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_ __ Massachusetts _j for
Officers Edward M. Bloom President Christopher S. Pitt President-flea Michelle T. Simons Clerk Michael D. MacClary Treasurer Thomas O. Moriarty Immediate Pest-President Board of Dtrectors Paul F. Alphen Thomas 8hisitkul Erica P. Bigelow Douglas J. Brunner Jon S. Davis Wendy M. Fiscus Robert T. Gill Kurt A. James Susan B. LaRose Charles N. Le Ray Clive D. Martin Gregor I. McGregor Donald R. Pinto, Jr. John T. Ronayne Richard M. Serkey Joel A. Stein Directors Al LargeMary K. Eaton Stephen M. Edwards Michael J. Goldberg Darren M. Lee Christopher l. Plunkett Rebecca C. Richardson Donald H. Rousseau Mary K. Ryan
Delivered by Hand
Attorney General Martha Coakley Office of the Attorney General John W. McCormack Building One Ashburton Place Boston, MA 02108 Re: The Validity ofMERS
Dear Attorney General Coakley: This letter addresses the issue of the validity of the 11ERS business model in Massachusetts for discussion with staff members of the Office of the Attorney General. Register John O'Brien and others have linked the foreclosure crisis, the issue ofrobo-signers, and the validity ofMERS into one conversation. In fact, the validity of the way MERS conducts business is primarily an economic issue for the Register; the lack of recorded assignments has resulted in a loss of recording revenue. Despite the regular use ofMERS since 1999, its validity has only now been challenged. BACKGROUND Mortgage Electronic Registration Systems, Inc. (MERS) is the central electronic clearinghouse for the mortgage finance industry in the United States and whollyowned, bankruptcy remote subsidiary ofMERSCORP, Inc. Both are Delaware corporations; MERS was incorporated in Massachusetts on February 26, 1999. Shares of the parent company are held by a broad base of organizations active in the residential mortgage industry, including Fannie Mae, Freddie Mac, the Mortgage Bankers Association of America, and the American Land Title Association. For a complete list of shareholders, see the MERS web site at www.mersinc.org.
Sami S. Baghdady E. Christopher Kehoe Robert J. Moriarty, Jr. Staff Peter Witten borg Executive Director Edward J. Smith Legislative Counsel Nicole Cunningham Cilief Operating Officer Robert A. Gaudette In/ormolion Tecilnology Manager Andrea M. Hardy Office Administrator ft Event Coordinator
Servin9 the real estate bar lor over 150 years as the Massachusetts Conveyancers Association 50 Congress Street, Suite 600. Boston, MA 02109·4075 ~ Telephone: 617·854·7555 www.reba.net 800·496·6799 ~ Facsimile: 617·854-7570
MERS' MISSION Residential mortgages are rarely retained and serviced by the originating lender. The beneficial interests in and servicing rights to most mortgages are assigned at least once in the secondary market, usually immediately after loan inception. Often the mortgagees' beneficial interests are assigned multiple times before a mortgage is satisfied. In Massachusetts, recording each assignment was a condition precedent to releasing the mortgage lien upon satisfaction. These recording requirements delayed the release of a mortgage lien and increased transactional costs. In addition, these recording requirements created financial risks for title insurance companies and closing companies and resulted in delays in closing transactions which impacted consumers. MERS was created to eliminate the need to record assignments, because MERS can remain the mortgagee of record when lenders and servicers transfer their interests in mortgages through purchase and sale agreements. In this way, the MERS system reduces the delay, expense and risk ofloss associated with the recording requirements. HOW MERS WORKS No mortgage rights are transferred on the MERS System. The MERS System only tracks the changes in servicing rights and beneficial ownership interests. Servicing rights are sold via a purchase and sale agreement. This is a non-recordable contractual right. Beneficial ownership interests are sold via endorsement and delivery of the promissory note. This is also a nonrecordable event. The MERS System tracks both of these transfers. :MERS remains the mortgage lien holder in the land records when these non-recordable events take place. Therefore, because l\1ERS remains the lien holder, there is no need for any assignments. Transactions on the MERS System are not electronic assignments. Because MERS only holds lien interests on behalf of its Members, when a mortgage loan is sold to a non-MERS member, an