The private system for registering mortgages around the country is coming under increased attach by foreclosure and bankruptcy courts, according to the New York Times. And now a bankruptcy judge on Long Island has questioned the whole concept of the system.
In an article by Michael Powell and Gretchen Morgenson, dated March 6, 2011, the current status of the MERS Corporation is reviewed and explored. MERS – the Mortgage Electronic Registration Systems – is a private company located in Reston, VA, which purports to be the holder of 60 million mortgages, even though it actually loans no money and has fewer than 50 employees. And Bloomberg News (Article by Thom Weidlich, dated Feb. 14, 2011) reports on the Long Island bankruptcy case , where the judge ruled that the MERS does not appear to have the authority to assign mortgages (more on that case below.)
In New York State, as in most states, mortgages are recorded in the local county clerk’s office, so if anyone wanted to know who owned the mortgage encumbering a parcel of land could look it up in the clerk’s land records. If the mortgage was sold, an ‘assignment of mortgage’ would be recorded in the clerk’s office, so there would be a recorded chain of title to the instrument.
Apparently this age-old system ran into a couple problems. One was caused by the government in some localities – couunty clerks were getting way behind in actually recording mortgages and other land records. This has never been a problem locally: in the Monroe County Clerk’s Office a mortgage is electronically recorded immediately upon filing, and a digital image of the mortgage is available online in a matter of weeks. But apparently in other localities recording got behind by months or even years. In modern real estate financing, where mortgages are often sold immediately after they were created, this recording delay was a serious problem.
Beyond lagging recording practices, national real estate funding practices emphasized economy of scale, and following the local recording requirements of thousands of county clerks was perceived to be inefficient. So MERS was created as a nationalization and privatization of mortgage recording. MERS would be the apparent owner of the mortgage recorded in the local land offices, and would keep track of the true owners internally as mortgages were sold and resold – and combined into investment vehicles, sliced and diced and sold to private investors. Anyone looking at the clerk’s records would only see MERS; you would have to check with them to see who was the actual mortgage owner.
But transfer of mortgage ownership, no matter how done, must be done by an officer of a corporation, and with just a few employees MERS itself could not supervise the execution of documents needed to assign a mortgage from one entity to another. According to the article, the system was simplified by allowing staff at mortgage banks to be appointed as ‘Vice Presidents’ of MERS; apparently the bank would pay a small fee and then their own staff would become an officer of MERS authorized to assign mortgages. MERS itself apparently had no idea how many ‘Vice Presidents’ it had, but the number was in the thousands.
On February 10, 2011, the Hon. Robert E. Grossman of the Bankruptcy Court for the Eastern District of New York issued a written opinion, In re Agard (Chapter 7 Bk #810-77338) which challenges the status of MERS or banks purporting to be nominees of MERS to be treated as secured creditors. In an unusual twist, the debtor in the case actually lost: prior to the filing of the bankruptcy petition the MERS-related bank had obtained a foreclosure judgment by default in state court, and the bankruptcy court decided that it could not overturn a valid final order by the state court.
However, because the court was facing many other MERS cases, and because MERS itself participated in litigating the issue of its status in the Agard case, the court went ahead and issued an opinion that would apply to the other MERS cases. The opinion is attached below, and basically says that MERS did not prove that its system conformed to the New York land recording statutes, and that MERS also failed to show it owned the mortgage note – a separate legal issue.
As usual, this will not be the end of this case. According to the court docket, the debtor in Agard has filed an appeal to District Court, and MERS has filed a cross appeal. MERS has also filed a motion in bankruptcy court for reconsideration, which will be heard later this month.