U.S. Bankruptcy Judge Questions Legal Claims of MERS

On Thursday, February 10th, a federal bankruptcy court judge issued an opinion offering a scathing critique of the Mortgage Electronic Registration Systems, or MERS, the electronic-lien registry system built by the housing-finance industry to facilitate the bundling and selling of pools of mortgages.

The decision by U.S. Bankruptcy Judge Robert E. Grossman in Central Islip, N.Y., didn’t change the outcome of the borrower’s foreclosure proceeding. The foreclosure had been approved earlier by a state court, and the judge ruled that he didn’t have the authority to stop it.

But that didn’t stop [Judge] Grossman from offering an opinion that he said would have a “significant impact” on the industry by calling into question the rules and procedures that MERS uses to transfer mortgages and handle foreclosures on behalf of the largest U.S. banks.

MERS was built by Fannie Mae, Freddie Mac, and several large U.S. banks in 1996 as an electronic registry of land records, creating a parallel database that bypassed local county courthouses and reducing costs for banks. The company’s name is listed as the agent for mortgage lenders on more than 65 million home loans.

The company’s practices have begun to receive heavy scrutiny from state prosecutors and federal regulators, particularly in light of foreclosure documentation problems that surfaced last fall. State and federal lawmakers have considered bills that would make it harder for banks to use or foreclose on properties through MERS, and critics say it has made it much harder for borrowers to tell who owns their loans.

The case was brought after Ferrel Agard, a Westbury, N.Y., homeowner, filed for Chapter 7 bankruptcy protection after facing foreclosure by U.S. Bank, the trustee for bondholders in a mortgage backed security that the loan, and the servicer, Select Portfolio Servicing, a unit of Credit Suisse.

At issue was whether U.S. Bank had legal standing to foreclose. The loan was originated by First Franklin in 2006 and MERS became an agent for First Franklin, which ultimately transferred the loan to Aurora Bank and later to U.S. Bank. Both of those banks are members of MERS, which allowed it to also act on behalf of those agents, according to MERS’s lawyers.

“By MERS account, it took no part in the assignment of the Note in this case, but merely provided a database which allowed its members to electronically self-report transfers of the Note,” wrote Judge Grossman. “[T]here is nothing in the record to prove that the Note in this case was transferred according to the process described above other than MERS’s representation that its computer database reflects that the Note was transferred to U.S. Bank.”

The judge also concluded that MERS didn’t have authority to assign the mortgage to U.S. Bank without having “specific written directions” from the party that initially assigned the loan to MERS, which was First Franklin.

“The documentation provided to the Court in this case…is stunningly inconsistent with what the parties define as the fact of this case,” Judge Grossman wrote. The theory that MERS “can act as a ‘common agent’ for undisclosed principals is not support [sic] by the law.”

The opinion also rejected any argument that MERS’s reach was so broad and deep that it should receive favorable treatment from the judiciary:

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. 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. 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.

Laurence Platt, a banking industry attorney at K&L Gates in Washington, said the Agard case represented an “outlier that goes against years of decisions by New York courts that find assignments from MERS to be consistent with New York law.”

A spokeswoman for MERS also said that a separate decision on Friday by a U.S. Bankruptcy Court judge in Kansas had affirmed MERS’s ability to foreclose on behalf of Countrywide Financial Corp. In the case, the judge wrote that the court had received “uncontroverted evidence” that MERS was acting as an agent for Countrywide, allowing MERS to act on its behalf.

via U.S. Bankruptcy Judge Questions Legal Claims of MERS – Developments – WSJ.

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