A Nation Mired in MERS

Mortgage Electronic Registration Systems Inc. (MERS) is the leading electronic registry for mortgage lenders, and is linked more and more each day to the foreclosure crisis. MERS has been recently challenged in state foreclosure actions, frequently to different ends creating a “patchwork of conflicting laws and court decisions in different states.”[1]

MERS is a nationwide database that facilitates the buying, selling and transfer of mortgages. It is a member-based service that allows the tracking of servicing and ownership of more than 30 million loans[2] and nearly 60 million homes. As a central registry for loans, MERS allows borrowers to locate servicers and track the owners of their note. It also assists public servants in determining who is responsible for vacant properties and in the detection of mortgage fraud.

Generally speaking, MERS, through its certifying officers, acts as the mortgagee of record with the consent of the borrower. Such consent is reflected in the mortgage documents. Although MERS is conveyed the specific right to act on the lender’s behalf, the lender has beneficial title, or the specific rights of use and title in equity.[3] Certifying officers have typically been able to execute assignments, loan modifications, and subordination agreements, as well as initiate foreclosure proceedings and execute bankruptcy filings. However, such is no longer necessarily the case.

To bankruptcy practitioners, MERS may initially seem irrelevant, as it does not make decisions as to loans, security and foreclosures, nor does it hold mortgage documents. Adding confusion to the inherently murky legal issue of the status of MERS are the various legal challenges that are brought against MERS, meaning that a ruling “against” MERS may only pertain to some issues or rights and not others. These include, but are not limited to, issues of conveyance based on blank endorsements, assignments made by “officers” under the authority of corporations that no longer exist, the issue of whether MERS has a legal or beneficial interest in the note, and whether the circumvention of recording fees constitutes an illegal purpose.[4] Some of these challenges are brought in state court and some in federal courts and these cases involve consistent challenges—that mortgage transfers by MERS and their certifying officers are invalid, and the ostensible holders should be stripped of enforcement remedies.

Furthermore, the difficulty with MERS is unavoidable in the U.S. bankruptcy courts and it is in those courts that the issue came to a head. Unfortunately, the courts have come to conflicting resolutions. In one case, In re Agard,[5] where the servicer of loan moved for relief from an automatic stay, the U.S. Bankruptcy Court of the Eastern District of New York found that no agency relationship existed between MERS and the mortgagor (as it was not in writing) and thus did not have an “enforceable right against the Property.”[6] As the assignment of mortgage in question was by MERS, the court found that the assignment rendered the status of the lender as “noteholder” defective, and put the holding of the mortgage in question as well. The court also found that the note no longer stayed with the mortgage because of the MERS nominee process.  However, such an agency relationship was indeed found in the District of Kansas in In re Martinez.[7]

In In re Sheridan, an Idaho case decided in 2009, the court determined that the trustee MERS claimed to represent had no proof of interest in the note but did not determine whether MERS as nominee would otherwise have legal right to lift the stay.[8]  Some states are still interpreting MERS as holding authority to hold or convey mortgages. New Hampshire upheld MERS as a nominee and determined that they have clear rights to convey.[9] Other states that have also upheld the rights of MERS are Alabama, Kansas, California and Georgia. However, some states, including New York, have ruled in the opposite direction, invalidating a foreclosure. Rhode Island Federal Judge Grossman recognized that the results of invalidating MERS transfers would be staggering, but in Agard noted that

The Court recognizes that an adverse ruling regarding the authority of MERS to assign mortgages or act on behalf of its member/lenders could have a significant impact on MERS and upon the lenders [that] do business with MERS throughout the United States. However, the Court must resolve the instant matter by applying the laws as they exist today. It is up to the legislative branch, if it chooses, to amend the current statutes to confer upon MERS the requisite authority to assign mortgages under its current business practices. MERS and its partners made the decision to create and operate under a business model that was designed in large part to avoid the requirements of the traditional mortgage recording process. This Court does not accept the argument that because MERS may be involved with 50% of all residential mortgages in the country, that is reason enough for this Court to turn a blind eye to the fact that this process does not comply with the law.[10]

Circuit splits are not unusual, but Kansas’s District Court of Appeals has affirmed In re Martinez. Higher courts may continue to intervene as the courts strive for some kind of consistency in the current tumultuous real estate environment. Because U.S. real property law has historically been left to the states, fragmented and disparate approaches are likely, at least for the short term. However, inconsistent treatment of mortgage lenders, MERS and assignments will certainly be scrutinized by federal efforts to stem the current extraordinary rates of real estate in default. Be sure to consult a practitioner who specializes in real estate default for questions as to how this affects you or your client, as the MERS road grows muddier every day.