The Indiana Court of Appeals decided one of those MERS cases, relying a good deal on a Kansas case I mentioned some time ago. (Also see). In the case of Citimortgage v. Barabas (pdf), a split panel of the Indiana Court of Appeals held that MERS, as a nominee for Irwin Mortgage, had no interest to pass along to Citimortgage.
Apparently what happened was something like this: Barabas bought Property with Irwin Mortgage as the Lender. The mortgage securing the loan was given to MERS “solely as nominee” for Irwin Mortgage. Later, Barabas took out a second loan with ReCasa and defaulted on that loan. ReCasa foreclosed on the second mortgage and, in the course of the foreclosure proceedings named Irwin but not MERS to speak to their interest. In the meantime, Irwin had apparently sold its interest in the loan and, therefore, when the foreclosure proceedings came around simply filed notice with the court disclaiming its interest.
Whoever bought Irwin’s interest in the loan never got notice; they were likely relying on MERS to get notice of the lawsuit and either take appropriate action or send the notice along. The buyer may have been Citimortgage, but it’s not clear — it appears that Citimortgage bought its interest in the loan sometime after the ReCasa foreclosure. In any event, judgment was entered in favor of ReCasa and the mortgage securing the first loan was foreclosed. Sometime later, Citimortgage came along and tried to set aside the ReCasa judgment because the ReCasa proceedings had not provided notice to MERS, the entity named on the mortgage recorded at the Recorder’s office.
The Court of Appeals rejected that claim, saying that notice requirements to MERS were satisfied when notice was sent to Irwin Mortgage. Because the mortgage document set forth that MERS was the nominee for Irwin, the court reasoned, MERS was simply a strawman for Irwin.
This is a problem for MERS participants. You’ll recall that the MERS system was created so that loan notes could be sliced, diced, repackaged, bundled and sold hither and yon without the messiness of having to re-record mortgages securing those loans every time the loan changed hands. MERS would simply be a placeholder for whoever the owner of the loan happened to be at the moment. Here the court is saying that MERS is not an independent entity entitled to notice. If the lender of record gets notice of foreclosure proceedings, that’s sufficient for the court. And, if the lender of record, after selling the loan, does not pass along notice to MERS or whoever happens to own the loan, junior lienholders are going to jump their place in line.
Actually you only have to record the mortgage one time. The purpose of MERS is to avoid having to record assignments of the mortgage. MERS was set up to be sort of a private recording system that allowed these loans to be passed more quickly and easily from one company to another without having to go to the Courthouse.
As an attorney for a title insurance agency, responsible for clearing title, I always hated MERS. It created a mess when we would go to track down payoffs or try to clear old mortgages off the title.
I think this case stands for the proposition that lenders participating in the MERS system rely on the MERS mortgage recording at their own peril.
Now, that I like Doug. Have you seen in other states they have done qui tams to recover recording fees? Can’t do that in Indiana because qui tam has to involve state money.
As a foreclosure lawyer, I have been leery of the MERS system for some time, and have had my share of headaches with them. On the flip side, some of the court cases which seem to invalidate or make unenforceable mortgages handled by MERS strike me as unjustly enriching someone, sometimes another lender who gets moved ahead in lien priority, as in this case, sometimes a homeowner who borrowed the money to buy the home, and suddenly gets a windfall by not having to repay the money he borrowed from SOMEBODY.
This kind of mess happens when someone tries to shortcut the law for purposes of greed. And we all end up paying the piper.
I remember sitting in a conference room years ago listening to a MERS presentation ( I was a risk manager at a national bank ) and we were all looking at each other saying, “This can’t be legal….”
Using this system was an unproven financially engineered way to enable creation of a fixed income product. People act surprised when it goes south, but I see these things as the financial equivalent of Biotech investing. If a Biotech form says they have a drug that cures cancer, but in the end fails, investors lose money. They should have understood what they were investing in.
This is the same thing: nobody ever vetted the use of MERS to enable privatized RMBS creation. They lost. There may be recourse from an investment fraud angle, but relying on legalities on the margins and expecting judicial activism to save you when you roll snake eyes doesn’t benefit anybody.
The very foundations of our economy are rooted in the idea that contracts and commerce are backed by a somewhat predictable set of laws and courts. To meddle with that foundation by bailing out a party when they try a shortcut and err is not wise.
I don’t look at it as a borrower getting something for free – I see it as a party to a contract being punished for doing something foolish. That punishment is key to capitalist incentives and the invisible hand working.
I’m not sure how much of a windfall it actually is, Greg. The note is still good, it’s just unsecured because, in essence, the lender failed to properly record their interest. The lender can reduce the note to judgment which will, itself, put a lien on the property. The order of priority is, obviously, shuffled.
I guess in the case of a junior lienholder, it’s a windfall in the sense that they loaned out their money at higher interest based on the notion that they were back in the line of priority.
Doug, if a lender cannot prove the mortgage is theirs, how much trouble do you think it would be for them to prove they own the note? Probably the same level of trouble. Heck, I have seen lenders who WROTE the loan not be able to locate their documents.
What you say is true in a general sense, but what if the borrower is post-bankruptcy (and a lot are) and then it is discovered that the mortgage lender/servicer cannot prove they have any legal interest in the debt OR the lien? It happens, and it happens often enough that people are making life more difficult for lawyers like me, even when there are no MERS issues, because people think they might get out of their mortgage loan for free. And doubtless a few will.
Greg:
I may be misinterpreting what you are saying, but it sounds as though you are implying a mortgagor does not have a burden of proof in a foreclosure action. If a creditor screws up and cannot prove existence of a debt, why should presumption be with them?
And for future reference, I don’t think that many people will be persuaded by the argument that you are making life difficult for someone in the bill-by-the-hour legal profession. It appears to me that the people aren’t making your life difficult, but the mortgagors who can’t document a claim are.
What if I walked into court and said that I paid off my mortgage without any proof? Somehow I think your opinion on that would be quite different.
In the above, I meant lender where I said mortgagor. Not sure what I was thinking.
MarcD, the issue is not of a “presumption”, but of a situation where a homeowner borrowed “X” dollars from SOME lender, for the purpose of purchasing a home. There is typically no dispute about that. My observations about windfalls in this situation were not intended to whitewash borrowers who can’t keep good records, nor the MERS mess. But there is more than one side of the story, and it is far more complex than most people realize.