Perhaps Slow And Steady Does Win The Race: The Unforeseen Consequences Of MERS

In light of the economic collapse beginning in 2006, thousands of Americans continue to default on residential mortgages, falling prey to mortgage foreclosure actions. A plaintiff in a foreclosure action has standing “where it is both the holder or assignee of the subject mortgage and the holder or assignee of the underlying note at the time the action is commenced.”[1]  Following the traditional mortgage-recording route, a lender-mortgagee maintains ownership of both the promissory note and the mortgage by having the mortgage recorded within the county registry and keeping the note.[2]  Thereafter, any transfer of the property’s title allows the lender to sell both the mortgage and the note, which serves as the underlying security interest in the property.[3]

However, as local regulations and mortgage database systems became more complex over time, recording mortgages within county registries became less desirable. Thus, a number of powerful contributors to the real estate mortgage industry created the Mortgage Electronic Recording System (MERS) in 1993 as a means to reduce delays associated with the traditional mortgage-recording route.[4]  Specifically, MERS developers sought to “streamline the mortgage process by using electronic commerce to eliminate paper.”[5]  Thus, “[m]ortgage lenders . . . 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 [also known as a “nominee”] on all mortgages they register in the MERS system.”[6]  In other words, a MERS transaction requires the borrower to execute a promissory note in favor of the lender and the mortgage in favor of MERS.[7]

Despite the efficiencies of an online mortgage-recording system, the nation’s recent housing bubble burst and resulting foreclosure actions have exposed MERS’ fatal flaw.  In particular, Bank of New York v. Silverberg, a New York case of first impression, declared MERS’ inability to assign a mortgage where it is “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.”[8]

Plaintiffs, the Silverberg’s, executed a mortgage in favor of MERS and the underlying note in favor of its originating bank, Countrywide Home Loans. A year later, the Silverberg’s executed a second set of mortgage documents, as well as a consolidation agreement, neither to which Countrywide Home Loans was a party.  After the Silverberg’s defaulted on the second agreement, MERS assigned the consolidation agreement to defendant Bank of New York.

In its discussion, the court maintained that MERS lacked the authority to assign the consolidation agreement to the bank because it never possessed the promissory note—that is, it never had a security interest in the mortgage.[9]  As such, the bank did not have standing to commence a foreclosure action against the Silverberg’s.

In light of the Silverberg decision, it is not surprising that MERS’ rules were changed on July 22, 2011 to deny MERS the opportunity to initiate foreclosure actions.[10]  Instead, starting on September 1, 2011, foreclosure actions must be commenced by originating banks. This will require the physical conveyance of both the mortgage and the note to the originating bank in the traditional, non-MERS manner.[11]  However, while this may seem like the ideal solution, mortgage-recording and foreclosure systems continue to vary from state to state, each having to follow its own statutory guidelines.[12]  Therefore, instead of leaving the door to future litigation ajar, the federal government should work towards creating a nation-wide electronic recording system that provides for contemporaneous recordings of promissory notes and their mortgages.



[1] Bank of New York v. Silverberg, 926 N.Y.S.2d 532, 537 (N.Y. App. Div. 2011) (citation omitted).

[2] See id.

[3] Id.

[4] Id. at 535.

[5] About MERS, mersinc.org, http://www.mersinc.org/about/index.aspx (last visited Aug. 14, 2011).

[6] MERSCORP, Inc. v. Romaine, 8 N.Y.3d 90, 96, 861 N.E.2d 81, 83 (N.Y. 2006).

[7] Adam Leitman Bailey et al., The Brewing MERS Crisis: Everyone Loses, n.y.l.j., Aug. 10, 2011, at 5-6.

[8] Silverberg, 926 N.Y.S.2d at 533.

[9] See id. at 537. The court further explains in pertinent part:

As a general matter, once a promissory note is tendered to and accepted by an assignee, the mortgage passes as an incident to the note (see Mortgage Elec. Registration Sys., Inc. v. Coakley, 41 A.D.3d 674, 838 N.Y.S.2d 622; Smith v. Wagner, 106 Misc. 170, 178, 174 N.Y.S. 205 [“assignment of the debt carries with it the security therefor, even though such security be not formally transferred in writing”]; see also Weaver Hardware Co. v. Solomovitz, 235 N.Y. 321, 331-332, 139 N.E. 353 [“a mortgage given to secure notes is an incident to the latter and stands or falls with them”][.] Id.

[10] See MERSCORP, Inc. Rules of Membership, Rule 8, Required Assignments for Foreclosure & Bankruptcy, available at http://www.mersinc.org/about/index.aspx.

[11] Id.

[12] See Leitman Bailey, supra note 8 at 5.

Author: Rachel Sigmund

Rachel is a 3L and a Senior Editor on the RCTLJ for the 2012-2013 academic year. Rachel is responsible for keeping the RCTLJ website current with the most recent and innovative computer and technology related news stories. Prior to attending law school, Rachel received a B.S. in Psychology with a Business Concentration from Pennsylvania State University's Schreyer Honors College in 2010. Currently, Rachel is a Summer Associate at the real estate law firm of Adam Leitman Bailey, P.C. in New York City. In July 2013, Rachel will sit for the New York and New Jersey Bar Exams.

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