March 21, 2007
'As we discussed in our previous column, Mortgage Electronic Registration Systems, Inc. ("MERS") is a rating-agency-approved organization created in the 1990's by large players in real estate finance responding to the "rising tide of paper that was choking mortgage loan productivity."1 Essentially a mortgage database, MERS tracks changes in the ownership of the beneficial and servicing interests of mortgage loans as they are bought and sold among MERS members or others. Simultaneously, MERS acts as the legal mortgagee of record in a nominee capacity (a form of agency) for the beneficial owners of these loans.
Because MERS is a privately held database and not a public recording system, mortgages and assignments must still be recorded in public land records in order to perfect a lien. MERS becomes a mortgagee and secured party of record by either an assignment of an existing mortgage to MERS or the naming of MERS by the borrower as original mortgagee. No mortgage rights are transferred through MERS, whose members contractually agree to look to the MERS database to determine ownership. While beneficial and servicing interests are thus traded and tracked, MERS remains the mortgage lien holder in the public records, eliminating the need to record assignments or pay associated filing fees. By making accessible fast, inexpensive, and accurate information, MERS speeds up loan closing and securitization and enables an active secondary mortgage loan marketplace.
Recent Developments
Recently, the Court of Appeals ruled in favor of MERS in its five-year-old dispute with the Suffolk County Clerk's office (the "Clerk") involving the recording of MERS mortgages.2 While the Court established that the Clerk must record MERS mortgages, it stopped short of declaring MERS mortgages "lawful in all respects."3
In interpreting New York's 1951 recording statute, the court addressed two issues: First, must the Clerk record MERS mortgages, even though MERS acts only as a legal nominee and has no ownership interest itself in the underlying mortgage loan? Second, must the Clerk record mortgage discharges presented by MERS, even though these fail to list explicitly the mortgage assignments tracked in the MERS database yet never publicly recorded?
The Clerk contended that MERS instruments were not proper "conveyances" fit for recording, as the statute uses that term, because MERS holds no beneficial interest in the mortgage loan instruments bearing its name. The Clerk further argued that Real Property Law ("RPL") Section 321(3) required it to refuse to record discharges of a mortgage that had not been assigned "of record" unless the satisfaction instrument listed the chain of assignments. The court ruled against the Clerk on both issues.
In holding that the Clerk must record MERS mortgages, the court cited RPL Section 291: "a conveyance of real property, within the state, on being duly acknowledged...may be recorded in the office of the clerk...and such county clerk shall, upon the request of any party...record the same (emphasis added)."4 The Court reasoned that the recording of instruments affecting real property is a mandatory "ministerial" duty; the Clerk "lacks the statutory authority to look beyond an instrument that otherwise satisfies the limited requirements of the recording statute."5
The Court emphasized the two words "of record" in interpreting RPL Section 321(3):
Every certificate presented to the recording officer shall be executed and acknowledged or proved in like manner as to entitle a conveyance to be recorded. If the mortgage has been assigned, in whole or in part, the certificate shall set forth the date of each assignment in the chain of title of the person or persons signing the certificate, the name of the assignor and assignee, the interest assigned and, if the assignment has been recorded, the book and page where it has been recorded or the serial number of such record; or if the assignment is being recorded simultaneously with the certificate of discharge, the certificate of discharge shall so state. If the mortgage has not been assigned of record, the certificate shall so state. (emphasis added)6
The Court said the text offered an either/or scenario: either a mortgage has been assigned "of record" and its discharge must list the details enumerated above for such an assignment, or there has been no assignment "of record" and the discharge need only "so state."7 Because MERS discharges truthfully state that no assignment has been made "of record" (MERS tracks them privately), MERS need not list assignment details on its mortgage satisfactions.
In her partial dissent, Chief Judge Kaye said that the majority ignored the plain meaning of the statute:
Plainly, the statute requires all assignments of the mortgage to be listed on the certificate of discharge, whether recorded or not. The statute first sets out this general requirement, then it addresses each possible scenario in turn: if the assignment was recorded...if the assignment...is being recorded simultaneously...if the assignment was not recorded... To read the statute as providing that the certificate "either" list the recorded mortgage "or" simply state that the assignment has not been recorded renders the language of the preceding sentences superfluous and the clause regarding the listing of recording details "if recorded" nonsensical.8
According to Chief Judge Kaye's interpretation, basic details of assignments must always be listed on discharges and what varies is only the additional information or assertions may also need to be supplied.
Statutory construction aside, both the dissent and a majority concurrence expressed concerns about the public policy impacts of the MERS system, including reducing "the amount of public data accessible for research and monitoring of industry trends."9 By potentially making it more difficult for a borrower to learn who owns his mortgage, "it may also function, perhaps unintentionally, to insulate a note holder from liability, mask lender error, and hide predatory lending practices."10 The dissent further argued (although the court's majority stayed silent on this point) that the twin issues of whether MERS violated the prohibition against separating a note from its mortgage or had standing in New York State to foreclose on a mortgage remained open for later judicial consideration.
