Much wailing and gnashing of teeth was heard in mortgage banking circles after the Kansas Supreme Court answered the question: “What is MERS?” in the case Landmark National Bank v. Kesler, 289 Kan. 528, 216 P.3d 158, 2009 Kan. LEXIS 834. Read on to find out why.
What is MERS?
MERS, an acronym for Mortgage Electronic Registration Systems, Inc., was set up some years back by mortgage bankers to be the “straw man,” or placeholder, for lenders, with MERS to be the mortgagee or recipient of mortgage to real estate, while the debt was held by the mortgage lender. MERS is really just an electronic database, nothing more. MERS is privately owned by, you guessed it, the mortgage bankers who created this fictional entity.
Although state laws require that there be a clear chain of assignment recorded at the county level, MERS allowed lenders to circumvent this requirement and had the added benefit of permitting lenders to avoid paying registration fees and recording costs to local governmental units. The creation of MERS also allowed a number of other things to occur, all beneficial to the mortgage banking industry, and none helpful to homeowners. By putting the mortgage in the name of MERS, lenders could then sell and assign their notes to each other without worrying about recording an assignment. Farewell to transparency. Homeowners knew that MERS held their mortgage, but might not have the foggiest notion about who owned the note, i.e., who the creditor was in the transaction. Moreover, even if the homeowner knew at the beginning of the loan who the lender was, the creditor holding the note might change on a regular basis through assignments to other mortgage lenders. Last but certainly not least, a third party, known as a loan servicer, would often be the entity to whom payments were made by borrowers.
The Problem with MERS
The creation of MERS was part and parcel to the mortgage securitization bugaboo that was instrumental in bringing on our current recession, the worst since the Great Depression. Think of securitization as the mortgage industry’s version of the Cuisinart. They sliced and diced home loans, repackaged the bits and pieces into mortgage-backed securities, then marketed those securities to the investing public. Many of these repackaged mortgage debts included high-risk loans: mortgages in which the debt exceeded the value of the home, interest-only mortgage loans, and adjustable rate mortgages with “teaser” rates at inception.
What's wrong with these types of mortgages? When home values stopped going up, there was no incentive for speculative homeowners to continue to make payments, even if they were interest only. Likewise, when interest rates adjusted upward, after teaser periods expired, home buyers walked away. These sliced and diced mortgages, now repackaged as mortgaged-backed securities, began to lose value. If the underlying mortgages were increasingly falling into nonperforming status, the value of the securities had nowhere to go but down. And so they did.
Kansas Supreme Court Says MERS Can't Foreclose
So what did the Kansas Supreme Court have to say about MERS? Just this: No debt is owed to MERS, and therefore MERS has no right to foreclose. The entity that holds the debt has no security in the form of a home mortgage to back up the debt, so it is an unsecured creditor. The debt-holder also has no right to foreclose. In the words of the court:
"The law generally understands that a mortgagee is not distinct from a lender: a mortgagee is a party to whom property is mortgaged, which is to say, a mortgage creditor or lender. A mortgagee and a lender have intertwined rights that defy a clear separation of interests. By statute, assignment of the mortgage carries with it the assignment of the debt. K.S.A. 58-2323. Although MERS asserts that, under some situations, the mortgage document purports to give it the same rights as the lender, the document consistently refers only to rights of the lender, including rights to receive notice of litigation, to collect payments, and to enforce the debt obligation. The document consistently limits MERS to acting ‘solely’ as the nominee of the lender."
The Court went on to state that "[t]he practical effect of splitting the deed of trust from the promissory note is to make it impossible for the holder of the note to foreclose, unless the holder of the deed of trust is the agent of the holder of the note. [Citation omitted.] Without the agency relationship, the person holding only the note lacks the power to foreclose in the event of default. The person holding only the deed of trust will never experience default because only the holder of the note is entitled to payment of the underlying obligation. [Citation omitted.] The mortgage loan becomes ineffectual when the note holder did not also hold the deed of trust. Bellistri v. Ocwen Loan Servicing, LLC, 284 S.W.3d 619, 623 (Mo. App. 2009)."
Can Landmark v. Kesler Help You?
The mortgage banking industry characterized the Kansas Supreme Court's opinion in Landmark National Bank v. Kesler as having a “narrow application.” I disagree. In 2009, I represented a homeowner whose house was being foreclosed upon by MERS. The trial judge ordered that the foreclosure proceed. I appealed that decision to the Kansas Court of Appeals and relied upon the Kansas Supreme Court's decision in Landmark National Bank v. Kesler to convince the court of appeals that the trial judge was wrong and that the foreclosure should be dismissed. In that case, MERS v. Graham, 2010 Kan. App. LEXIS 210, the court held that:
- the mortgage states that MERS acts “solely as nominee” for Countrywide
- there is no indication that MERS possesses any interest in the promissory note
- there is no evidence that Countrywide assigned the note to MERS
- there is no evidence that MERS received permission to act as an agent for Countrywide, and
- the note does not obligate the borrowers to make payments to MERS.
Thus, there is no evidence that MERS suffered any injury caused by the borrowers' failure to make payments on the promissory note, and having suffered no injury MERS lacks standing to bring a foreclosure action. Accordingly, the district court did not have jurisdiction to grant MERS’s petition to foreclose the mortgage.
If MERS is trying to foreclose on your home, familiarize yourself with the two cases mentioned above--Landmark National Bank v. Kesler and MERS v. Graham--and contact an attorney about fighting your foreclosure in court.