MERS has become a mysterious figure in the recent foreclosure boom. Many attorneys that work in the industry remain unsure of what exactly MERS is and who exactly works for MERS. MERS serves as a common agent for numerous participating banks. It was created in the early 1990’s in response to delays at local recording offices. The idea was that if all of the participants used a common agent the agent could track ownership and assignments, while saving the participants recording costs and speeding up the transfer process.
While MERS does not lend money or service loans it was involved in the origination of approximately 60% of all United States mortgage loans. MERS participating banks have typically named MERS nominee on a Mortgage while leaving themselves listed as the lender on the Note. A Note is a promise to pay money; a Mortgage attaches that promise to pay to a piece of property. If someone doesn’t pay their Note (aka the promise to pay) they may be at risk of losing their property because the Mortgage clearly states that if the Note is violated the underlying property can be sold.
When MERS serves as nominee on the Mortgage it is generally stated that it has the power to assign the Mortgage. As a result, when one MERS participating bank buys a loan from another MERS participating bank they create an Assignment of Mortgage that assigns the Mortgage from “MERS as nominee for the First Bank” to “the Second Bank”. This was relatively simple and straightforward way of transferring Mortgages back and forth. Silverberg (a currently unpublished Second Department decision issues on June 7, 2011) likely changed everything.
In a typical MERS Assignment of Mortgage it states that the Note is transferred with the Mortgage. The issue, as the Court in Silverberg points out, when a Note is transferred to and accepted by an assignee, the Mortgage naturally follows. In contrast, the transfer of a Mortgage without the transfer of the Note does not actually transfer anything. Remember….a Note is the promise to pay; the Mortgage simply backs up that promise with a piece of property. MERS (or any person or entity) would have the authority to transfer the Note if possessed or owned the Note or was given authority by the owner. Nowhere is it stated that MERS was given the authority to transfer the Note by the owner and it is rarely proven that MERS actually possess the physical Note. Therefore, in Silverberg the Plaintiff, Bank of New York, stepped in the shoes of MERS and had the power to assign the Mortgage but did not gain ownership of the Note because MERS was unauthorized to transfer ownership. In addition, since MERS did not have the power to commence a foreclosure on behalf of the previous owner, Bank of New York did not have standing to bring the action and the defendants Motion to Dismiss the Action was granted.
The simple rule that comes out of this case is one that has been around forever – a foreclosing party must be the holder or assignee of the Mortgage and the Note at the time the action is commenced. The twist that is about to cause a lot of banks a lot of problems is that a typical MERS Assignment of Mortgage does not properly transfer ownership of the Note. Since so many banks have commenced foreclosure based on an Assignment that did not actually give them ownership of the underlying Debt at minimum hundreds (at most thousands) of active New York foreclosures will need to be discontinued and then re-filed after new Assignments are created. At minimum this case will slow down New York Residential Foreclosures 6 months to a year. At maximum it prolong the foreclosure boom another couple of years.
Written by: Adam J. Friedman, Esq.