The Florida Cases
Our previous column described cases decided in the circuit courts of both Pinellas and Dade County Florida in 2005, which focused on the issue of standing to foreclose. Those courts denied MERS such standing because they saw MERS as an improper plaintiff against whom a defendant could not properly bring counterclaims since MERS was not the beneficial mortgage owner. MERS appealed on several grounds, including that it held an original note and a note allonge in blank, which, under the Uniform Commercial Code as adopted in Florida, made MERS a holder in due course of a negotiable instrument with standing to enforce that debt instrument in court.11
On Feb. 21, 2007, the Second District Court of Appeals of Florida ruled that MERS has the right to be a party in a foreclosure action, seeing its status as similar to that of mortgage servicers, who have that right.12 The Florida court saw standing as "broader than just actual ownership of the beneficial interest in the note" and said the state's civil procedure rules permitted an action to be prosecuted "in the name of someone other than, but acting for, the real party in interest."13 The Dade County appeal, in Florida's Third District Court of Appeals, remains pending.14
Implications for Lenders
At higher court levels, these recent decisions represent a positive trend for judicial acceptance of the MERS system. Currently, in New York State, MERS mortgages remain not only eligible for recording but also, it would certainly appear, lawful and enforceable in the state's courts. Florida's appellate courts seem to be moving in the same direction.
Yet, court decisions in other states, particularly at the trial court level, have had mixed results. One Nebraska court favored MERS by declaring the organization exempt from mortgage broker licensing in that state because of the limited nature of its services.15 Another South Carolina trial court-using statements from the Nebraska court's decision three months earlier--ruled against MERS in a foreclosure action and rejected the holder-in-due-course theory, reasoning that MERS was too closely connected to its membership to have acquired its mortgage interest, if any, for valuable consideration at arms-length.16 That case illustrated that attorneys and mortgage industry professionals--perhaps struggling with the still novel nature of the MERS concept-can fail to grasp the distinction between being the "holder and owner of the mortgage" (a status MERS denies) and being the nominee/agent of the true owner.
This possibility for misunderstanding led Fannie Mae, in December 2006, to require that all its new judicial foreclosures avoid naming MERS as the plaintiff.17 Fannie Mae sought to avoid engaging a local judge on the standing issue when MERS could easily assign the mortgage on record back to the beneficial owner before a foreclosure suit is filed. Outside the courts, pragmatic considerations involving MERS continue to straddle both the legal and contractual worlds. For example, although MERS has gained wide acceptance with residential loans, it may not always be flexible or robust enough to handle large commercial lending deals involving multiple lenders, participation interests, asset pools, and mezzanine loan structures. Money saved with MERS on fees for recording mortgage assignments may pale beside extra legal fees incurred to adapt the paperwork for such complicated deals to the MERS structure. Some lenders in a participation loan may not be members of MERS or wish to obligate themselves contractually by joining.
Conclusion
Legal developments involving MERS should be monitored as its legal and administrative reach evolves. New York State's Legislature may also deliberate the public policy costs and benefits of the MERS system, as some judges on the Court of Appeals invited. Outside New York, counsel must determine how each jurisdiction treats MERS as a vehicle for recording mortgages and transferring ownership.
Endnotes
1 See Kenneth M. Block & Jeffrey B. Steiner, Electronic Registration: Mortgage Nominee's Standing to Sue Challenged, N.Y.L.J., Nov. 16, 2005, at 5.
2 In the Matter of MERSCORP, Inc. v. Romaine , 8 N.Y.3d 90, 2006 N.Y. Slip Op. 09500. The Court's Dec. 19, 2006 decision is available online as opinion number 179 at http://www.courts.state.ny.us/ctapps/decisions/dec06/dec06.htm.
3 New York's Supreme Court denied a request by MERS for such a blanket ruling; the Court of Appeals left that lower court action undisturbed. See MERSCORP , 8 N.Y.3d at 105.
4 MERSCORP , 8 N.Y.3d at 97.
5 Id. at 97.
6 New York Real Property Law §321(3).
7 MERSCORP, 8 N.Y.3d at 99.
8 Id. at 103.
9 Id. at 104.
10 Id. at 104.
11 Block & Steiner, supra note 1 at 5.
12 See Mortgage Electronic Registration Systems, Inc. v. Azize , Case No. 2D05-4544 (Fla. Dist. Ct. App. 2005).
13 Id. at 5.
14 "Florida Second District Court Rules in Favor of MERS," Feb. 21, 2007 press release, available at www.mersinc.org.
15 Mortgage Electronic Registration Systems, Inc. v. Nebraska Dept. of Banking and Finance , 270 Neb. 529, 704 N.W.2d 784,787.
16 Mortgage Electronic Registration Systems, Inc. v. Girdvaninis, Jr. , No. 2005-CP-43-0278 (S.C. Ct. Com. Pl. 2005).
17 Fannie Mae Announcement 06-24, available at: https://www.efanniemae.com/sf/guides/ssg/2006annlenltr.jsp.
For more information, contact:
Kenneth M. Block
Jeffrey B. Steiner
212.895.2250
jsteiner@thelen.com
David Cohen assisted in the preparation of this article.
This article is reprinted with permission from the Wednesday, March 21, 2007 edition of the New York Law Journal. ©2007 ALM Properties, Inc. All rights reserved. Further duplication without permission is prohibited. For information, contact ALM Reprint Department at 800-888-8300 x6111 or visit www.almreprints.com. #070-03-07-0036.
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