactional. In case of note transfers, UCC contains cures that can be adopted. For instance, if Article 3 is not followed, there exists a safety net in Article 9. However a real problem exists in the area of state property law. A few have argued that the higher contractual replaces the applicable legal standard, i.e. UCC and property law, to become the governing law, nonetheless, as Mr. Platt mentioned there is not enough support for this proposition. In fact he remarked, a mortgage-backed security might be nothing more than a security backed by air.

The other issue he spoke about is a scenario where enforceable interest is acquired but still there is failure to foreclose. This is a major problem in the current crisis and he illustrated by means of an example of Virginia state law. Under Virginia state law, assignment of real property interest is not required. However a recent law introduced a requirement of prior assignment to successfully foreclose. This constitutes a real problem for creditors.

The final step in the enquiry is where does Mortgage Electronic Registration System (MERS) stand? MERS was created to establish stock holding like depository holding only electronic interest. The idea was to make mortgage loans seem like securities. However a numerous problems have surfaced with MERS:

a) Consumer issues: borrowers cant find out who owns the mortgage on their property

b) Local recording office do not receive fee when assignment were not required by law

c) Third party purchasers might not know who owns – nevertheless, it is not a market protection issue but an inherent risk.

MERS sort of acts like a nominee for the lender. If that were so, can it so also act in such capacity in a foreclosure proceeding? A few cases have held no for absence of an actual economic interest.

Finally, he attributed the alleged failure of servicers to record an assignment to the absence of the requirement in State Law.

Mr Benjamin Weber of the Office of the San Francisco Assessor-Recorder (‘SF ASR’) gave a presentation on Reforming Title Recording and Transfer. He explained what land records and recording are and what their existence is intended to do, as well as reviewed the non-judicial process (another route in addition to judicial foreclosures available in California). The Recorder’s Office is charged with certifying documents from a variety of sources. Indeed, a certified copy of land record constitutes constructive notice and performs an evidentiary function. The SF ASR explains the foreclosure process for all to understand, informs the necessary legislative change that updates California law for the modern mortgage market and ensures compliance with laws to protect the integrity of the system. He also talked about MERS which is a registry that attempts to track servicing rights and loans as well as investors’ beneficial rights and loans. Additionally, he summarized the non-judicial process in California which starts with a notice of default, followed by a notice of trustee sale and a trustee’s deed upon sale. Finally, he concluded with some thoughts on future considerations, in particular the use of digital documents and submissions as opposed to paper/scanned documents in order to facilitate the transfer of documents. He posited that this is what recorders are moving towards in California.