Wednesday, February 16, 2011

Bankruptcy judge makes MESS of MERS

Guambat has written before about MERS, an uncommon concoction of financial wizardry that simply ignored centuries of the common law of conveyance.

It was a scheme intended to grease the wheels of real estate mortgage securitization, by depriving local governments across the USA of the control (and revenues) of recording title, and along the way, depriving many mortgage debtors of their due process, and, perhaps, some lawyers of their licentious licenses.

In much the same manner that the credit implosion served as a reality check for the mark to model dreamers, a bankruptcy court has thrown a cold bucket of reality on Le MERS.

Merscorp Lacks Right to Transfer Mortgages, Judge Says
Merscorp Inc., operator of the electronic-registration system that contains about half of all U.S. home mortgages, has no right to transfer the mortgages under its membership rules, a judge said.

“MERS’s theory that it can act as a ‘common agent’ for undisclosed principals is not supported by the law,” Grossman wrote in a Feb. 10 opinion. “MERS did not have authority, as ‘nominee’ or agent, to assign the mortgage absent a showing that it was given specific written directions by its principal.”

Grossman said Select Portfolio had to show that U.S. Bank owned both the note and the mortgage, and there was no evidence that it held the note. The judge disagreed with Select Portfolio’s argument that U.S. Bank held the note because the note “follows” the mortgage, which it said U.S. Bank owned.

“By MERS’s own account, the note in this case was transferred among its members, while the mortgage remained in MERS’s name,” Grossman wrote. “MERS admits that the very foundation of its business model as described herein requires that the note and mortgage travel on divergent paths.”

A WSJ real estate blog elaborated:

U.S. Bankruptcy Judge Questions Legal Claims of MERS
At issue was whether U.S. Bank had legal standing to foreclose. The loan was originated by First Franklin in 2006 and MERS became an agent for First Franklin, which ultimately transferred the loan to Aurora Bank and later to U.S. Bank. Both of those banks are members of MERS, which allowed it to also act on behalf of those agents, according to MERS’s lawyers.

“By MERS account, it took no part in the assignment of the Note in this case, but merely provided a database which allowed its members to electronically self-report transfers of the Note,” wrote Judge Grossman. “[T]here is nothing in the record to prove that the Note in this case was transferred according to the process described above other than MERS’s representation that its computer database reflects that the Note was transferred to U.S. Bank.”

“The documentation provided to the Court in this case…is stunningly inconsistent with what the parties define as the fact of this case,” Judge Grossman wrote. The theory that MERS “can act as a ‘common agent’ for undisclosed principals is not support [sic] by the law.”

The opinion also rejected any argument that MERS’s reach was so broad and deep that it should receive favorable treatment from the judiciary:
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 upon the lenders which do business with MERS throughout the United States. However, the Court must resolve the instant matter by applying the laws as they exist today. It is up to the legislative branch, if it chooses, to amend the current statutes to confer upon MERS the requisite authority to assign mortgages under its current business practices. 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. 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.

Laurence Platt, a banking industry attorney at K&L Gates in Washington, said the Agard case represented an “outlier that goes against years of decisions by New York courts that find assignments from MERS to be consistent with New York law.”

A spokeswoman for MERS also said that a separate decision on Friday by a U.S. Bankruptcy Court judge in Kansas had affirmed MERS’s ability to foreclose on behalf of Countrywide Financial Corp. In the case, the judge wrote that the court had received “uncontroverted evidence” that MERS was acting as an agent for Countrywide, allowing MERS to act on its behalf.

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