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Sunday, September 27, 2009
Courts - In Kansas, the Mortgage Machine Backfires; MERS issue raised in Indiana
This is a story about MERS (the Mortgage Electronic Registration System) and a Supreme Court decision in Kansas. We've had a Court of Appeals decision somewhat on this issue, which will be discussed at the end of this entry.
Gretchen Morgenson, highly respected business columnist for the NY Times, writes today:
WITH the mortgage bust approaching Year Three, it is increasingly up to the nation’s courts to examine the dubious practices that guided the mania. A ruling that the Kansas Supreme Court issued last month has done precisely that, and it has significant implications for both the mortgage industry and troubled borrowers.More from the story:
The opinion spotlights a crucial but obscure cog in the nation’s lending machinery: a privately owned loan tracking service known as the Mortgage Electronic Registration System. This registry, created in 1997 to improve profits and efficiency among lenders, eliminates the need to record changes in property ownership in local land records.
Dotting i’s and crossing t’s can be a costly bore, of course. And eliminating the need to record mortgage assignments helped keep the lending machine humming during the boom.
Now, however, this clever setup is coming under fire. Legal experts say the fact that the most recent assault comes out of Kansas, a state not known for radical jurists, makes the ruling even more meaningful.
Here’s some background: For centuries, when a property changed hands, the transaction was submitted to county clerks who recorded it and filed it away. These records ensured that the history of a property’s ownership was complete and that the priority of multiple liens placed on the property — a mortgage and a home equity loan, for example — was accurate.
During the mortgage lending spree, however, home loans changed hands constantly. Those that ended up packaged inside of mortgage pools, for instance, were often involved in a dizzying series of transactions.
To avoid the costs and complexity of tracking all these exchanges, Fannie Mae, Freddie Mac and the mortgage industry set up MERS to record loan assignments electronically. This company didn’t own the mortgages it registered, but it was listed in public records either as a nominee for the actual owner of the note or as the original mortgage holder.
As long as real estate prices rose, this system ran smoothly. When that trajectory stopped, however, foreclosures brought against delinquent borrowers began flooding the nation’s courts. MERS filed many of them.Here is the August 28, 2009 opinion of the Kansas Supreme Court in Landmark Nat'l. Bank v. Boyd A. Kesler and MERS.
“MERS is basically an electronic phone book for mortgages,” said Kevin Byers, an expert on mortgage securities and a principal at Parkside Associates, a consulting firm in Atlanta. “To call this electronic registry a creditor in foreclosure and bankruptcy actions is legal pretzel logic, nothing more than an artifice constructed to save time, money and paperwork.”
The system also led to confusion. When MERS was involved, borrowers who hoped to work out their loans couldn’t identify who they should turn to.
As cases filed by MERS grew, lawyers representing troubled borrowers began questioning how an electronic registry with no ownership claims had the right to evict people. April Charney, a consumer lawyer at Jacksonville Area Legal Aid in Florida, was among the first to argue that MERS, which didn’t own the note or the mortgage, could not move against a borrower.
Initially, judges rejected those arguments and allowed MERS foreclosures to proceed. Recently, however, MERS has begun losing some cases, and the Kansas ruling is a pivotal loss, experts say.
While the matter before the Kansas Supreme Court didn’t involve an action that MERS took against a borrower, the registry’s legal standing is still central to the ruling.
The case involved a borrower named Boyd A. Kesler, who had taken out two mortgages from two different lenders on a property in Ford County, Kan. The first mortgage, for $50,000, was underwritten in 2004 by Landmark National Bank; the second, for $93,100, was issued by the Millennia Mortgage Corporation in 2005, but registered in MERS’s name. It seems to have been transferred to Sovereign Bank, but Ford County records show no such assignment.
In April 2006, Mr. Kesler filed for bankruptcy. That July, Landmark National Bank foreclosed. It did not notify either MERS or Sovereign of the proceedings, and in October, the court overseeing the matter ordered the property sold. It fetched $87,000 and Landmark received what it was owed. Mr. Kesler kept the rest; Sovereign received nothing.
