It seems increasingly likely that at some point the Supreme Court is going to have to make a ruling on the validity of real estate transfers and foreclosures through the Mortgage Electronic Registration System (MERS).
MERS is a system that was created in order to allow mortgage originators to more easily securitize mortgages and bundle them into mortgage backed securities. It enabled MERS users to avoid many of the transfer and recording fees that were typically charged by towns and counties under the paper system of transferring property. MERS is the subject of many ongoing lawsuits that seek to establish the legality of these transfers.
A ruling came down last Wednesday from the California Court of Appeals that said property transfers through MERS are legal. Judge Joan K. Irion wrote:
“Under California law, MERS may initiate a foreclosure as the nominee, or agent, of the noteholder.”
California has both judicial and non-judicial foreclosures. Lawyers said they intend to appeal the ruling. New Hampshire, which is a non-judicial foreclosure state, also upheld the validity of MERS transfers last week. Judge John Arnold of the Cheshire County Superior Court ruled:
“MERS’ status as nominee allows it to perform its core function of facilitating the tracking of mortgages… Contrary to the plaintiff’s assertions, the use of MERS as nominee is in and of itself neither fraudulent nor wrong.”
A court in Kansas has ruled similarly.
Meanwhile, Judge Robert E. Grossman of the U.S. Bankruptcy Court for the Eastern District of New York ruled that property transfers under MERS are illegal (n.b. the bankruptcy court is a federal, rather than state court):
“This court does not accept the argument that because MERS may be involved with 50% 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.”
Also along these lines, The Register of Deeds in South Essex County in Massachusetts announced its intention to sue MERS for $22 million over missed recording revenue. The press release said that:
“The fact that they deliberately chose to create a for-profit private cyber Registry of Deeds whose only purpose was to avoid paying the same fees as everyone else and keeping the public in the dark as to who was the rightful owner of the mortgage clearly demonstrates to me that this was a scheme of epic proportions.”
Part of the issue here is that foreclosure laws are established on a state by state basis. Some states have judicial foreclosure procedures, others have non-judicial foreclosures, and some have a hybrid system. Further, real estate property law varies amongst the states. As the situation changes, I will try to keep you up-to-date here.