assignment of mortgage is required to transfer the mortgage lien from MERS to the nonMERS member. Such an assignment is subsequently recorded in the land records providing notice as to the termination of'MERS's role as mortgagee. MERS ADDRESSED A NEED AND HAS BEEN iN USE SINCE 1999. In fact, the creation ofMERS addressed a growing crisis-the number of "missing assignments" causing numerous title defects, resulting in delayed closings and losses to consumers, title insurance companies, and conveyancing attorneys. Assignments were regularly recorded out of order, or not at all, and in some cases corrective assignments were unavailable, as lenders had gone out of business. This "missing assignment" issue regularly impacted consumers whose titles were called into question. Consumers regularly faced delays in closings and occasionally experienced financial loss. MERS was not only welcomed by title professionals but was accepted by the Registers of Deeds Association and the Massachusetts Land Court. The Registers of Deeds acknowledged the using ofMERS in its Guidelines published in 2000 and revised in 2008.
"1~15 MERS OR MORTGAGE ELECTRONIC REGISTRATION SYSTEM. Should be indexed as MORTGAGE ELECTRONIC REGISTRATION SYSTEM INC. The name of the bank or mortgage company involved may be entered in the index but is not required to be." The Real Estate Bar Association met with Land Court Judges and Land Court personnel in 2000 and the following Guideline, as revised in 2008, was published; "42. Mortgage Electronic Registration Systems ("MERS") (May 1,2000, Revised February 27,2009) MERS is a national electronic registry for tracking servicing rights and beneficial ownership interests in mortgage loans; it also acts as the mortgagee of record and, as such, is the nominee for both the servicer and the beneficial owners of mortgage loans in the public land records. MERS becomes mortgagee of record in one of two ways: The first is by an assignment from a lender or servicer to MERS; the second is by being the mortgagee of record as nominee in the original security instrument when the loan is closed. In either case the holder of the mortgage on the encumbrance sheet will be listed as Mortgage Electronic Registration Systems, Inc., without any reference to the institution for which MERS is holding the mortgage, whether or not the original mortgage or any subsequently filed instrument affecting the mortgage makes reference to the party for whose benefit "NIERSis holding the mortgage." By the issuance of this Guideline, the Land Court, the ultimate arbiter of the validity oftitJes for the registry districts across the Commonwealth, acknowledged the validity ofMERS. In a blog entry dated July 14, 2011, North Middlesex Register of Deeds, Richard Howe, wrote the following, in part: "Today's Globe business section has a major story on Essex South Register of Deeds John O'Brien and his efforts against l'vlERSand "robe-signers." Because of articles such as this, there is increasing interest in this topic, so it seemed appropriate to address it here. As I understand it, there are two separate issues. The first is Register O'Brien's assertion that MERS - Mortgage Electronic Registration System Inc. - owes the Commonwealth millions of dollars in recording fees for mortgage assignments that were never recorded." Looking back in time, Howe acknowledged the acceptance ofMERS upon its inception in 1999. "MERS first came to my attention in 1999. During the real estate crash of the early 1990s, many banks failed and it became difficult if not impossible for homeowners to obtain the legal documents necessary to establish that mortgages had been assigned or discharged. The purpose of MERS was to have a single entity that would hold the mortgage, almost as a trustee for the financial entity that held the underlying promissory note. With MERS, consumers would have a single point of contact for legal documents related to their mortgages. Now this arrangement 3
