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MERS MORTGAGES CAN'T BE FORECLOSED - FEDERAL JUDGE RULES

By
Real Estate Attorney with THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY

In a federal bankruptcy court decision in the influential Eastern District of New York, Judge Robert Grossman explained in a 37 page decision in In re: FERREL L. AGARD, Case No. 810-77338-reg that MERS must have specific powers from its "principal" to transfer the mortgage and promissory note, and that the transfer of the mortgage by MERS does not automatically also transfer the promissory note it secures.

Borrower attorneys nationwide have called suspect the practice of the splitting of the promissory note from the mortgage using the MERS concept of "nominee" and "mortgagee of record". MER'S "... argues that any member/lender which holds a note secured by real property, that assigns that note to another member by way of entry into the MERS database, need not also assign the mortgage because legal title to the mortgage remains in the name of MERS, as agent for any member/lender which holds the corresponding note. MERS's position is that if a MERS member directs it to provide a written assignment of the mortgage, MERS has the legal authority, as an agent for each of its members, to assign mortgages to the member/lender currently holding the note as reflected in the MERS database."

In a classic foreclosure question of whether the plaintiff has standing to sue for the relief requested, the court went on a detailed analysis of the MERS scheme and basis for its existence.  The court acknowledged the far reaching effect of its decision on mortgages nationwide. "The Court recognizes that 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. 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."  The court went on to say that the argument that MERS owns 50% of the mortgages in the US is not a reason to turn a blind eye to the requirements of the law.

Also classic is who has the note?  The court said, "By MERS's own account, the Note in this case was transferred among its members, while the Mortgage remained in MERS's name. MERS admits that the very foundation of its business model as described herein requires that the Note and Mortgage travel on divergent paths. Because the Note and Mortgage did not travel together, Movant must prove not only that it is acting on behalf of a valid assignee of the Note, but also that it is acting on behalf of the valid assignee of the Mortgage."

The next issue is about the abiltiy of MERS to assign the mortgage. "Other than naming MERS as "nominee", the Mortgage also provides that the Borrower transfers legal title to the subject property to MERS, as the Lender's nominee, and acknowledges MERS's rights to exercise certain of the Lender's rights under state law. This too, is insufficient to bestow any authority upon MERS to assign the mortgage. In Bank of New York v. Alderazi, the court found "[t]he fact that the borrower acknowledged and consented to MERS acting as nominee of the lender has no bearing on what specific powers and authority the lender granted MERS." Alderazi, 900 N.Y.S.2d at 824. Even if it did bestow some authority upon MERS, the court in Alderazi found that the mortgage did not convey the specific right to assign the mortgage."

In wrapping up its decision, the court said, "However, even if MERS had assigned the Mortgage acting on behalf of the entity which held the Note at the time of the assignment, this Court finds that MERS did not have authority, as "nominee" or agent, to assign the Mortgage absent a showing that it was given specific written directions by its principal.

"This Court finds that MERS's theory that it can act as a "common agent" for undisclosed principals is not support by the law. The relationship between MERS and its lenders and its distortion of its alleged "nominee" status was appropriately described by the Supreme Court of Kansas as follows: "The parties appear to have defined the word [nominee] in much the same way that the blind men of Indian legend described an elephant - their description depended on which part they were touching at any given time."

The significance of this decision has been enough for it to have reached most news wires on a global basis.  Although the decision is long, it is a very interesting read, and it will help give detail and meaning to the endless articles you see in the newspaper on the foreclosure litigation issues.

This decision lends tremendous support to the defense counsel arguments made over the past half dozen years that standing alone, MERS does not have the standing to foreclose a mortgage.

UPDATE: Just a few days after this decision, MERS instructed all of its members to STOP filing foreclosures in the name of MERS!  This case apparently was the tipping point for change in policy of operations at MERS.

Copyright 2011 Richard P. Zaretsky, Esq.

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Be sure to contact your own attorney for your state laws, and always consult your own attorney on any legal decision you need to make.  This article is for information purposes and is not specific advice to any one reader.

