Decoding MERS: What It Potentially Means for Residential Real Property
By Andrew Naylor
SAALFELD GRIGGS PC
WHAT IS MERS?
There are many problems created by the current financial crisis, ranging from increasing foreclosure rates to chronic unemployment. A problem that has, so far, avoided significant attention concerns a growing majority of court opinions challenging title to real estate held by MERS, or the Mortgage Electronic Registration System. MERS is an entity created to avoid local recording fees. Before MERS, whenever a creditor recorded a mortgage in local real property records, the county charged a recording fee. This was also true whenever a mortgage was assigned from one party to another.
Following the creation of MERS, it is now common practice for the lender who originated a residential real property loan to immediately assign that loan, and mortgage, following origination. Ultimately, financial institutions began bundling these assigned mortgages together and placing them into a trust. The trust produced income from the bundled mortgages which, in turn, were sold to investors. MERS was created to avoid the local recording fees created in this process. By creating an entity that, on paper, appeared to “own” all of the mortgages, assignments could occur without the need to record those assignments with the county. Instead, MERS is designed to track the assignments internally and charge a transactional fee for its efforts. Lenders would retain the original promissory notes and other rights, but could then sell their rights to other parties who were members of the MERS system without recording the assignment and, therefore, without having to pay a recording fee.
SO, WHAT’S THE PROBLEM?
MERS is not typically listed as the beneficiary under a mortgage. Rather, MERS is designated as a “nominee.” Thus, the issue becomes whether the designation of MERS as a nominee has any legal significance. Recent decisions within Oregon have held that a “nominee” does not have any legal meaning. Rather, it is an internal designation used to track ownership of a mortgage. A recent opinion by one Oregon court stated that “[t]he relationship of MERS to [the creditor] is more akin to that of a straw man than to a party possessing all the rights given a buyer.” The Court, when addressing legal notice issues, concluded that because the listing of MERS as a nominee lacked any legal meaning, notice to MERS was unnecessary.
In a subsequent opinion, a different Oregon court granted a debtor’s motion for a temporary restraining order to prevent the foreclosure of her home. The debtor argued that MERS did not have any right to assign the trust deed because it lacked any authority to assign the underlying promissory note. Thus, the creditor who received the deed of trust by assignment from MERS had no authority to foreclose because the assignment was invalid. The court, in granting the restraining order, noted the growing line of cases holding that MERS lacks any legal authority to act on behalf of the original creditor. Thus, the court believed that the debtor had shown she could likely succeed on the merits of her claim that MERS was not permitted to assign the debt and thus the party seeking to foreclose had no right to do so.
WHAT DO THESE DECISIONS MEAN?
The impact from the ever-growing number of court decisions holding MERS lacks any real legal authority is difficult to assess. However, one potentially devastating result is a cloud on title that MERS-related residential real property titles may now carry. For example, in cases where MERS is the party foreclosing the mortgage, the foreclosure itself may be invalid. If MERS lacks any legal authority, then it cannot foreclose upon a mortgage. It is unclear what the full impact of MERS foreclosures will be and there remain countless unanswered questions.
For example, if the sale is void, but an innocent buyer purchased the property, is that purchase still valid, or is the entire transaction undone? If a foreclosure is invalid, or if the underlying assignments were invalid, parties could be establishing legal title for years to come. Acquiring clean title to purchased properties that have been somehow tainted by MERS may become a costly and time consuming endeavor. While most title companies have continued to issue title insurance to purchasers of MERS foreclosed properties, they are doing so on a case-by-case basis. Depending upon who is foreclosing and what has been represented, title insurance to purchase the property may not be available.
In sum, the full impact of the growing MERS court decisions has yet to be seen. For parties who have purchased properties sold through a foreclosure, it is critical that the potential impact of a MERS-affiliated assignment be addressed. Likewise, creditors holding mortgages or deeds of trust either purchased or assigned through MERS, or upon which MERS is designated as a nominee, need to carefully evaluate whether such instruments are currently enforceable. In addition, creditors seeking to provide “notice” to a title holder with MERS as a “nominee” need to carefully consider whether notice to MERS is sufficient.
The attorneys in our Litigation Group can help you evaluate whether MERS may impact your real property rights. If you believe you may be impacted by the MERS issues discussed in this article, and the growing number of courts reviewing this issue, please contact our office to discuss the matter in greater detail.