The current foreclosure crisis has sparked an inordinate amount of lawsuits against various financial institutions and more recently against a new player, Mortgage Electronic Registration System, Inc. (MERS). MERS is an electronic –lien registry established in 1995 by Fannie Mae, Freddie Mac and several banks as a way to streamline and speed up the recording and transfer of mortgages.1 When trading residential and commercial mortgage loans, MERS eliminates the need to prepare and record assignments.2 Lenders generally designate MERS as the “nominee,” which grants it power to assign mortgages as they are traded from one real owner to another.3 The former CEO of MERSCORP, Inc., R.K. Arnold,4 explained that any loan registered on the MERS system is inoculated against future assignments because MERS remains the nominal mortgagee no matter how many times servicing is traded.5 It is claimed that because the interest that is conveyed to MERS is “legal title,” MERS can act on behalf of the lender to foreclose and sell the property.6
As such, there are two primary functions of MERS: It maintains a database of mortgage loans that allows servicing rights and transfer of ownership interests to be tracked, and secondly, se of MERS was to provide the convenient option of tracking the owner and servicer of each individual mortgage.8 Although, this servicing company consists of only 50 employees, it claims to own about half of all mortgages in the U.S., which is estimated at 60 million.9
Given the current foreclosure crisis, it is not surprising that MERS has been accused of sloppy record keeping. The critics range from defaulting borrowers to judges who are forced to make decisions on a variety of attacks. Last year, the Arkansas Supreme Court held that MERS could no longer file foreclosure proceedings there because it does not actually make or service any loans.10 Yet, the Fourth Circuit Court of Appeals in Virginia has affirmed several trial court decisions that recognize MERS’ right to initiate foreclosure and assign deed of trust.11
More controversial is the case of Landmark National Bank v. Kesler, where the Kansas Supreme Court decided that MERS acted as a straw man in the transaction and has no rights.12 John R. Chiles, Partner at Burr & Forman, LLP, explains the two ways Kesler may be interpreted.
The first view is that this ruling is a narrow decision which is based on procedure. The other view challenges MERS’ right to notice of foreclosure actions. That is, as a nominee, MERS did not have any interest because the bifurcation of the promissory note and mortgage created a flaw in title.13 Of course, MERS has adopted the former view while consumer advocates follow the latter view.
In California, however, the courts have sided with MERS. In the key decision of Gomes v. Countrywide Home Loans, the Court of Appeals for the Fourth Appellate District determined that there was no right of action under California’s nonjudicial foreclosure statues, which allows a borrower to file a lawsuit in order to require a foreclosing party to prove its right to foreclose.14 The Court also emphasized that even if they did have such a right, the borrower consented in its deed of trust that MERS has the authority to initiate foreclosure.15 The reasoning of this decision relies on Civil Code Section 2924, subdivision (a)(1): “a trustee, mortgagee, or beneficiary, or any of their authorized agents may initiate the foreclosure process.”16 As such, the court concluded that MERS has the right to proceed with foreclosure as the nominee, or agent of the noteholder.17
In response to these multiple rulings and pressure from regulators and the courts, MERS has decided to redraft some of its procedures.18 Furthermore, as consumer advocates continue to challenge MERS’ authority, the company continues to defend its right to foreclose. However, on July 21, 2011, ERS announced that its members are no longer permitted to file any more foreclosure actions in MERS’ name.19 With almost 3000 mortgage lenders as members of MERS,20 it is therefore not surprising that the responsibility and authority given to this system has far-ranging implications for lenders and borrowers in the ongoing foreclosure crisis.