By Adam Leitman Bailey and Dov Treiman
In Homer’s Odyssey, the protagonist, Odysseus, is called upon to sail his crew through the Straits of Messina, passing between two legendary monsters, Scylla and Charybdis. To avoid one, the only option was to approach the other, risking a horrible death in either instance. Odysseus was at times a wise captain and managed to minimize the number of deaths, if not to avoid it altogether.
New York is, thanks to the economic collapse of 2008, part of the larger real estate crisis setting forth the Scylla of further economic collapse by making the foreclosure procedure so difficult for banks that they refuse to issue residential mortgages in New York at all or the Charybdis of wholesale ejectment of homeowners from houses they should not have purchased. Tightening the foreclosure rules threatens economic destruction from the top; loosening them threatens that destruction from the bottom. Any action taken, including inaction, threatens our land transfer system and/or hardship on hundreds of thousands of people.
Although not the cause of the problem, yet at the heart of its mechanics, is the national “Mortgage Electronic Registration Systems,” known as MERS. Operating near Washington, D.C., MERS is involved in nearly 60 percent of mortgage-like transactions nationally, with a registry entailing some 60 million mortgages. The authors and sponsors of this national system intended both to simplify and to centralize the tracking process of rights regarding each mortgage-like instrument.
MERS attempts to attain these goals despite the fact that states differ as to whether they have “mortgages” or “deeds of trust,”1 on how instruments are recorded, and as to what the remedies are for defaults. MERS’s uniformity is further compromised by each state’s highest court separately deciding exactly what a MERS transaction means. Even Federal District courts sitting in different districts may find their rulings influenced or not by the laws of the host states, depending on whether they find foreclosure rules to be essentially substantive or procedural in nature.
Approximately 50 percent of New York State mortgages involve MERS. In a non-MERS mortgage, there is a borrower-mortgagor and a lender-mortgagee. The lender keeps the promissory note and has the mortgage recorded in the county registry. In this scenario, the lender owns both the promissory note and the mortgage. The lender may sell both, but should keep them together.
In a MERS transaction, the lender still lends the money and the borrower still executes a promissory note in favor of the lender, but the borrower executes the mortgage in favor of MERS, recorded in the county registry as the bank’s so- called nominee. MERS neither does the recording itself nor has the mortgage or promissory note. However, the lender, known as an “originator,” sells the note and, at times, informs MERS of the sale. MERS is available to transfer the mortgage to the vendee of the note, should it become an issue, when MERS sells its subscribers a vice-presidency in MERS to effect the transfer. MERS transfers nothing itself. If requested, it just makes entries in its database.
Nationally, there are well over 3,000 recording offices, but only one MERS. Non-MERS records in New York are located in 62 different county recording offices. Although the governmental recording fees are modest compared to the monies in the transactions the mortgages are securing, MERS cuts into these fees as its members pass mortgages among themselves as relay race batons, thus depriving government and saving the banking industry roughly $1 billion since the initiation of MERS.
Further, the MERS system hides from borrowers the history of their mortgages. While some states have systems like New York City’s ACRIS system to make land records available to internet connection, MERS does not allow non- members access to any of its records. MERS ensures that borrowers know nothing beyond to whom they should be sending their check. Furthermore, when there are errors in MERS and the same mortgage gets assigned to more than one financial institution, the homeowner has no way of figuring out who actually has the superior right without resorting to the court system, which itself may not be able to untangle the MERS threads.
There are current calls to replace the 3,000 office system with something governmentally nationally administered. Although a national system remains beyond the horizon, calls for New York to have a single statewide system are becoming more urgent. But, for now, that part of the crisis remains in stasis.
Attacks on MERS
In a case of first impression in New York, Bank of New York v. Silverberg,2 ruled that since MERS never was either the owner of the promissory note nor ever had physical possession of it, MERS had no assignable interest in the mortgage in its favor as “nominee,” thereby voiding its assignment to the bank.
In 2006, Stephen and Fredrica Silverberg executed a mortgage in favor of MERS with an underlying note in favor of originating bank, Countrywide Home Loans. In 2007, they executed a second, similar set of documents, together with a consolidation agreement to which Countrywide was not a party. When the Silverbergs defaulted on this later agreement, MERS assigned the consolidation agreement to Bank of New York who brought a foreclosure action.
Since the court found that MERS lacked physical possession of the note or an assignment of it, it also lacked the authority to assign the consolidation agreement, and the court found the bank lacked “standing” to bring a foreclosure action. “Physical possession” is key, it being sufficient to establish ownership—rather like cash.3
Under established doctrine, in American jurisdictions recognizing mortgages, separate ownership of a mortgage and note voids the mortgage.4 However, in MERS transactions, we see anyone with an that the mortgagee, MERS, was never the lender and was never the promisee on the promissory note. Thus, it could well be argued that MERS mortgages are not mortgages at all, but are, at most, unsecured monetary loans to the borrower. Matter of MERSCORP Inc. v. Romaine,5 determined that the county clerk did not have the discretion to refuse to record MERS mortgages, but never addressed whether a MERS mortgage is enforceable as a mortgage. While a finding that a MERS mortgage is no mortgage at all does not deprive the bank of all remedies, it does mean that the judgment a bank would acquire for nonpayment of the loan would not necessarily have any seniority as a lien against the promisor’s real property.
