The case in question is Kansas Supreme Court No. 98,489, Landmark National Bank v. MERS. According to a message board I read,
Is that a valid intrepretation? If not, what are the implications of this case?
Who’s writing on that message board? There aren’t 60 million people in Kansas. How do they come to 60 million mortgages there would be invalidated?
I understood it as “if the interpretation in the OP is correct” and “if this decision is taken as precedent in all states across the u.S.” Yhe figure might make more sense when considering 300 million people in 50 states.
I take it the 60 million includes all the states that are part of that judicial district/circuit.
This is the Kansas Supreme Court, not a federal district or circuit court.
In any case, Kansas is in the 10th federal circuit, which includes Wyoming, Utah, Colorado, New Mexico, and Oklahoma as well. All together, the entire circuit has fewer than 20 million people.
I would say that it has no implications for the OP unless they live in Kansas. I am sure there will be more cases like this in other states and those state courts will rule separately. They could certainly look at the Kansas ruling and see if it applies to the law in their own states, but certainly aren’t under any need to hold that as a precedent.
If someone is being foreclosed on in KS, I would think that the mortgage servicers, trustees and bondholders are going to look at their options to see what they can accomplish.
As far as availability of mortgages, this could lead to problems since Fannie Mae and Freddie Mac, who are among the lenders providing any sort of liquidity in the market use MERS and could be handcuffed by this. If they can’t foreclose in KS, they may be unwilling to lend unless an alternative to MERS assignments can be found. If I were a lending officer there right now, I would probably shut down any outstanding apps until my lawyers tell me how to proceed.
- The case doesn’t say anything about criminality.
- MERS may have difficulty in some foreclsosure cases.
- The case will probably have little effect outide of Kansas.
As you know, the mortgage crisis is intimately tied up with the securitization of home mortgages, which is essentially (and oversimplified) taking bunches of mortgages and rolling them up into packages, which are then sliced up, with the slices issued to separate owners. MERS is a key player in that process.
From time immemorial, a holder of a mortgage could sell the mortgage to another holder, but the transfer would have to be documented and recorded on the county land records, a cumbersome process and expensive when multiple mortgages are transferred.
With securitization, large pools of mortgages were frequently transferred back and forth into the control of different entities, usually with major banks acting as trustees for the security holders. MERS is essentially a consortium of major banks and other mortgage market participants. Its function is to act as a clearinghouse for the mortgages so that it could act as (or on behalf of) the holder of the mortgage recorded on the county land records, and when the mortgage was transferred (and re-transferred, and re-transferred), it could keep track of the ownership of the mortgage. If the mortgage were to be foreclosed, it would either be a party to the foreclosure as mortgage holder, or act to transfer the land record ownership to the mortgage’s owner.
Essentially, MERS is the back-office bookkeeping that keeps straight who owns all of these mortgages that were sliced and diced into securities.
The problem with MERS is that the legal system for mortgage foreclosures is not really set up to handle MERS’s role in all of this. As I said, the changes of the ownership of mortgages is supposed to be recorded on the county land records, and MERS is a major work-around to this legal requirement.
The Kansas case is procedurally rather complex. What happened is there was a first and a second mortgage on a property, and the first mortgage holder (Bank A) foreclosed, giving notice to the lender on the second mortgage (Bank B), but not to MERS, who was listed as “nominee” on the second mortgage. In the meantime, Bank B had sold the second mortgage which was eventually held by Bank C, but the transfer of the second mortgage was not recorded on the land records because Bank C (and any other transferees) relied on “nominee” MERS to give it notice of important proceedings like the foreclosure of a superior mortgage. In the first mortgage foreclosure, nobody appeared on behalf of the second mortgage, and the property was sold for enough money to pay off the first mortgage and leave a surplus. Sometime after the sale, MERS and Bank C woke up and tried to set aside the foreclosure sale, or at least get paid the sale proceeds (which the second mortgage holder would normally be entitled to).
The court held that Bank C was not entitled anything because it was not listed on the land records as mortgage holder, and that MERS has no actual interest in the mortgage. As a result, it distributed the sale surplus to the property owner. MERS appealed, complaining that it was denied due process because it never got notice of the foreclosure even though it was listed as nominee on the original recorded mortgage document. The Kansas Supreme Court essentially said that as a nominee with no actual or economic interest in the mortgage, MERS wasn’t deprived of a sufficient property interest for there to be a due process violation.
