In an opinion with possible far reaching consequences, a New York appellate court has held that a party does not have standing to commence a foreclosure action when that party’s assignor, in this case, Mortgage Electronic Registration Systems, Inc. (hereinafter MERS), was listed in the underlying mortgage instruments as a nominee and mortgagee for the purpose of recording, but was never the actual holder or assignee of the underlying notes.
In Bank of New York v. Silverberg, the court discusses the MERS system, extensively citing an article by Chris Peterson, and concludes that efficiency does not trump the law. The court stated:
“In 1993, the MERS system was created by several large participants in the real estate mortgage industry to track ownership interests in residential mortgages” (Matter of MERSCORP, Inc. v. Romaine, 8 N.Y.3d 90, 96). MERS was intended to “streamline the mortgage process by using electronic commerce to eliminate paper.” MERS’s implementation followed the delays occasioned by local recording offices, which were at times slow in recording instruments because of complex local regulations and database systems that had become voluminous and increasingly difficult to search (see Peterson, Foreclosure, Subprime Mortgage Lending, and the Mortgage Electronic Registration System,78 U. Cin. L. Rev. 1359, 1366 (2010).
“Mortgage lenders and other entities, known as MERS members, subscribe to the MERS system and pay annual fees for the electronic processing and tracking of ownership and transfers of mortgages. Members contractually agree to appoint MERS to act as their common agent on all mortgages they register in the MERS system” (Romaine, at 96)
The MERS system facilitated the transfer of loans into pools of other loans which were then sold to investors as securities (see Peterson, at 1361-1362). MERS delivers savings to the participants in the real estate mortgage industry by allowing those entities to avoid the payment of fees which local governments require to record mortgage assignments (see Peterson at 1368-1369).
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Lenders identify MERS as nominee and mortgagee for its members’ successors and assignees. MERS remains the mortgagee of record in local county recording offices regardless of how many times the mortgage is transferred, thus freeing MERS’s members from paying the recording fees that would otherwise be furnished to the relevant localities (id.; see Romaine, at 100). This leaves borrowers and the local county or municipal recording offices unaware of the identity of thetrue owner of the note, and extinguishes a source of revenue to the localities. According to MERS, any loan registered in its system is “inoculated against future assignments because MERS remains the mortgagee no matter how many times servicing is traded.” Moreover, MERS does not lend money, does not receive payments on promissory notes, and does not service loans by collecting loan payments
Therefore, assuming that the consolidation agreement transformed MERS into a mortgagee for the purpose of recordingeven though it never loaned any money, never had a right to receive payment of the loan, and never had a right to foreclose on the property upon a default in paymentthe consolidation agreement did not give MERS title to the note, nor does the record show that the note was physically delivered to MERS. Indeed, the consolidation agreement defines “Note Holder,” rather than the mortgagee, as the “Lender or anyone who succeeds to Lender’s right under the Agreement and who is entitled to receive the payments under the Agreement.” Hence, the plaintiff, which merely stepped into the shoes of MERS, its assignor, and gained only that to which its assignor was entitled (see Matter of International Ribbon Mills, 36 N.Y.2d 121, 126; see also U.C.C. 3-201 [“(t)ransfer of an instrument vests in the transferee such rights as the transferor has therein”]), did not acquire the power to foreclose by way of the corrected assignment.
In sum, because MERS was never the lawful holder or assignee of the notes described and identified in the consolidation agreement, the corrected assignment of mortgage is a nullity, and MERS was without authority to assign the power to foreclose to the plaintiff. Consequently, the plaintiff failed to show that it had standing to foreclose.
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MERS purportedly holds approximately 60 million mortgage loans (see Michael Powell & Gretchen Morgenson, MERS? It May Have Swallowed Your Loan, New York Times, March 5, 2011), and is involved in the origination of approximately 60% of all mortgage loans in the United States (see Peterson at 1362; Kate Berry, Foreclosures Turn Up Heat on MERS, Am. Banker, July 10, 2007, at 1). This Court is mindful of the impact that this decision may have on the mortgage industry in New York, and perhaps the nation. Nonetheless, the law must not yield to expediency and the convenience of lending institutions. Proper procedures must be followed to ensure the reliability of the chain of ownership, to secure the dependable transfer of property, and to assure the enforcement of the rules that govern real property.