Favorite sentence: “MERS’s position that it can be both the mortgagee and an agent of the mortgagee is absurd, at best.”
Well, after all, banking has become the theater of the absurd.
Merscorp Inc., operator of the
electronic-registration system that contains about half of all
U.S. home mortgages, has no right to transfer the mortgages
under its membership rules, a judge said.
U.S. Bankruptcy Judge Robert E. Grossman in Central Islip, New York, in a decision he said he knew would have a
“significant impact,” wrote that the membership rules of the
company’s Mortgage Electronic Registration Systems, or MERS,
don’t make it an agent of the banks that own the mortgages.
Merscorp was created in 1995 to improve servicing after
county offices couldn’t deal with the flood of mortgage
transfers, Karmela Lejarde, a spokeswoman for MERS, said in an
interview last year. The company tracks servicing rights and
ownership interests in mortgage loans on its electronic
registry, allowing banks to buy and sell the loans without
having to record the transfer with the county. It played a major
role in Wall Street’s ability to quickly bundle mortgages
together in securitized trusts.
“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,” Grossman wrote. “The court does not accept the
argument that because MERS may be involved with 50 percent 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.”
In the case Grossman ruled on, Credit Suisse Group AG’s
Select Portfolio Servicing, a mortgage servicer, sought to
bypass the automatic shield against legal claims triggered by
Ferrel L. Agard’s filing for personal bankruptcy in September.
Select Portfolio wanted permission to foreclose on Agard’s
home in Westbury, New York, on behalf of U.S. Bancorp’s U.S.
Bank unit, the trustee for the mortgage-backed trust the home
loan was in. The house is worth about $350,000 and the mortgage
amount was $536,921, according to the decision.
Grossman ruled in favor of Select Portfolio because he
couldn’t overrule a November 2008 foreclosure judgment the
servicer won in state court, he said. Without that state-court
ruling, Select Portfolio wouldn’t have had the right to bring
its motion, Grossman said.
He then addressed whether a mortgage transfer by MERS is
valid, because “MERS’s role in the ownership and transfer of
real-property notes and mortgages is at issue in dozens of cases
before this court,” including those where “there have been no
prior dispositive state-court decisions,” he wrote.
Select Portfolio argued in part that MERS’s February 2008
assignment of the mortgage to U.S. Bank was valid because Agard
agreed that MERS would hold title to it for the original lender, Bank of America Corp.’s First Franklin, and for whichever banks
it was further assigned to. First Franklin transferred the
promissory note the mortgage secured to Lehman Brothers Holdings
Inc.’s Aurora Bank and Aurora to U.S. Bank, according to the
“An adverse ruling regarding MERS’s authority to assign
mortgages or act on behalf of its member/lenders could have a
significant impact on MERS and upon the lenders which do
business with MERS throughout the United States,” Grossman
wrote. “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
Grossman said Select Portfolio had to show that U.S. Bank
owned both the note and the mortgage, and there was no evidence
that it held the note. The judge disagreed with Select
Portfolio’s argument that U.S. Bank held the note because the
note “follows” the mortgage, which it said U.S. Bank owned.
“By MERS’s own account, the note in this case was
transferred among its members, while the mortgage remained in
MERS’s name,” Grossman wrote. “MERS admits that the very
foundation of its business model as described herein requires
that the note and mortgage travel on divergent paths.”
The judge said that the membership agreement wasn’t enough
to assign the mortgage and that to do so the lender would have
to give power of attorney or similar authority to MERS.
MERS’s membership rules don’t create “an agency or nominee
relationship” and don’t clearly grant MERS authority to take
any action with respect to mortgages, including transferring
them, Grossman wrote. Because the interests at issue concern
“real property” — land and buildings — under state law, any
transfer has to be in writing, which isn’t done under the MERS
system, he said.
“Without more, this court finds that MERS’s ‘nominee’
status and the rights bestowed upon MERS within the mortgage
itself, are insufficient to empower MERS to effectuate a valid
assignment of mortgage,” the judge wrote. “MERS’s position
that it can be both the mortgagee and an agent of the mortgagee
is absurd, at best.”
Grossman said parties coming to him to seek to lift the
automatic ban on legal claims in cases involving MERS will have
to show they own both the mortgage and the note.