Richard Zaretsky, Esq., RICHARD P. ZARETSKY P.A. ATTORNEYS AT LAW, 1655 PALM BEACH LAKES BLVD, SUITE 900, WEST PALM BEACH, FLORIDA 33401, PHONE 561 689 6660                                            email: RPZ99@Florida-Counsel.com   - FLORIDA BAR BOARD CERTIFIED IN REAL ESTATE LAW - We assist Brokers and Sellers with Short Sales and Modifications and Consult with Brokers and Sellers Nationwide!  Shortsales@Florida-Counsel.com     Website www.Florida-Counsel.com

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Ryan Frost
Compass Lending Solutions, LLC - Draper, UT

So is MERS still allowed to charge the $6.95 registration fee to borrowers? It seems that it would be an unearned fee and thus a violation of RESPA. I would like to know your thoughts on that.

Feb 16, 2011 05:28 AM
Brad Rachielles
CENTURY 21 Peak, Ca BRE# 01489453 - Upland, CA
REALTOR, CDPE, Upland, CA

A lot to think about here. Do you have other information sources that you might recommend for updates and analysis that you trust?

Feb 16, 2011 06:09 AM
Carla Muss-Jacobs, RETIRED
RETIRED / State License is Inactive - Portland, OR

When MERS can into play, and with the head nod, wink and handshakes of the MBA (Mortgage Bankers Assoc.) it created a system of its own design.  Only done to trade the mortgages they held as poker chips for their investment vehicles.  Of course, home owners' properties were used to finance, more like parlay, huge vasts empires and wealth schemes.  So, we have one Judge who can see through this.  The thought of usuary on this grand scale is sickening.  All home owners wanted to do was buy a home . . .  Of course, this ruling will be appealed, don't you think? 

Feb 16, 2011 06:15 AM
Yvonne Jaramillo Ahearn, Esq. (B)
Hawaii Life Real Estate Brokers - Kailua, HI
REALTOR-Broker, CRS, GRI, ABR CLHMS

I've been waiting for this to happen...

Feb 16, 2011 06:18 AM
Tni LeBlanc, Realtor®, J.D.
Mint Properties, Lic. #01871795 - Santa Maria, CA
Tenacious Tni (805) 878-9879

Just more mess. 

Feb 16, 2011 06:49 AM
Douglas Ching
Kenmore, WA

An amazing win (battle) for homeowners!  If used to the letter of the law this could have huge implications and help many Americans.

Homeowners simply used as particles of sand with the perception of security the water of which they build.  As much as I want to believe that this will stick (please!) I have a feeling that in the end when this hits the supreme court loopholes will be found (they are masters of this), money will exchange hands, favors will be called in and the elite who run things even though their castles be built of sand we will not see it crumble.

 

 

Feb 16, 2011 06:54 AM
Bill Gillhespy
16 Sunview Blvd - Fort Myers Beach, FL
Fort Myers Beach Realtor, Fort Myers Beach Agent - Homes & Condos

Hi Richard,  Quite an involved read of this verdict.  Now we have to see how others react and perhaps change their treatment of the distressed market.  Well done.

Feb 16, 2011 07:23 AM
Bill Rozek
Embrace Home Loans, Inc. - Potomac, MD
NMLS #214260

Thanks for posting this Richard.  Not only will this be interesting for agents and lenders, but I think that owners title insurance may become very important to some borrowers as a result of the MERS mess.

Feb 16, 2011 08:54 AM
Chris Olsen
Olsen Ziegler Realty - Cleveland, OH
Broker Owner Cleveland Ohio Real Estate

Hi Richard -- Do you think this is going to slow down the foreclosure process?

Feb 16, 2011 10:08 AM
Lenn Harley
Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate - Leesburg, VA
Real Estate Broker - Virginia & Maryland

I read this decision a couple of days ago.  Fascinating and especially facinating since it came from a bankrupty judge. 

If I'm not mistaken, appeals from bankruptcy court go directly to U.S. District Court.  I believe that the time to file is 10 days. 

What I find curious is that the debtor is in chapter 7.  I'm not sure what they hope to gain from this ruling in a chapter 7. 

This will be interesting to watch.

Feb 16, 2011 10:08 AM
Allison Stewart
St.Cloud Homes - Saint Cloud, FL
St. Cloud Fl Realtor, Osceola County Real Estate 407-616-9904

Thanks Richard for this interesting read. It will be interesting to watch see what develops from this decision.

