For Many Homeowners, the Key to Stopping Foreclosure is a Four-Letter Word: MERS
Homeowners seeking to stop foreclosure of their homes have increasingly found that the key to saving their homes consists of a four-letter word: MERS. The acronym "MERS" refers to the company, Mortgage Electronic Registration Systems, that plays an astonishingly important (and, increasingly suspect) role in the transfer and recording of mortgages throughout the United States. MERS was originally set up to make it easier and cheaper for financial institutions to transfer mortgages. Questions regarding the legitimacy of mortgage transactions handled by MERS have created a conduit for homeowners to stop foreclosure of their homes.
Most homeowners never consider the myriad of legal implications which accompany the purchase of a new home. Nor are homeowners likely to examine whether the bank bringing foreclosure properly acquired both the mortgage and the underlying promissory note. Yet because of a long-standing principle of law, some courts are considering just that, and they are making it more difficult for banks to foreclose.
To understand the complexities of the issue, one must first understand how modern mortgages operate. Historically, when a person wanted to buy a new home, he or she would go to his local bank or credit union. The local bank would extend the purchase price of the home, minus any down payments made by the purchaser, in exchange for the homeowner's promise to pay back the bank. This promise was evidenced in writing by what is known as a promissory note. In addition, the bank would require the homeowner to execute a mortgage, giving the bank the right to foreclose upon the home in the event the homeowner fails to make timely payments. Generally, the lending institution kept both the promissory note and the mortgage in its private vault until the loan was paid off or the property was foreclosed upon.
Those days are dead and gone, and in its wake lies MERS, a private corporation located in Reston VA. With fewer than 50 full-time employees, MERS now holds approximately 60% of all U.S. mortgages. Though you may have never heard of MERS, it is very likely that it is the holder of the mortgage to your home.
And precisely what service does MERS provide? Well in this age of unprecedented greed and short-term profits, banks no longer want to hold onto mortgages until they are fully paid. They are much more attracted to the idea of selling the mortgages to third parties, which allows for immediate profit. In the end, these mortgages are often bought and sold dozens of times before being sold to investment institutions, which bundle multiple loans through a process known as securitization.
However, this process of short-term profits and fast cash does not live harmoniously with the recording systems in the United States, which often require every purchase and sale to be recorded, in writing, with the county clerk. In short, properly recording a mortgage takes time and money, two things banks do not like sparing. To "fix" this, several banks in the mid-1990s created MERS. In essence, MERS continually holds onto a mortgage while banks and other institutions buy and sell the underlying note. If an institution ever needs the mortgage, it simply retrieves it from MERS.
And therein lies the problem. Traditionally, a transfer of the mortgage without the underlying note is null and void. In Carpenter v. Logan, a Supreme Court case from 1872, the Court explained that "the note and mortgage are inseparable." Following this logic, MERS could never legally hold a mortgage without holding the underlying note.
During foreclosure crisis gripping the United States since 2008, a substantial number of homeowners have been saved from foreclosure precisely because courts have scrutinized MERS and the lending institutions with which it conducts business. The Arkansas Supreme Court, for instance, has barred MERS from bringing foreclosure actions altogether. While banks themselves can still seek foreclosure, MERS cannot be a party to the action. Other courts, including one in Utah, have allowed homeowners to completely escape foreclosure due to the role MERS has played in the action.
Perhaps most striking, however, is the stance that the Second Department of the State of New York recently adopted. Last year the Second Department, which encompasses millions of people living in Brooklyn, Queens, Staten Island, Long Island, and several other counties, held that the Bank of New York, as assignee of a consolidation agreement from MERS, lacked standing to bring a certain foreclosure action because it did not hold the underlying notes. Remember that 19th Century Supreme Court case? Well it seems the Second Department adopted its reasoning, finding that a mortgage cannot be transferred without the underlying note. In the end, the case was dismissed, despite the fact that the consolidation agreement was worth $479,000.
However, while these cases are favorable to those facing foreclosure, one should not believe that he or she can escape foreclosure simply by showing that MERS once held his or her mortgage. Most courts have declined to follow New York's Second Department, and MERS has recently began strengthening its compliance with state and federal law, making it more difficult for homeowners to make a successful argument. Nonetheless, homeowners facing foreclosure should at least consider the role MERS has played in the process.