Daily Development for Wednesday, January 10, 2007

by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri

MORTGAGES; ASSIGNMENT; MERS: Divided New York High Court comes down for MERS on all counts - MERS may record as “nominee” and may execute discharges even though assignments of the beneficial interest are unrecorded.  In the Matter of Merscorp, Inc. v. Romaine, 2006 N.Y. Slip Op. No. 09500, 2006 WESTLAW 3716017 (N.Y. 12/19/06)

Although the opinion is a bit vague on the point, it appears that the original mortgage was executed to MERS as nominee of a named lender, and that the first recording was of this mortgage.  Thereafter, of course, MERS maintained on its electronic records information pertaining to the successive assignment of the debt, with the accompanying mortgage.  The case does not indicate, nor would it likely be relevant, whether the note was kept by the original lender as trustee, by the trustee of a securitized fund held by a special purpose vehicle, or physically transferred from one assignee to another.  All the likely assignees participated in the MERS master agreement, and they agreed to look to the MERS records as the final determinant as to who held the rights under the mortgage.

Recorders across the nation have viewed MERS as nothing short of the devil incarnate because it has stripped them of an extremely lucrative business in accepting recordings of successive mortgage assignments, which in the modern context of accumulating mortgages into pools for securitization purposes, can occur multiple times for any one mortgage in a short period.   Not all assignees in fact recorded their mortgages, but many did.  After MERS stepped in, almost all such recordings stopped, as did the revenue from them, to which county recorders had become accustomed. 

The county recorders argued that MERS should not be permitted to record as owner of the mortgage when it was not.  The consequence of their prevailing on such an argument would have been that the mortgage assignments on the books of MERS would be vulnerable if not recorded, since the original mortgagee would be shown as the owner of the mortgagee, and persons taking an interest from that mortgagee, or modifying the mortgage with that mortgagee, or obtaining judgments against that mortgagee (in some states)  would prime any assignees recorded only with MERS. 

To be fair, the county recorders, depending upon custom in individual areas, also argued that they were the proper guardians of information concerning ownership of land recorders, that their function was more than simply custodial and that both statute and policy dictated that their records have a complete record of ownership.  This tends to ignore the fact that even before MERS, many assignments had not been recorded.

But in addition to arguing that MERS should not record as owner when it was not the owners also argued that New York state law, like many other state’s laws, requires that the current owner of record be the party to grant and record any discharge of the mortgage.  They claimed that even if MERS were permitted to originally record its “representative ownership,” it could not make an argument that it was empowered to grant a discharge, since it was not in fact the “current owner,” as almost invariably many assignments, albeit unrecorded, would have occurred.

The trial court bought this latter argument, although it permitted MERS to record as original representative owner.  But this result was reversed in the intermediate appeals court and the New York Court of Appeals here sealed that result by concluded that New York law permitted MERS, as owner of record, to record a discharge of the mortgage even where subsequent unrecorded assignments had occurred.

The court took pains to note the legislative history of the language of the discharge statute.  Where assignments had been recorded, the statute required that all recorded assignments be listed in the discharge, including book and page of recording, in order to demonstrate that the current party executing the discharge was the “true owner.”  The statute had recorded that if no assignment had been made, the discharge could simply state that.  This would have been a problem for MERS, of course, since in fact assignments admittedly had been made, and MERS was not anxious to record in each case all such assignments in order to validate the discharge by giving the proper recording information.  Language had been added to the statute to provide that where no assignment had been made *and recorded*, the discharge could simply state that fact.  MERS relied on this language and stated simply in its discharges that no assignment had ever been recorded.  The Court of Appeals concluded this w as proper. 

Comment 1: This was not exactly a complete policy victory for MERS, although it was a complete legal victory.  A concurring judge noted that the narrow issue resolved here did not necessarily answer all the questions posed by MERS’ business model, and that legislation should be undertaken if, as MERS argued, recognition of its function is in fact in the public interest.

Comment 2: Perhaps even more troublesome is the opinion of a dissenting judge, who carefully parsed the discharge statute to demonstrate that the rest of the statute is inconsistent with MERS reading, and that at best the statute is ambiguous and at worst does not validate the recording of a discharge without recording all intervening assignments.  In fact, in the editor’s view, the dissenting judge has a very strong interpretative argument, even the editor really would like MERS to walk away with a complete victory. 

The fact of the matter is that the discharge statute was not written with MERS-like operations in mind, and it would not be surprising if it failed to fully support MERS operations.  Although, in New York, MERS seems secure, the fact that the New York opinion did have a concurrence and a dissenter and the fact that it is based upon questionable reasoning might influence other courts to give the opinion less credence than they otherwise might.

Comment 3:   In the editor’s view, MERS wins the policy battle and courts ought to conclude that, in this context at least, the function of the recorder’s office is as a mere records custodian and that the public interest is best served by permitting recording by nominees and discharges by nominees of record.  Here is the counterargument, voiced by the dissenting judge:

“Although creating efficiencies for its members, there is little evidence tha tthe MERS system provides equivalent benefits to home buyers and borrowers - - and, in fact, some evidence that it may create substantial disadvantages.  While MERS necessarily opted for a system that tracks both the beneficial owner of the loan and the servicer of the loan, its 800 number and Website allow a borrower to access information regarding only his or her loan servicer, not the underlying lender.  The lack of disclosure may create substantial difficulty when a homeowner wishes to negotiate the terms of his or her mortagee or enforce a legal right against the mortgagee and is unable to learn the mortgagee’s identity.  Public records will not longer contain this information as, if it achieves the success it envisions, the MERS system will render the public record useless by masking beneficial ownership of mortgages and eliminating records of assignments altogether.  Not only will this information  deficit detract from the amount of public data accessible for research and monitoring of industry trends, but it may also function, perhaps unintentionally, to insulate a note holder from liability, mask lender erro and hide predatory lending practices.  The County Clerks, of course, are concerned about the depletion of their revenues - - allegedly over one million dollars a year in Suffolk County alone.”

The editor has refrained from contacting MERS directly before writing this, as the editor wanted to maintain what objectivity he has on these issues.  But the editor believes that it is MERS’ position, not categorically denied by the dissenting judge, that evidence of the true ownership of any MERS mortgage is in fact available to anyone who asks, even if it is not on the website or the 800 number.  The editor would also note that persons inquiring about ownership by contacting MERS are far more likely to get accurate and timely information about the ownership of any given mortgage than they would have had from an examination of a typical public land record, with the uncertainties of the indexing system, the slowness in indexing in general, and, most important, given the fact that many assignees in fact never recorded in the old days.

Of course, naysayers could argue that we are not talking about MERS as it now does business, but about whether a nominee can serve as a public record representative of a true owner, even if that nominee did not provide the information that MERS does as to beneficial owners.  In short, does the argument for MERS prove to much?  The answer, of course, ought to be legislation that gives nominees the right to serve as land record placekeepers, but only when the identity of beneficial owners is readily available.

Comment 4: As to the lost revenue to the county recorders, the editor doesn’t believe that judicial interpretation or public policy ought to be guided by a desire to increase cash flow to these offices.  Recorders should get the money to do what needs to be done, but shouldn’t be able to charge fees for useless functions.

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