Since so many of the MERS loans were done during the housing boom when the originating banks were extremely sloppy about keeping track of promissory notes, sloppier still among the banks that failed, banks seeking to foreclose on these housing bubble mortgages will, thanks to Silverberg, merely have additional procedural and evidentiary hurdles to overcome to make sure that they can prove possession or ownership of the note underlying the mortgage prior to the commencement of the foreclosure action. Thus, fears that Silverberg ended the world are vastly overstated.
The closing days of the spring 2011 session of the state Legislature was pre-occupied with highly politicized issues, leaving other bills postponed to the autumn session. One of those, A629/S697, thus far passed only by the Assembly, if enacted, would so devastate the foreclosure process as to require an entire new lawsuit post-foreclosure.
As we have discussed, the underlying basis of Silverberg is lack of standing. A629/S697 carves out foreclosures as an exception to the rule that “lack of standing” is a defense that is waived unless in an answer or in a motion to dismiss. It also requires that foreclosure plaintiffs file copies of the note and mortgage with the complaint and provide immediate proof that the plaintiff is the owner of both documents or is a duly authorized delegee. While these requirements would greatly ease examination of titles from a foreclosure proceeding, the removal of the waiver rule with regard to lack of standing means that the question may always be raised, even after the foreclosure auction. While the title industry believes passage of this bill would require a quiet title action after a foreclosure sale, nobody has said what it would look like. Perhaps it would need to name as defendants every entity that owned the mortgage from first issuance to the foreclosure action. However, with multiple failed banks, MERS’s opacity may make finding that chain of title impossible to trace.
Thus, even with a quiet title action, the title with a MERS foreclosure in the chain may remain uninsurable. This can drive down the prices at the foreclosure auction and leave both the foreclosure plaintiff and defendant without funding. The homeowner winds up with a large deficiency judgment and the bank with a serious loss.
Current practice in the title industry insures titles passing through a foreclosure proceeding without”exception,”provided only that personal service is effected on the defendant- borrower. However, the proposed bill raises so many questions that if it is passed, havoc will ensue. While opinions differ as to how strongly against the plaintiff the statute will be construed, most agree that the courts will likely construe the foreclosure statutes strictly against the plaintiff. Thus, some fear that institutional lenders, responding to this bill, will simply refuse to issue mortgages at all in New York.
That fear seems overstated. Even if the bill becomes law, two practices would insure essential immunity from its impairing newly issued mortgages: first, that the mortgage be recorded in the traditional manner outside of MERS, the second, that any purchaser of the mortgage from the original issuing lender insist on the physical conveyance of the original note and mortgage as a condition of the sale. In short, mortgages would again become as freely exchangeable as securities as they were during the housing boom, but more slowly.
Another bill pending before the Legislature is S2373A—expected to be signed into law in the coming months—which would speed up the recording process by allowing county clerks to accept electronic documents in lieu of paper. While the legislation would require some regulations and funding to implement, it holds the promise of making the physical act of recording faster, even if it, by itself, does nothing to speed up the indexing—often the most critical feature.
Also, because the bill is permissive for the county clerks, it may encounter resistance in many counties who prefer traditional ways of doing things or who do not see the advantage to a system that only removes from their duties the smallest task—the physical recording. The bill does not, however, take the step that would really advance the stability of titles in New York, the adoption statewide of an ACRIS-like system with the full multiple indexing systems common in New York City, but less prevalent throughout the state: document number, grantor/grantee, and block/lot.
Obviously, creating a statewide system ofuniform multiple electronic indexing input from transactional attorneys’ desks would both save the state enormous funds and provide the public with a vastly more secure and useful title recording system. It cannot be denied that such a system would require substantial safeguards against fraud, such as a mechanism to alert overseers that a problem may arise when two deeds are recorded for the same property; signature verification; social security number verification; powers of attorney validated by licensed title professionals; and photographic identification scanned in with the documents offered for recording.6
Such an enhanced recording system could also handle the recording of promissory notes along with their mortgages, incentivized by a statutory rebuttable presumption that the owner stated on the recording is the current owner unless there is a recorded assignment of the note enjoying the same presumption. Logically, one would prepare any such assignment so as to assign both the note and the mortgage. That kind of recorded note system with ACRIS style indexing and access would make MERS— created chiefly for achieving speed— hopelessly obsolete and provide both lenders and the public with real value for their recording fees pouring once again into government coffers.
Both mortgage recording and foreclosure systems in New York are currently broken. Fixing the latter inevitably requires fixing the former. Clearly no federal fix is in the offing, but inspired leadership in Albany can go a long way, if not in curing the consequences of not having fixed the systems sooner, at least in erecting a system that will sustain commerce and secure titles in the future.
Adam Leitman Bailey, Dov Treiman, and Michael Brancheau assisted in the preparation of this article.
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1. Mortgages are mere liens on land. Deeds of trust are actual conveyances of the land to a trustee who acts ostensibly on behalf of both the borrower and the lender.
2. 2011 WL 2279723 (N.Y.A.D. 2 Dept.).
3. Levy v. Louvre Realty Co., 222 N.Y. 14, 20; Curtis v. Moore, 152 N.Y. 159, 162, Strause v. Josephthal, 77 N.Y. 622; Fryer v. Rockefeller, 63 N.Y. 268, 276.
4. Carpenter v. Longan, 83 U.S. 271 (1872).
5. 8 NY3d 90 (2006).
6. There are strong arguments to make these fraud prevention devices publicly inaccessible as public accessibility could have these devices foster fraud instead of preventing it.