A story on the front page of Sunday’s New York Times business section, “The Mortgage Machine Backfires,” caught my attention. It chronicled a decision of the Kansas Supreme Court that called into question the validity of mortgages held by Mortgage Electronic Registration System, better known as MERS. MERS was established at least a decade ago to serve as the record holder of mortgages that were filed with the registry of deeds. The intent was to allow the promissory note to be freely transferred among different financial institutions without the need to record assignments of that mortgage at the registry of deeds. MERS would serve as a perpetual point of contact for anyone interested in the mortgage. If you did a search of our database for grantees of mortgages (i.e., the name of the lender), MERS would be the name that appears most often, by far.
In the Kansas case the homeowner already had a first mortgage that was held by Landmark National Bank. He then obtained a second mortgage from Millennia Mortgage Corp. The mortgage that was recorded identified MERS as the mortgagee. At some point, Millennia assigned its interest in the loan to Sovereign Bank but did not record an assignment of the mortgage at the applicable registry of deeds. When Landmark foreclosed the mortgage, it served notice on the homeowner and on Millennia. Because Millennia had no interest in the mortgage, it ignored the notice. The foreclosing lender did not serve notice on either MERS or Sovereign. The money obtained at the foreclosure auction exceeded the amount owed to Millennia, so the court paid the surplus to the homeowner. At some point well after the auction, Sovereign and MERS filed pleadings in the case to assert their rights. The trial court found that MERS had not standing since it was only an agent for Millennia and since Sovereign had failed to record an assignment at the registry of deeds, Sovereign was precluded from asserting any rights in the mortgage after the foreclosure had occurred. The court upheld the foreclosure and the distribution of the surplus.
The Kansas Supreme Court upheld the trial court’s decision, holding that when ownership of the mortgage and the note were separated, the mortgage became unenforceable. The court seemed to reason that while MERS may have legitimately served as the agent of the initial lender, once the note was assigned by that lender to another financial institution (Sovereign), any connection between the mortgage, held by MERS on behalf of the initial lender, was severed and the MERS/Millennia/Sovereign mortgage was rendered inoperable without an assignment having been recorded.
I have no idea whether this defense has been asserted in Massachusetts yet. If not, it undoubtedly will. If a court here was ever to follow the Kansas ruling, the validity of tens of thousands of mortgages would be suddenly thrown into question.