Judge Melvin Hoffman of the U.S. Bankruptcy Court for Massachusetts overturned the foreclosure of a property transferred through MERS earlier in the week. This case could potentially have widespread ramifications on foreclosures in Massachusetts, as well as other states.
Attorney Rich Vetstein has an excellent write-up this morning (Judge Tells Lenders You Can’t Have Your MERS Cake & Eat It Too) of the verdict (In Re. Schwartz) on the Massachusetts Real Estate Law Blog. The same post was re-published on Barry Ritholtz’ The Big Lead today. I highly suggest reading it because it goes further into the legal details of the case than I am able to. Rather than attempt to summarize it, I’ll quote portions of Vetstein’s write-up:
“The ‘lender’ on her [Sima Schwartz] original mortgage was Mortgage Electronic Registration Systems (MERS), as nominee for First NLC. Many housing advocates have criticized MERS’ role in the foreclosure crisis, with the New York Times weighing in most recently. The mortgage loan was securitized and subsequently transferred at least 3 times, ultimately winding up held by Deutsche Bank. No assignments of mortgage were recorded with the registry of deeds until a day before the foreclosure sale on May 23, 2006. That assignment was executed by Liquenda Allotey, one of the hundreds of deputized vice president of MERS, and an alleged ‘robo-signer’ for Lender Processing Service (LPS) which has come under fire for document irregularities. The assignment ran to Deutsche Bank, which completed the foreclosure sale on May 24, bid its mortgage debt and purchased the property.
There was no dispute that under the U.S. Bank v. Ibanez case, the late-filed mortgage assignment rendered the foreclosure defective unless Deutsche could establish its ownership of the mortgage loan when the foreclosure process started. During the trial, Deutsche submitted all the various agreements documenting the securitization process including the pooling and servicing agreement (PSA), loan purchase agreement, bill of sale and custodial log.
Critically, as the judge noted, thePSA provided that for a MERS mortgage such as this, assignments of mortgages did not have to be prepared or delivered to the buyer of the loans. As is endemic with most securitized mortgages, the participants in the securitization did not deliver and record any assignments documenting such transfers, instead, relying on the internal MERS registration system, which is out of the public records view. Throwing this provision back in the lenders’ faces, the judge basically said “you can’t have your cake and eat it too” — rendering his ruling that the mortgage itself (as opposed to the underlying loan) was never transferred through the securitization system from entity A, B, C, to Deutsche Bank, and that MERS had always held, and never relinquished, “legal title” to the mortgage. Accordingly, the judge held, Deutsche Bank was never the owner of the mortgage in the first place, could not foreclose in its name, and its foreclosure sale was null and void.”
So what’s the takeaway here? Well for one thing, MERS has told its member banks to stop foreclosing in its name. The judge’s orders here seem to run counter to that edict. Furthermore, this ruling could cast a lot of doubt over foreclosures and the sale of foreclosed properties in Massachusetts where the mortgage and assignments were transferred through MERS.
With each passing day we are seeing more and more MERS-related foreclosure lawsuits. It is increasingly clear (if it wasn’t already) that this system has effectively clouded the chain of titles for hundreds of thousands or maybe even millions of homes. I’m unsure how this whole thing will play out, but it doesn’t seem like the issue will be settled any time soon.