Wednesday, November 30, 2011
MERS - Judge Young's Ruling is Both Positive and Negative.
Judge Young's ruling is both positive and negative. A potentially influential ruling issued by the U.S. District Court in Boston this week both endorses the Mortgage Electronic Registration System (MERS) - and supports the notion that in order to properly foreclose the lender or its servicers must possess both the mortgage and the note. the question remains as to whether the Supreme Judicial Court will agree with him in its upcoming ruling in Eaton vs Fannie Mae.
The federal ruling, Culhane v. Aurora Loan Services of Nebraska, grants summary judgment to the servicer, saying that the law is so clear in the case that Milton homeowner Oratai Culhane was not entitled to a trial on the matter of whether Aurora could foreclose on her home. But over 59 precisely argued pages, District Judge William G. Young took the opportunity of the Culhane case to take a panoramic view of the current state of mortgage law in the commonwealth.
On the one hand, the ruling's ringing endorsement of MERS will be of tremendous comfort to the industry.
"It is as if by clever design that the MERS system fits perfectly into the Massachusetts model for the separation of legal and beneficial ownership of mortgages," Young wrote in the decision.
Young had some criticisms of how MERS works in practice and in law, saying that the power of sale written into the standard MERS mortgage contract was null and void under Massachusetts law, and saying he was "deeply troubled that, with little to no oversight, individuals without any tie to or knowledge of the company on whose behalf they are acting may assign mortgages."
But, according to MERS "The bottom line in this case is clear: MERS complies with the letter of the law, MERS held legal title to the mortgage, and, its assignment to the servicer was valid," MERSCORP's Vice President for Corporate Communications Janis Smith said in a statement. Other courts have also endorsed MERS' standing in the state, including U.S. Federal Bankruptcy court in the In re Marron case in June.
The decision also touched on another important issue, possession of the note, currently being deliberated by the Massachusetts Supreme Judicial Court in the Eaton v. Fannie Mae case.
Young's discussion of the still-pending Eaton case, however, may cause a lot more anxiety among lenders and servicers than his kind words for MERS will relieve. He is the first to endorse the ruling in Eaton that the note and the mortgage have to be united under Massachusetts law in order for the servicer to be able to foreclose.
"The assignment was necessary to comply with the common law of Massachusetts requiring unity of the note and mortgage in the same entity prior to foreclosing," Young wrote. "Aurora, as Deutsche's loan servicer, has an interest in the underlying debt; Aurora also physically possesses the collateral file, including the note. With the assignment of legal title to the mortgage from MERS, Aurora became the mortgagee of record as well, thus perfecting its standing to bring a foreclosure action against Culhane."
That reading differs from the bankruptcy court, meaning the federal courts have now split on how to interpret the law, making it even more important for the Supreme Judicial Court decision to resolve the issue in its ruling to come.
If the SJC agrees with Young - particularly his notion that the note has to be physically in the possession in of the mortgage holder or its servicer - it could throw an even bigger monkey wrench into the foreclosure works than that introduced by the Ibanez and Bevilacqua decisions.
Unlike the orderly record-keeping of the servicer in Culhane, many loans issued during the boom have seen their notes go astray. And even if the servicers' ducks are in all in a row, "we're going to see an unending number of people bringing in cases, forcing foreclosing lenders to prove that they hold the note," said Joel Aaron Stein, chair of 2011 Title Insurance and National Affairs Committee for the Real Estate Bar Association (REBA).
"Ibanez and Belivacqua will be like a pebble in the heel of your shoe," said Ed Bloom, a partner at Sherin and Lodgen and president of REBA.