does run counter to a fundamental principle of Massachusetts real estate law - that being the mortgage always follows the note - but from 1999 until the commencement of this most recent housing collapse, everyone seemed to think MERS was a pretty good idea and no one complained about it." Register Howe was the principal architect of the Registry Indexing Standards in 2000, and he correctly recalls the acceptance ofMERS and its way of conducting business. Register Howe does reference the issue of the mortgage and the note; however, Massachusetts's case law does not support his contention that the mortgage always follows the note. THE NOTE AND MORTGAGE A mortgage is typically given to secure a debt that is evidenced by a note. See Crocker's Notes on Common Forms §439 (8th ed. 1955). Unlike a mortgage, a note is not generally recorded at the registry of deeds. When a mortgage is assigned, it is customary to endorse the note and deliver it to the assignee. Under Section 9 of the Short Forms Act, Chapter 502 of the Acts of 1912, the standard short form of assignment of mortgage assigns the mortgage "and the note and claim secured thereby." The use of this language in an assignment of mortgage makes the note, as between the original lender and the assignee, the property of the assignee. See Strong v. Jackson, 123 Mass. 60, 62
Even prior to the Short Forms Act, it was sufficient to transfer ownership of the mortgage and the note in an assignment containing the clause "and the note and claim secured thereby" even if the note was not actually delivered to the assignee. See 0 'Gaspian v. Danielson, 284 Mass. 27, 31-2 (1933) ("The intention to assign the note was clearly manifested ... [s]uch assignment was effective to transfer to the intervenor even if the note was not endorsed or delivered."); see also Barnes v. Boardman, 149 Mass. 106, 115 (1889) ("[W]here a mortgagee ofland, by a single instrument duly executed under seal and acknowledged, makes an absolute assignment of his mortgage debt and of the mortgage, such assignment is sufficient to vest in the assignee the full legal title of the mortgagee to the mortgaged premises].]"). THE USE OF MERS HAS BEEN LITIGATED IN MASSACHUSETTS COURTS AND nJDGES HAVE REGULARLY UPHELP THE LEGALITY OF THE MERS BUSINESS MODEL IN THE COMlvlONWEAL TH
Bassilla, et al. v. GMAC Mortgage, et al., Case #09-1-519, Commonwealth of Massachusetts
Appeals court (December 4,2009). In Bassilla, both the trial and appellate level courts denied the Plaintiffs' motion for a preliminary injunction to stay the foreclosure sale and upheld MERS rights to assign the mortgage as the mortgagee. The appellate court held that MERS had the authority to assign the mortgage interests without owning or holding the promissory note and that MERS did not split the mortgage from the note when the note transferred to a subsequent investor. The appellate court specifically held that "[T]he lender's nominee and record title holder had the ability to make a valid assignment."
The Massachusetts appellate court, in Novastar Mortg., Inc. v. Saffran, 2010 Mass. App. Div. 117, at *2 (Mass. App. Div. 2010), implicitly recognized MERS' authority as nominee to assign its interest: ("... , the notice of sale that was recorded did identify Novastar and described it as 'the present holder by assignment' of the mortgage given by Saffran to MERS dated July 27,2007. It is true that Novastar did not record an assignment from MERS, but [the statute governing foreclosure under power of sale) does not require that assignments of mortgages be recorded ... Saffran, once again. introduced nothing to rebut, or contradict, the recorded documents stating that Novastar was the holder of the mortgage by assignment[.]"). In David Kiah v. Aurora Loan Svc., MERS, et ai, Case #10-cv-40161 (D.Mass, Nov. 16,2010), the U.S. District Court for the District of Massachusetts upheld the "successors and assigns" language stating that MERS could assign the mortgage without holding the note or possessing a beneficial interest in the note because "legally MERS was holding the mortgage in trust for Aurora." It reasoned that, "[b]y law, the transfer of the note automatically transfers the underlying security, even without a formal assignment" and that "[p]laintiffs theory that the note and the mortgage somehow became disconnected from one another, and that the mortgage should disappear as a result, is not tenable[.]" Moreover, "plaintiff's claims [were] contradicted by the very documents that he submitted with the complaint].]" In an amended order on the motion to dismiss (March 4, 2011), the court further held that the "commonplace phrase 'successors and assigns' ... [made] clear that the note and mortgage may be assigned and that MERS may continue to act as an agent for the new owners." "By law, the transfer of the note automatically transfers an equitable interest in the underlying mortgage ... [and that] [a]n equitable right to the mortgage was therefore transferred to Aurora along with the note." Plaintiff has appealed the decision to the United States