MERS Stubs Its Toe Trying To Foreclose

Daily Development for Friday, September 16, 2005
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
[email protected]

MORTGAGES; FORECLOSURE; PROCEDURE; STANDING TO FORECLOSE:  Florida trial court rules that MERS lacks status to foreclose as representative of lender even when MERS holds the note. 

In re Mortgage Electronic Registrations Systems, Inc., Cir. Ct. Pinellas County, Fla., Walt Logan, Judge, 8/18/05) (Numerous case numbers)

As most readers of this list know, the Mortgage Electronic Registration System, MERS, was established about fifteen years ago to facilitate the rapid transfer of mortgages for the purpose of developing large pools to support securitization of mortgages.  All parties participating in the MERS system (primarily mortgage bankers) agree to recognize as the owner of a note and mortgage that party shown on the MERS register.  Although, originally, MERS functioned without recording and without taking possession of the note, more recently MERS has both recorded itself as the record owner of the mortgage at the time of the original loan funding, or shortly thereafter, and has also begun to take possession of a note endorsed in blank.

One assumes that the various parties who rely upon MERS as the registry of ownership of mortgage loans that they make sign agreements that make very plain the powers that MERS has to foreclose in their name. Use of MERS has become the standard for residential mortgages, over 95% of which are securitized, and for securitized commercial mortgage as well.  But this Florida case puts at least MERS’ foreclosure arrangements very much at issue.

This order dismissed foreclosures in 28 pending foreclosures brought by MERS in Pinellas County.  In each case, MERS was listed as a plaintiff or co-plaintiff seeking to collect on a note via mortgage foreclosure.  In the end, the court dismissed all 28 cases for want of a proper party plaintiff. 

In each case, MERS acknowledged that it was representing the interest of another corporate entity in the collection effort, and described its role as a “nominee” of the other corporate entity.

The court reviewed the files and stated that it found that the petition for foreclosure, which alleged that MERS “now owns and holds the mortgage note and mortgage” were not supported in the record.  It acknowledged that MERS claimed that it was a “nominee” or the corporate entity that owned the note, but claimed that one corporation is not permitted to act for another in bringing a lawsuit.  Rather, lawyers, and not corporations, represent other corporations in lawsuits.

In some of the files,  there was an indication that the note was made out to a particular lender and no indication that it had been transferred to MERS or at least no “chain of transfer” linking the original lender to MERS.  In another files, there was in fact a lost note affidavit filed indicated another owner of the note.  In some files, in the view, MERS had inconsistently listed itself as a nominee of several different owners of the note, but again showed no chain of transfer from any of them. 

MERS pointed out in court that it in fact had possession of each of the notes.  It took the position that it was not necessary to show a chain of title of the note from the original payee to MERS, as it was in fact only a nominee.  .  It acknowledged that any foreclosure proceeds would flow through MERS to the real owner of the note as shown on MERS electronic records.   At one point, the court was able to get counsel for MERS to admit that MERS wasn’t sure who the beneficial owner of the note was at that precise moment. 

MERS nevertheless claimed that the notes had been endorsed in blank and that they essentially were bearer instruments under the UCC.  Therefore, MERS physical possession of the notes should be enough to permit it to foreclose on the related mortgages, even though it acknowledged in court that it was not in fact the beneficial owner of them.  There was confusing dialogue in the case, however, where the lawyers for MERS may have agreed that they didn’t have the note in court and were relying upon lost note affidavits. 

The court made the point that the defendants in these cases might have counterclaims against the real beneficial owners but would be barred from bringing them because they didn’t know who those owners were, and furthermore they were not in court. 

In the end, the court concluded that “beneficial interest to sue” cannot exist separately from other beneficial interests in the note.  Since MERS claimed no other beneficial interest, its possession of the note endorsed in blank did not avail it.    It commented that only positive legislation, and not contract, can establish a right to foreclose in someone other than the owner of a secured debt instrument:

“The MERS situation seems to have resulted from the establishment of the corporation and agreements with lenders without the participation of the Florida Legislature or the Supreme Court in its rule making role.  The fact that the market might find it easier to operate with the real party in interest somewhere in the background of a foreclosure lawsuit is not a compelling reason to modify the traditional requirements of a party to establish status to bring litigation.” 

Although the court refers to MERS as a “foreclosure agent” rather than a “servicing agent,” it appears that it would also exclude servicing agents from bringing foreclosure actions.

Comment 1: The author is informed that MERS views this case as an aberration, likely resulting from the failure of local counsel to use MERS standard form pleadings, and that it anticipates that it will not have a long standing problem in Florida or anywhere else. 

Comment 2: The editor is not familiar enough with MERS practices to know whether MERS typically forecloses on behalf of all registered mortgage owners or only when these mortgages are at some defined step on the way to, or after, securitization.  If others know, an inquiring mind would like the answer.

Comment 3: The presence of MERS has undoubtedly led to huge savings in mortgage securitization by the “private label” process.  It likely is not as critical for FNMA or FHLMC when they engage in their traditional function of acquiring loans directly from originators, but likely FNMA and FHLMC have evolved quite a lot in the current market, so MERS may play a major role in their operations as well.  Whether it is necessary for MERS to perform its function for it to be involved in a foreclosure is another question.  On the other hand, are there any sensible reasons why it shouldn’t be able to carry out the foreclosure?  The editor can’t think of any, nor can he think of any reason why legislation is necessary if MERS’ status as agent can be clearly made out by the contract and it produces the note.

Comment 4: It is difficult to make out all the details of the instant dispute, but it appears that in some cases there was no way to know who the true owner of the note is.  This seems to be completely inconsistent with the basic notion of MERS that the owner is the party shown on MERS computer record.  Consequently, it is hard to know why the owner of the note can’t be named.  Therefore, the problem of counterclaims that the court mentions would disappear.  The mortgagee is in the suit through its agent, MERS. 

Published by: DIRT  

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