Feb 16, 2011 10:40 AM
Christine Donovan
Donovan Blatt Realty - Costa Mesa, CA
Broker/Attorney 714-319-9751 DRE01267479 - Costa M

Richard - That is just a huge mess.  It sounds like there's going to be huge ramifications.

Feb 16, 2011 10:47 AM
George Bennett
Inactive - Port Orford, OR
Inactive Principal Broker, GRI


Thank you for summarizing the finding of the Court. I'm sure that MERS and the MERS legal team will appeal this finding but for now, in my opinion, it is a step in the right direction.

Feb 16, 2011 04:37 PM
Gabe Sanders
Real Estate of Florida specializing in Martin County Residential Homes, Condos and Land Sales - Stuart, FL
Stuart Florida Real Estate

I wonder if some that have lost their homes are going to come back and try to get them back.  What a mess this could create.

Feb 16, 2011 11:58 PM
Karen Hurst
RICOASTALLIVING.COM - Warwick, RI
Rhode Island Waterfront!

 

 

As much as I am fascinated by all the MERS' discussions lately and agree with this particular judge, I can only imagine the havoc this will continue to cause.

I have already been involved with this type of thing in my own practice.  Two times in the past two months where a house COULD NOT CLOSE!

On the other side, if I did not pay my mortgage to WHOMEVER I was supposed to pay it to, do I have the right to get my home back due to what is essentially a scammy (on MERS part) paperwork error?  I STILL owe the money!!  

While proper proceedures should be put in place for MERS (and there should be some retribution involved), the sheer amount of homeowners this may have affected across the Nation is insurmountable!     AND.....this is NOT why they did not pay their mortgage!

Feb 17, 2011 06:33 AM
Anonymous
Richard Vetstein

If this decision gains any national traction, it will quickly be squashed by the Feds because it simply will cause way too much havoc in the U.S. mortgage market. Over 50% of the trillion dollar mortgage market is involved in the MERS system. Whether the system was properly established in the first place doesn't really matter. It's just too big to fail, and the goverment won't let it fail.

Here's my take:  http://www.massrealestatelawblog.com/2011/02/15/oh-my-oh-mers-ny-bankruptcy-judge-rules-that-mortgage-electronic-registration-systems-mers-lacks-right-to-assign-mortgages/

Trust me on this.

 Richard D. Vetstein, Esq.

Feb 18, 2011 04:32 PM
#22
Richard Zaretsky
THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY - West Palm Beach, FL
Florida Real Estate Attorney

To all - the first update is that MERS on Thursday instructed all of its members to STOP filing foreclosures in the name of MERS!  This case apparently was the tipping point for change in policy of operations at MERS.

Gabe and Bill - I have been writing for some time now about the upcoming title issues that the robo-signing and similar foreclosure short cuts will cause challenges to title warranties.  REO and foreclosure titles with defective foreclosures have titles that are "voidable" but not automatically void.  Some attorneys are going to cash in on this one!

Chris - the foreclosure process is already slowed down.  I sat next to South Florida foreclosure judge to hear Associate Justice Breyer speak to our Bar Association, and he told me that he almost has no motions for summary judgment anymore - just hundreds of foreclosure sale cancellations every week.  Just look at the next week's foreclosure schedule online with the Palm Beach County Clerk - probably 75% of every day's sales are "cancelled".  That is the robo-signing mess that still has to be cleaned up.  I think the issues in this case can be addressed along with the robo defects at the same time, so I don't see an additional layer of time delay for this in existing cancelled foreclosure sale cases.

Just remember - this is not a panacea to defaulting borrowers.  The decision just says do it right.

Feb 19, 2011 01:43 AM
Anonymous
cindy

So will the banks continue to report negatively on credit reports?

Feb 22, 2011 10:28 AM
#24
Anonymous
Alison
What people can just stop paying and just sue to get their house?
Feb 25, 2011 05:42 AM
#25
Richard Zaretsky
THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY - West Palm Beach, FL
Florida Real Estate Attorney

Allison - Essentially, no one can stop paying and expect to get their house free and clear.  Even if the mortgage is unenforceable today, the issues can be fixed with work at the lender and their documentation.  Also, the borrower can get sued just on the promissory note - although that is not a foreclosure on the house.

Feb 25, 2011 09:01 AM