2-15-11

By: Stephen J. Nash
Nash Law Firm
nash@nash-law.com

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The continuing MERS saga staggers forward with no clear resolution.  Last week a U.S. Bankruptcy court in New York ruled against MERS while a U.S. Bankruptcy court in Kansas ruled in favor of MERS.

In the New York case, MERS brought the foreclosure on behalf of US Bank.  The Eastern District of United States Bankruptcy Court in the Eastern District in New York ruled that MERS was unable to prove that the note was actually assigned.  MERS members are allowed to self-report that an assignment took place.  MERS relied on its internal data base in an attempt to prove that an assignment actually took place.  The judge did not accept this argument and wrote,""[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."

In a U.S. Bankruptcy case in Kansas, a judge allowed MERS to foreclose on behalf of Countrywide (now Bank of America).  The court held that Countyrwide could foreclose the mortgage and have an assign (MERS) bring the foreclosure on it's behalf.

So far, MERS has posted wins in Arizone, Missouri and Minnesota and have lost in state supreme courts in Arkansas, Kansas and Maine.  

In a March 2009 ruling, U.S. Bankruptcy Judge Linda B. Riegle in Las Vegas wrote,"“If it doesn’t walk like a duck, talk like a duck and quack like a duck, then it’s not a duck.”  In the Minnesota case, the court ruled that a 2004 statute (drafted by MERS a lawyer representing MERS), did not require the sale of a promissory note, versus the mortgage, to be recorded.

What Does This All Mean?

In Minnesota the first attack on MERS failed.  Whether another attack is mounted or will be successful is unknown.  What is known is that there are numerous lawsuits attacking the MERS system throughout the country and it appears that it is unlikely that a concensus will be reached for quite some time.

Additionally, the MERS system has also come under political attack.  One of the attractive features of the MERS suystem for the lenders was that it allowed them to by-pass the public recording system and the costs associated.  By not recording the assignments of mortgage, a borrower can no longer determine from the public records who owns their note and mortgage.  The is also the question of fees that would have been paid to the counties if assignments had been recorded.  In a 2009 depostion in a lawsuit in Alabama, Merscorp (parent company of MERS) Chief Executive Officer R.K. Arnold stated that MERS has saved the industry about $2.4 billion. At a time when city, county and state budgets are upside down, this lose of revenue may become a bigger issue.  

Since sixty percentage of all new mortgages goes through the MERS system, uncertainty over the MERS system has a tremendous impact on the real estate market nationwide.  Winning in some states while losing in other states will put additional pressure on MERS since it will be difficult for MERS to opperate differently in ever state and/or with a shadow hanging over every foreclosure they commence.  

The question also has to be asked at some point, is it really worth the risk?  If the MERS process is invalidated even in some states, what does that mean for the foreclosures that have already been completed in those states?  What about the REO sales that took place after those foreclosures, especially, since the foreclosing lender does not warrant to the buyer that they have good title to the property?

Each conflicting decision, simply creates more confusion over the entire system at a time when the real estate market needs clarity.  Unfortunately, I doubt we are going to have a clear answer any time soon.