The highly contentious Mortgage Electronic Registration System (MERS) has made numerous courtroom appearances since its inception, the question for homeowners being: does MERS have the authority to initiate foreclosure? We explore the answer through the lens of the recent case decision, In re Cedano.
Facts: A homeowner took out a home loan, executing a promissory note secured by a trust deed naming Mortgage Electronic Registration Systems (MERS) as the named beneficiary. The loan was sold on the secondary mortgage market and MERS substituted trustees when the homeowner went into default. The home was later sold by the substitute trustee at a trustee’s sale.
Claim: The homeowner sought to regain title to his home, claiming the trustee’s sale was invalid since MERS had no authority to substitute trustees, as it did not hold the note.
Counter claim: MERS claimed the trustee’s sale was valid since it had the authority to substitute trustees, as MERS was the named beneficiary under the trust deed.
Holding: The ninth circuit bankruptcy appeals court held the foreclosure was valid since MERs as the named beneficiary in the trust deed had the authority to substitute trustees.
Also at issue in this case:
Facts: A homeowner took out a home loan secured by a trust deed granting the beneficiary the right to appoint a successor trustee and to foreclose. The beneficiary executed a Substitution of Trustee, appointing a new trustee. The homeowner defaulted and the substitute trustee recorded a Notice of Default (NOD) before the Substitution of Trustee was recorded. The home was later sold at a trustee’s sale and the homeowner sought to regain title to his home.
Claim: The homeowner claimed the trustee wrongfully foreclosed since, without the prior recording of the Substitution of Trustee, the substitute trustee lacked authority to record the NOD and commence foreclosure.
Counter claim: The trustee claimed the trustee’s sale was valid since a Substitution of Trustee must only be executed, not recorded, for the substitute trustee to initiate foreclosure.
Holding: The ninth circuit bankruptcy appeals court held the foreclosure was valid since there is no requirement for the substitution to be recorded before initiating foreclosure, only that it be executed (signed and delivered). [In re Cedano (April 17, 2012) _BR_]
The perpetual controversy of MERS
Mortgage Electronic Recording Systems (MERS) has been the subject of countless lawsuits from homeowners who entered the market during the superheated years of the Millennium Boom. When they eventually find going to trial offers zero retribution, many of these homeowners feel justice has failed them in their claims against MERS.
As a private organization created by the mortgage banking industry, MERS provides a (legal) way for lenders to transfer ownership of home loans without having to record the transfer with the county recorder’s office, and make public the ownership of the note and trust deed. Thus, MERS enables the transfer to remain beneath the radar of county land recording offices (and the public, property owners in particular) which otherwise would collect fees on the millions of transfers MERS facilitates in this “off record” manner.
MERS’ facilitations of note and trust deed assignments between lenders are difficult to track compared to publicly recorded transfers, which are transparent. Thus, homeowners often have no way of knowing who actually owns their home loan – a major point of contention for homeowners facing foreclosure (the preverbal straw these homeowners grasp at, if you will).
Homeowners whose loans are secured by a trust deed naming the beneficiary as MERS (currently, approximately three out of every five homes) rightly find this uncertainty troubling; they’re left wondering who is authorized to dictate the outcome of their fate.
It’s little wonder these homeowners believe their case will prove successful in court as the tangled knot of ownership is impenetrable, hidden by the servicing agent (a lender usually) and MERS’ participation. However, there are laws solidly in place to protect MERS, and recent court decisions have reiterated this repeatedly and consistently.
The legality of MERS
Filing a lawsuit to determine whether MERS has been authorized by the note’s holder to initiate foreclosure is a meaningless course of action and waste of money. MERS consistently gets the benefit of the doubt and homeowners get the boot. [Gomes v. Countrywide Home Loans, Inc. (2011) 192 CA4th 1149; Calif. Civil Code §2924(a)]
In In re Cedano, the trust deed named MERS as the beneficiary, authorizing it to exercise all the rights of the lender holding the note (and trust deed by legal result), including the right to foreclose. The homeowner’s claim was based on the assumption MERS’ substitute trustee was not able to record an NOD once the note has been reassigned, as it has no monetary interest in the note and the trust deed by law always follows the assignment of the note.
However, MERS (and its substitute trustee) is not required to have a financial interest in the note to initiate foreclosure. MERS is the beneficial nominee for the original lender and every succeeding lender. Thus, MERS remains the beneficiary for every succeeding lender who purchases the loan, and as the beneficiary, is perpetually able to initiate foreclosure. [CC §2924]
Who looks out for the homeowner?
MERS is allowed to skirt the law, laundering what is supposed to be public information. MERS claims the privileges of owning the loan without actually possessing any financial stake in it. Homeowners incorrectly rely on the misconception that MERS is unable to have any part in foreclosing their home, often needlessly handing over their last dime in attorney fees to pursue the issue unsuccessfully. For California homeowners, this convoluted system means they are out a house – and at the risk of throwing more good money after bad.
It is not the job of the court to look out for the homeowner’s best interests; rather, its job is to uphold the law in all its pristine glory. We are a country ruled by law, not by beliefs and hopes. It is an agent’s job to look out for the interests of the owner, meaning agents are to share their knowledge on the hazards of misunderstanding MERS, to alert their clients to avoid needlessly bringing their cases against MERS to court.
And, saving your homeowner the trauma is sure to breed goodwill towards those brokers and agents who speak up with their advice and opinion, redeemable when the homeowner returns to the market for another property.