MERS May Not Have Standing to Initiate Foreclosure Proceedings or Lift Automatic Stays in Bankruptcy
MERS attempts to assuage its critics by claiming that its system is designed to better track ownership and servicing rights of mortgages across the country, despite the fact that once a loan is assigned to MERS, the public land records no longer reveal who actually owns a lien on the property in question.
Clearly, MERS has effectively deprived each countys recorders office of recording fees, but how successful MERS has been in tracking ownership interests in mortgages remains a huge issue. Lenders lawyers in Florida foreclosure cases routinely file lost note counts, calling into question the true identity of the owners of the mortgage documents - MERS purported main objective.
As the fraudclosure frenzy continues to unwind, and the Florida economy continues to hover on the border of recession, MERS, not only desires to track the ownership and servicing rights of security instruments, but also to serve as the party seeking to foreclose mortgages and force homeowners out of their homes.
MERS ability to initiate foreclosure cases is at the heart of several legal challenges; especially, since MERS claims to be the owner (or the owners nominee) of the security interest, but has absolutely no skin in the game. This means that MERS does not solicit, fund, service or actually own any mortgage loans. Making matters worse, if MERS is successful in the mortgage foreclosure case, it does not receive any of the proceeds from the foreclosure sale or take back the property into its own name.
Growth of MERS
Today, MERS is legally involved in the origination of approximately 60% of all mortgage loans in the U.S, according to Kate Berry in her article Foreclosures Turn Up Heat on MERS (American Banker July 10, 2007). By 2002, MERS had recorded its name, instead of the actual assignee or mortgagee, in ten million residential home mortgages, according to an article MERS Registers 10 Million Loans (Inside MERS, Nov./Dec. 2002). One year later, the total number of loans recorded in MERSs name doubled to 20 million, according to the article MERS Registers 20 Million Loans (Inside MERS, Jan./Feb. 2004). By May 2007, MERSs name was listed as the mortgagee or assignee on 60 million residential mortgages, according to Berry.
Legal Controversy Surrounding MERS
The controversy surrounds MERSs role as the mortgagee of record for the life of the mortgage even after the original lender or subsequent assignee transfers the loan into a pool of loans that are ultimately sold to investors. That is, MERS has attempted to file foreclosure proceedings in its own name, rather than the name of the actual owner of the loan, which often times is a securitization trust or other similar entity. Compounding the problem, to expedite the foreclosure process, MERS has authorized loan assignees, or their servicers, to bring foreclosure actions in MERSs name, rather than in their own name.
Thus, the seminal issue surrounding MERSs involvement in foreclosure cases is whether MERS owns title to the mortgage such that it has standing to bring a foreclosure lawsuit.
Legal standing refers to the capacity of a litigant to show a sufficient nexus to the subject matter of a lawsuit to justify that partys participation in the case. The U.S. Supreme Court in the case of Sprint Communications Co., LP v. APCC Servs., Inc., 128 S. Ct. 2531, 2535 (2008) set forth the following three-part test to determine whether a party has standing: (1) an injury in fact, (2) causation and (3) redressability.
We need not look any further than the first part of this three part test to arrive at our answer. That is, when a homeowner fails to pay its mortgage loan, the non-payment of the mortgage loan injures either the bank that lent the money, which desires to have its debt repaid or the investors that have purchased securities that draw on revenue from that loans monthly payments.
In these cases, MERS is neither the originating lender nor the investor in such securities, as MERS has absolutely no expectation of receiving loan payments or proceeds of a foreclosure sale. MERS makes the same amount of money in the transaction, whether the homeowner pays his mortgage on time, late or not at all. As such, it does not appear as if MERS has been injured at all. Thus, MERS seemingly fails to satisfy the first part of the three part standing test.
This is where the controversy begins. There is currently a split of authority on whether MERS has standing to bring foreclosure actions against homeowners.
In Florida, for example, both the Third District Court of Appeals in Miami and the Second District Court of Appeals in Lakeland have held that MERS can foreclose upon mortgages. In doing so, it appears as if those two District Courts of Appeal simply relied upon the form mortgage--by definition, as set forth in the mortgage, that MERS is the mortgagee--rather than the substance of the transaction, which does not require any payments to be made to or collected by MERS.
When commenting on mortgages with MERS, the honorable Jon Gordon, a circuit court judge in Miami, stated:
It truly concerns me, however, that thousands and thousands of mortgage foreclosure actions have been filed with these allegations. I am not certain what remedy, if any, these people would have were it to be determined that MERS was not ever the proper party notwithstanding that these folks might have been in default what their recourse, if any, would be. Im not certain with the satisfaction of mortgages that have been filed on behalf of MERS how good those are and I am not certain how good title to property is that people bought at these foreclosure sales if it turns or becomes established that MERS was indeed not only not the right party, but misrepresented by way of their pleadings and affidavits that they held something they didnt own, so Im not certain of the consequences, but it seems vast.
On the other hand, the New York Court of Appeals ruled in 2006 that clerks in New York are required to record MERS mortgages, mortgage assignments and discharges. This ruling essentially says that a private company like MERS, which is owned and is invariably paid by banks and other financial institutions, can no longer usurp the clerks role by serving as the custodian of and repository for legal documents and as the party responsible for producing the chain of title.
In short, this New York ruling calls into question the legality of MERS design, which calls for legal documents to be recorded and accounted for by MERS.
Further, at least one trial court judge in New York has refused to process MERS foreclosures, according to the New York Times article Tracking Loans Through a Firm That Holds Millions (Mike McIntire April 23, 2009).
The New York Supreme Court stated in LaSalle Bank, N.A. v. Lamy, 2006 WL 2251721 at 1:
this court and others have repeatedly held that a nominee of the owner of the note and mortgage, such as Mortgage Electronic Registration Systems, Inc. may not prosecute a mortgage foreclosure action in its own name as nominee of the original lender because it lacks ownership of the note and mortgage at the time of the prosecution of the action.
Similarly, in the case of In Re: Sheridan, No. 08-20381-TLM, 2009 WL 631355, a bankruptcy court judge in Idaho stated in [a] homeowners bankruptcy, MERS lacked standing to file a motion for relief from the automatic stay that would facilitate foreclosure under state law (Bankr. D. Idaho 2009).
The question as to whether MERS has legal or equitable ownership rights to afford its standing to initiate foreclosure proceedings has yet to be resolved, although in Florida, it appears as if MERS does have standing to initiate foreclosures and eject homeowners from their homes.
Nonetheless, if you are contemplating a strategic default, attempting to obtain a loan modification or currently in foreclosure proceedings and MERS is the mortgagee, nominee for the lender or the plaintiff in the lawsuit, you should consult an attorney experienced in foreclosure defense like the Florida Homestead Law Group (www.homesteadlegal.com [http://www.homesteadlegal.com/]) who is familiar with these issues.