Abstract

http://ssrn.com/abstract=1908893
 


 



All in One Basket: The Bankruptcy Risk of a National Agent-Based Mortgage Recording System


John P. Hunt


University of California, Davis - School of Law

Richard Stanton


University of California, Berkeley - Finance Group

Nancy Wallace


University of California, Berkeley - Real Estate Group

February 3, 2012

46 U.C. Davis L. Rev. 1 (2013)

Abstract:     
Mortgage Electronic Registration Systems, Inc. (“MERS, Inc.”) owns legal title to some 30 million mortgages in the United States. The company, which was a key part of the mortgage securitization apparatus in the late 1990s and 2000s, is now under intense pressure from public and private lawsuits and investigations and faces a very real threat of insolvency. Policymakers are looking ahead to potential replacements for MERS, Inc., as a recent Fed staff proposal for a substitute system indicates. This Article examines what might happen to the mortgages that MERS, Inc. at least nominally owns in the event that the company enters bankruptcy, a question that apparently has never been explored in a publicly available analysis.

Although the legal analysis underlying the design of MERS, Inc. does not appear to be publicly available, a key assumption seems to have been that if the company ever entered bankruptcy, the mortgages in its hands would not enter the company’s bankruptcy estate and would not be available to creditors. This Article challenges that assumption, pointing to the broad authority the Bankruptcy Code confers on the bankruptcy trustee with respect to interests in real property, such as mortgages. Most courts that have considered the issue have found that the bankruptcy trustee can bring into the estate any real property interest that the debtor could have conveyed to a good-faith purchaser. There is a significant risk that MERS, Inc. can convey MERS mortgages to a purchaser acting in good faith.

Although part of that risk arises from the company’s conduct in making and acquiescing in claims in court that the company can sell the mortgages, has constitutionally protected property interests in the mortgages, is a creditor of mortgage borrowers, and owns a beneficial interest in the mortgages, part of the risk is inherent in any mortgage recording system that operates nationally and holds mortgages as an agent. Policymakers should consider that risk as they consider whether MERS should be replaced and what form the replacement should take.

Number of Pages in PDF File: 52

Keywords: Mortgage-backed securities, MBS, Special Purpose Vehicle, SPV, bankruptcy remoteness, MERS, Article 9

JEL Classification: G18, G21, K22, M41

Accepted Paper Series


Download This Paper

Date posted: August 15, 2011 ; Last revised: February 19, 2013

Suggested Citation

Hunt, John P. and Stanton, Richard and Wallace, Nancy, All in One Basket: The Bankruptcy Risk of a National Agent-Based Mortgage Recording System (February 3, 2012). 46 U.C. Davis L. Rev. 1 (2013). Available at SSRN: http://ssrn.com/abstract=1908893 or http://dx.doi.org/10.2139/ssrn.1908893

Contact Information

John P. Hunt
University of California, Davis - School of Law ( email )
Martin Luther King, Jr. Hall
Davis, CA 95616-5201
United States
(530) 752-5052 (Phone)
HOME PAGE: http://ratingagencylawblog.wordpress.com/
Richard H. Stanton (Contact Author)
University of California, Berkeley - Finance Group ( email )
Haas School of Business
545 Student Services Building #1900
Berkeley, CA 94720-1900
United States
(510) 642-7382 (Phone)
(510) 643-1412 (Fax)
Nancy E. Wallace
University of California, Berkeley - Real Estate Group ( email )
Berkeley, CA 94720-1900
United States
Feedback to SSRN


Paper statistics
Abstract Views: 1,810
Downloads: 259
Download Rank: 67,468

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo4 in 0.297 seconds