Days later, Sovereign asked the court to rescind the sale, arguing that it had an interest in the property and should have received some of the proceeds. It told the court that it hadn’t been alerted to the deal because its nominee, MERS, wasn’t named in the proceedings.
The court was unsympathetic. In January 2007, it found that Sovereign’s failure to register its interest with the county clerk barred it from asserting rights to the mortgage after the judgment had been entered. The court also said that even though MERS was named as mortgagee on the second loan, it didn’t have an interest in the underlying property.
By letting the sale stand and by rejecting Sovereign’s argument, the lower court, in essence, rejected MERS’s business model.
Although the Kansas court’s ruling applies only to cases in its jurisdiction, foreclosure experts said it could encourage judges elsewhere to question MERS’s standing in their cases.
“It’s as if there is this massive edifice of pretense with respect to how mortgage loans have been recorded all across the country and that edifice is creaking and groaning,” said Christopher L. Peterson, a law professor at the University of Utah. “If courts are willing to say MERS doesn’t have any ownership interest in mortgage loans, that may eventually call into question the priority of liens recorded in MERS’s name, and there are millions and millions of them.”
In other words, banks holding second mortgages could find themselves in the same pair of unlucky shoes that Sovereign found itself wearing in Kansas.
The Indiana Corut of Appeals opinion is Adrienne Weathersby and MERS v. JPMorgan Chase Bank, from May 21, 2009 (ILB summary here). Judge Brown wrote:
Adrienne Weathersby and Mortgage Electronic Registration Systems, Inc. (“MERS”) appeal the trial court’s grant of summary judgment to JPMorgan Chase Bank, N.A., successor by merger to Bank One, N.A. (“Chase”). Weathersby and MERS raise five issues, which we consolidate and restate as whether the trial court erred by finding that Chase’s mortgage was valid and that Weathersby’s deed and MERS’s mortgage were invalid. We reverse and remand.A petition for rehearing was denied, and the opinion has now been certified.
This complex real estate dispute concerns a determination of ownership to a piece of property in Lake County for which multiple chains of title exist. Chase claims that Bessie Lewis is the valid owner of the property and that it holds a valid mortgage, while Weathersby claims that she is the valid owner of the property and MERS holds a valid mortgage. * * *
On December 5, 2006, Chase filed a declaratory judgment complaint against Weathersby and MERS, seeking a declaration that the Weathersby deed and the MERS mortgage were invalid because they were recorded outside the proper chain of title. In May 2007, Chase filed an amended complaint for declaratory judgment against Weathersby, MERS, and the 5285 Adams Trust. Chase alleged that the 5285 Adams Trust had “no estate, right, title, lien, claim or interest in the Property,” that Lewis owned the Property, and that its mortgage was valid. Appellant’s Appendix at 117. 5285 Adams Trust failed to answer the amended complaint, and a default judgment was granted to Chase against the 5285 Adams Trust. Chase then filed a motion for summary judgment, which the trial court granted * * *
The issue is whether the trial court erred by finding that Chase’s mortgage was valid and that Weathersby’s deed and MERS’s mortgage were invalid. * * * [The opinion then dissolves into complexity, then concludes.]
As a result, we conclude that genuine issues of material fact exist regarding whether the 5285 Adams Trust had actual knowledge in October 1998 of the prior transfer from the Blair Family Trust to FHCS and, thus, whether the 5285 Adams Trust was a bona fide purchaser of the Property. If the 5285 Adams Trust was not a bona fide purchaser of the Property, the chain of title leading to Lewis and Chase fails. We conclude that the trial court erred by granting summary judgment to Chase, and we remand for proceedings consistent with this opinion. For the foregoing reasons, we reverse the trial court’s grant of summary judgment to Chase and remand for further proceedings.
For more on MERS issues in Indiana foreclosures, see this August 4th entry in Advance Indiana, where Gary Welsh quotes at length Stephanie Katich, an attorney with Indiana Legal Services' Foreclosure Defense Unit in Merrillville.