Court of Appeals for the First Circuit. As of the date of this publication, no decision has been rendered on appeal. In In re Lopez, Case No. 09-10346-WCH (E.D. Massachusetts, Feb. 9,2011), the debtor opposed Aurora's Motion for Relief on two grounds (1) that Aurora failed to follow RAMP guidelines and (2) that Aurora lacked standing to file a Motion for Relief based on an assignment of the mortgage from MERS. The debtor specifically cited Carpenter v. Longan, contending that an assignment of the mortgage, without the note, is a nullity. ("The note and mortgage are inseparable; the former as essential, the latter as an incident. An assignment of the note carries the mortgage with it, while an assignment of the latter alone is a nullity."), The debtor also argued that MERS, as nominee of Shelter, could not assign the Mortgage to anyone because it is merely a title holding entity and that the current holder of the Note is unknown (endorsed in blank), making it unclear who authorized :rvtERSto assign the Mortgage. Citing the First Circuit Court of Appeals decision in Grella v. Sa/em Five Cent Sav. Bank, 42 FJd 26, 32 (151 Cir. 1994), the Court held that a relief from stay hearing should not involve a full adjudication of the merits of claims, but merely a determination of "whether a creditor has a colorable claim to property of the estate." Citing Grella, the Lopez Court says the First Circuit explained:
"The statutory and procedural schemes, the legislative history, and the case law all direct that the hearing on a motion to lift the stay is not a proceeding for determining the merits ofthe underlying substantive claims, defenses, or counterclaims. Rather, it is analogous to a preliminary injunction hearing, requiring a speedy and necessarily cursory determination of the reasonable likelihood that a creditor has a legitimate claim or lien as to a debtor's property. If a court finds that likelihood to exist, this is not a determination of the validity of those claims, but merely a grant of permission from the court allowing that creditor to litigate its substantive claims elsewhere without violating the automatic stay." Based on the MERS assignment, the Lopez Court stated, " ... I find that Aurora has established a colorable claim to the Property as Mortgagee" and that Aurora is a party in interest with standing to seek stay. The court noted " ... the Mortgage specifically identified MERS as the mortgagee under the instrument and granted it and its 'successors and assigns' a power of sale." Regarding the debtor's challenge that the assignment was a nullity without a transfer of the note, the Court cited Boruchoff v. Ayvasian, 323 Mass. 1, 10, 79 N.E.2d 892 (1948) and Kiah v. Aurora Loan Servs., LLC, No. 10-40161-FDS, 2010 WL 4781849 (D. Mass. Nov. 16,2010) to state that "under Massachusetts law, 'where a mortgage and the obligation secured thereby are held by different persons, the mortgage is regarded as an incident to the obligation, and, therefore, held in trust for the benefit of the owner of the obligation.' Accordingly, even though MERS never had possession of the Note, it was legally holding the Mortgage in trust tor the Note holder." Further, "Though :MERS never held the Note, it could, by virtue of its nominee status, transfer the Mortgage on behalf of the Note holder. Indeed, such a transfer appears to have been contemplated by the Mortgage, as the power of sale provision specifically identifies "the successors and assigns of :MERS." Regarding the debtor's various arguments pertaining to whether the assignment and travel of the note were properly authorized or undertaken, the court responds, "As explained at the outset, a party in interest need only demonstrate 'a colorable claim to property of the estate,' which Aurora has done by providing a complete and facially valid chain of title establishing that it holds the Mortgage with a power of sale. In the context of a motion for relief from stay, which the First Circuit instructs is a summary proceeding akin to a hearing on a preliminary injunction, the Court need not, and indeed should not, seek out latent defects of the kind now proposed by the Debtor. To do so would subject every motion for relief from stay to a full evidentiary hearing, even where the Debtor, as here, has not articulated an affirmative objection but an investigatory inquiry. [citing Valerio v. U.s. Bank, NA., 716 F.Supp.2d 124 (D. Mass. 2010) (application for injunctive relief denied where plaintiffs did nothing more than contend there was