Written by Craig D. Robins, Esq.
“The Mortgage Machine Backfires.” That was the title of a fantastic and incredibly interesting article in yesterday’s New York Times.
Times business columnist Gretchen Morgenson wrote about a recent Kansas Supreme Court case which lambasted a “dubious practice” that mortgagees have relied on for several years now. The principles discussed in that case have the stunning potential of operating as an absolute defense in mortgage foreclosure proceedings throughout the country and especially on Long Island.
“MERS” — The Mortgage Electronic Registration System
We are all used the standard recording process whereby deeds and mortgages are recorded with the county clerk. However, during the recent mortgage lending spree, mortgage loans changed hands constantly, often ending up in packaged and securitized mortgage pools. The Times characterized the constant changing of mortgage ownership as a “dizzying series of transactions.”
Each time a mortgage is recorded there is a hefty recording fee. To save money, the mortgage industry, including Freddie Mac and Fannie Mae, set up MERS to record mortgage assignments electronically.
MERS estimates that it saved its members about $1 billion during the previous decade. There are about 60 million mortgage loans that are registered in the name of MERS!
The MERS flaw: It does not own mortgages but merely records them in the MERS name
Not only does MERS register mortgages, it also began registering the various mortgage assignments and transfers. However, when it registered anything with a county clerk, it registered the mortgage in the name of MERS. And herein lies the significant flaw that may now become an incredible problem for all MERS mortgages. Even though MERS listed itself as the owner of the mortgage in the public records of county clerks across the country, it did not actually own any of the mortgages.
If MERS is only an Electronic Registry, How can it bring foreclosure actions?
One of the basic tenets of mortgage foreclosure law is that the mortgagee must have standing to bring the foreclosure action, which means it must own the mortgage being foreclosed upon. I successfully persuaded the Nassau County Supreme Court a few months ago to dismiss a foreclosure for this very reason. See my post: Long Island Foreclosure Case Dismissed!
Even though MERS may not technically have standing, it nevertheless brought great numbers of foreclosure proceedings. Some mortgage foreclosure defense lawyers asserted that MERS did not have legal standing to sue. After all, how can an electronic registry with no mortgage ownership claim that it has the right to evict people from their homes? However, judges initially rejected those arguments and allowed the MERS foreclosure actions to proceed.
A pivotal case from the Kansas Supreme Court may now preclude MERS from asserting that it has standing
Rather than get into the details of the Kansas Supreme Court case, the court held that a mortgagee’s use of MERS to register the mortgage was insufficient to enable the mortgagee to assert any rights. This, in essence, totally rejected the MERS’s business model.
This decision from a state’s highest court is quite important because it may likely encourage judges elsewhere to question MERS’s standing in their foreclosure cases.
There are other potentially far-reaching implications. For example, there can be an issue as to the priority of mortgage liens if a MERS mortgage is not recognized.
From a bankruptcy perspective, aggressive and creative Chapter 7 bankruptcy trustees can argue that mortgagees do not have a valid security interest and that a debtor’s home can therefore be liquidated without worrying about the mortgagee as a secured creditor.
As I have frequently written in the past, I refuse to do mortgage modifications. One of the primary reasons is because it is impossibly difficult to reach the appropriate individuals who have the authority to discuss a mortgage workout. Now we are learning that MERS is quite responsible for this. The MERS system has led to great confusion as borrowers are unable to identify who they should turn to.
The Kansas case is certainly a stunning victory for homeowners. It will be interesting to see the fallout from this case. Click here to read the New York Times article