A pair of rulings from federal bankruptcy judges last week is adding a new wrinkle to the role of MERSCorp Inc. in state foreclosure proceedings.
U.S. bankruptcy judge Robert Grossman, of the U.S. Bankruptcy Court for the Eastern District of New York, issued a ruling on Feb. 10 declaring that the contractual relationship between mortgage lenders and servicers and MERSCorp Inc. is insufficient to allow the Mortgage Electronic Registry Systems Inc. to act on behalf of lenders and servicers to transfer mortgage assignments.
But in a similar case, a Kansas federal bankruptcy judge, Janice Miller Karlin, ruled on Feb. 11 that contractual relationship between MERS and Countrywide Home Loans (now a Bank of America-owned entity called BAC Home Loans Servicing) was sufficient for MERS to act on the servicer's behalf.
While Grossman's ruling won't stop the impending foreclosure sale of a Westbury, N.Y. home at the heart of the case in question, it sets a new standard for how foreclosures will be considered in the New York bankruptcy court.
With the ruling, Grossman declared that MERS-member servicers seeking to lift an automatic stay of foreclosure in the New York court must now show that the trustee it represents validly holds both the mortgage and the underlying note in order to prove standing.
Beyond that, foreclosure attorneys told National Mortgage News the ruling could lead to a new foreclosure defense strategy—declare bankruptcy immediately prior to the initiation of a foreclosure and then challenge the trustee's legal standing in court. By arguing that MERS and its servicer members do not have the adequate agency relationship to ensure the promissory note is secured to the mortgage, borrowers can seek to reduce the status of the loan from a secured debt to an unsecured debt eligible for bankruptcy discharge.
MERSCorp officials did not respond to requests for an interview. But in a written statement, the company said it disagrees with the Grossman's ruling.
While the two opinions contradict, they're both rooted the judges' interpretations of relevant state law in their respective jurisdictions. At question is the legal concept of agency—whether MERS, as "nominee" and "mortgagee of record" of mortgages filed in municipal recordation offices, has established a relationship that empowers MERS to act on the behalf and control of its member lenders and servicers.
Karlin ruled that the agreement between MERS and Countrywide was sufficient to create an express agency relationship, but even if not, their actions were sufficient to establish an implied agency, which is allowed by Kansas state law.
Grossman's interpretation of New York law found that since neither the mortgage document or the MERS membership agreement it has with members contain the word "agency," and they do not expressly spell out in writing that the arrangement is an "agency relationship," a critical tenant of New York state contract law.
"MERS would have this Court cobble together the documents and draw inferences from the words contained in those documents," Grossman wrote. "However, the fact that MERS is named 'nominee' in the Mortgage is not dispositive of the existence of an agency relationship and does not, in and of itself, give MERS any 'authority to act.'"
Grossman wrote that the court recognizes that an adverse ruling regarding MERS's authority to assign mortgages or act on behalf of its member/lenders could have a "significant impact" on MERS and its lender/servicer members.
"MERS and its partners made the decision to create and operate under a business model that was designed in large part to avoid the requirements of the traditional mortgage recording process," Grossman wrote. "This Court does not accept the argument that because MERS may be involved with 50% of all residential mortgages in the country, that is reason enough for this Court to turn a blind eye to the fact that this process does not comply with the law."