a "substantial question" regarding U.S. Bank's right to enforce the promissory note at the time of foreclosure)." The court also noted that "[a]lthough the Assignment contains language purporting to assign both the Note and Mortgage, 11ERS lacked an assignable interest in the Note. While this surplusage evidences poor drafting, it does not affect the validity of:MERS' assignment of the Mortgage." In In re Marron, Case No. 10-45395, (Bankr. D. Mass., June 29, 2011), the bankruptcy trustee objected to HSBC Bank's motion for relief from automatic stays, arguing that the assignment of mortgage HSBC obtained from 1VfERSwas invalid and thus HSBC may not legally foreclose the mortgage. Citing In re Agard, the trustee contended that because MERS was merely a nominee
for the original lender, with limited legal authority, and because MERS never had the right to enforce the promissory note associated with the debtors' mortgage, it did not have a sufficient interest in the debtors' property to foreclose the mortgage. The trustee goes on to argue that since MERS did not have the right to foreclose, MERS could not have assigned that right to HSBC and it does not have standing to seek relief from the automatic stay. Citing the Massachusetts Supreme Court decision in US. Bank Nat 'l Ass 'n v. Ibanez and the Superior Court decision of Adamson v. MERS, the Marron Court concluded that, "Massachusetts law does not require a unity of ownership of a mortgage and its underlying note prior to foreclosure ... a mortgagee who is not the note holder may exercise the power of sale and foreclose the mortgage, but as a fiduciary for the note holder, to whom it must account for the foreclosure sale proceeds." Further, "[a]s Massachusetts law allows a mortgagee with no interest in the underlying obligation to foreclose, the trustee's argument that MERS did not have a sufficient interest in the debtors' property to foreclose the mortgage fails ... To the extent MERS held only bare legal title to the mortgage on the debtors' residence in its capacity as trustee for the note owner, MERS was able to assign its interest to HSBC. The fact that the debtors' promissory note passed like a hot potato down a line of owners, including some in bankruptcy and liquidation, with no accompanying assignment of the note owner's beneficial interest in the mortgage, changes nothing. Through all of these transfers right up until it finally assigned the mortgage to HSBC, MERS remained the mortgagee in its capacity as trustee and as nominee for whomever happened to own the note." The Court further refused to apply the reasoning found in the In re Agard decision (Bankr. NY) which suggested that a :tv1ERSassignment is only valid if MERS can prove its nominee relationship with whomever happens to be the current holder of the beneficial interest in the mortgage (i.e. the note owner), and that such note owner authorized MERS to assign the mortgage. The Marron Court pointed out that " ... under Massachusetts law, an assignment ofa mortgage is effective without the need to independently establish the authority of the assignor to make the assignment." Mass. Gen. Laws ch. 183 § 54B provides that an assignment ofa mortgage executed before a notary public is "binding" and entitled to be recorded. "The existence of the Massachusetts statute renders Agard's analysis inapposite and the trustee's argument unavailing with respect to assignments of Massachusetts mortgages." As to HSBC's standing, the Court determined that "[I]n order to have standing to file a motion to lift the stay ... a movant must be a party in interest ... [and a] mortgagee armed with the power of sale is a party in interest by virtue of having a substantive right to enforce the instrument." Citing the First Circuit Court of Appeals decision in Grella v. Salem Five Cent Sav. Bank, 42 F.3d 26, 32 (1st Cir. 1994), the Court further notes that, under Grella, "a bankruptcy court need not fully adjudicate the merits on the creditor's claims but rather determine 'whether a creditor has a colorable claim to property of the estate. '" Citing the MERS Rules of Membership and information obtained from the MERS System identifying HSBC as the investor, the Court holds that "HSBC has a colorable claim that it was listed in the MERS system as the beneficial owner of the debtors' mortgage at the time the mortgage was assigned by MERS to HSBC in compliance with theMERS Rules." It is noteworthy that an identical copy of the MERS Rules of Membership was also before the Agard court.
MERSANDFORECLOSURE Rule 8 of the MERS Corp., Inc., Rules of Membership, is entitled "Required Assignments for Foreclosure & Bankruptcy" and reads as follows; "With respect to each Mortgage loan, which shall mean a loan secured by a Mortgage ... for which the note owner or note owner's servicer has decided to: (1) initiate foreclosure proceedings whether judicial or non-judicial ... and for which Mortgage Electronic Registration Systems, Inc., is the Mortgagee, beneficiary or grantee of record (as applicable), the note owner or the note owner's servicer shall cause a MERS' certifying officer to execute an Assignment of the security instrument from MERS to the note owner's servicer or such other party expressly and specifically designated by the note owner." The much publicized cases of Bevilacqua v. Rodriguez and U.S. Bank v. Ibanez specifically demonstrate the importance of complying with this membership rule to obtain an Assignment from MERS prior to foreclosing. In the Land Court Judge's holding in Bevilacqua v. Rodriguez, 2010 WL 3351481 (Mass. Land Ct., Aug. 26, 2010), the plaintiff (Bevilacqua), who purchased property in a post-foreclosure sale, attempted to quiet title against the mortgagor/former property owner (Rodriguez). The Land Court Judge held that Mr. Bevilacqua has no plausible claim to title since it derives, and derives exclusively, from an invalid foreclosure sale." The court determined invalidity of the foreclosure because ""tvffiRShas not assigned the mortgage to u.s. Bank" and "[U.S. Bank] was not the holder of the mortgage at the time the sale was noticed and conducted as required by G.L. c. 244, § 14 and thus [Bevilacqua] acquired nothing from that sale." The court further held that title is still held by Rodriguez.
In U.S. Bank v.Lbanez, 20] 1 WL 38071, the Massachusetts Supreme Judicial Court affirmed a Land Court Judge's opinion denying the plaintiffs' motions for entry of default in connection with two foreclosure proceedings in the consolidated cases of U.S. Bank National Association v. Ibanez, Misc. Case No. 384283 (KCL), Massachusetts Land Court (2009), and Wells fargo Bank, N.A. v. Larace, Misc. Case No. 386755 (KCL). The Supreme Judicial Court found that the lower court's opinion denying the plaintiffs motions was appropriate due to the fact that the plaintiffs did not have title to the mortgages at the time the notice of foreclosure was published or at the time of sale. Although MERS was not a party in either case and was never the mortgagee of record on either property, the Court's holding is consistent with the requirements under Rule 8 of the MERS Rules of Membership. Rule 8 requires that when commencing a foreclosure in a party name other than MERS, the MERS member must execute the assignment from MERS to the foreclosing party prior to the commencement of the foreclosure action. In each of the cases, the evidence before the court showed the assignments conveying the mortgages to the plaintiffs were not executed until months after the foreclosure sales were completed. The cases above demonstrate that although Courts have questioned whether certain mortgages have been validly assigned, Courts have not challenged the process of securitization itself Massachusetts Courts have not validated the so-called "produce the note" argument gaining favor among some advocates in which homeowners challenge foreclosures on the grounds that those initiating foreclosure proceedings on behalf of securitized pools of mortgage loans had no right to do so, because they could not prove they actually owned the debt.
MERS operated smoothly and without debate for most of the first decade of its existence. The numerous issues such as predatory lending, robo-signing, and poor record keeping should not impact the validity of the MERS System, which has been a benefit to both title professionals and consumers.
4/T.·~el~~~ -Edward ~ ~oom, Esq. REBA President Cc: REBA Board of Directors
Very truly yours,
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