Put more simply, Bank C (and really, the whole banking system) relied on MERS to protect its interest as buyer of the mortgage, and the court found that MERS wasn’t a proper party to protect a mortgage buyer’s interest.
This case is just one of a series in which courts around the country are expressing dissatisfaction with the MERS system and procedure. The New York Times recently profiled a Brooklyn judge who has held up many mortgage foreclosures because of “errors” in the papers, many of which are caused by issues with MERS procedures like the cross-designation of individuals as officers of multiple banks so they can sign transfer documents. Other New York courts have issued rulings casting doubt on MERS procedures.
The issue is that this ruling and others in this vein have the danger of further reducing the ability of the residential mortgage system to effectively protect the security interests they have. I would respectfully disagree with my colleague Gfactor that this will have little effect outside Kansas, as the Kansas procedures are similar to many around the country, and even small disruptions in the mortgage market can have substantial effects.
thanks for this excellent explanation, Billdo. I skimmed the decision but it was just too foreign for me to follow.
follow-up question: since Bank C and MERS have raised due process issues, would they be able to try to appeal it to the SCOTUS? or was it just due process under the state constitution?
You may be right about that. I was in a hurry when I wrote that post. Thanks for filling in the blanks.
The Kansas court decided the case under the due process clauses of both the federal and state constitutions. As such, it would be subject to review by the US Supreme Court on the question of Fourteenth Amendment due process.
Oh, god. Talk about burning down the barn after the horse has escaped. I don’t know if securitization of mortgages was a bad idea or simply badly executed, but this decision seems to kill it entirely. Does it seem likely to anyone else that correcting the deficiencies identified in this case will increase administrative costs to the point where returns will be insufficient to attract investors? That is, in the future, when investing in mortgage securities gets removed from the DSM…
I think that this is a bit overblown as a concern (and the quotein the OP is way over the top). This decision does not say that mortgage holders who have had their mortgage transferred cannot foreclose. Rather, the implication of this is that mortgage holders cannot simply proceed in the name of MERS, but rather must get the assignment of the mortgage properly documented prior to commencing foreclosure. This is the law in New York as well. See LaSalle Bank Natl. Assn. v. Ahearn, 59 AD3d 911 (3d Dep’t 2009).
Where it will cause problems is when the mortgage holder is required to be sent notice of things that can impair its interest like tax foreclosures and foreclosures of superior mortgages. The big reason that transfers of the mortgage are supposed to be recorded is so that the proper mortgage holder may be notified of things that affect its interest. The “MERS as Nominee” mortgage was designed to achieve that by having MERS as a record mortgage holder that would pass along notice to the right party. What this decision says is that if MERS doesn’t get notice, it is screwed along with the real mortgage holder it represents. However, I would expect that the regular practice of those prosecuting foreclosures would be to name MERS and all other parties whose interests are on the land records, as banks holding first mortgages probably would prefer that second mortgage holders are protected.
And lots of jurisdictions permit non-judicial foreclosure. In many of these states, there isn’t really a formal way to raise a “produce the note” type objection to foreclosure. To preven, or stall the foreclosure, you need to start a lawsuit seeking an injunction. http://www.consumerwarningnetwork.com/2009/03/05/how-to-use-produce-the-note-in-non-judicial-foreclosure-states/.
Some states are now imposing chain of title requirements in the non-judicial foreclosure process. Michigan passed a law earlier this year that requires a pre-foreclosure notice and opportunity for a face-to-face meeting with the foreclosing party before the property can be sold. The new law also added this requirement:
Yes. This is what I should have said earlier. This case deals with the rights between lienors–it doesn’t have any direct implications for homeowners, although MERS involvement does sometimes complicate the foreclosure process for the reasons you pointed out.
I’m sorry, I couldn’t help laughing at the situation. This is dark comedy at its best. It’s ripe for a Cohen Brothers film.
Thanks for the summary Billdo – very well done.
See, this is why I was having trouble skimming the decision - the basic starting points of your foreclosure system seem to be very different from the one I’m familiar with here in Saskatchewan.
If I’ve understood you correctly, the mortgagee can foreclose without going to court? Really? :eek:
Here, the only way to foreclose is by beginning an action. And you can’t just issue a statement of claim to start a foreclosure action. You must apply to court for permission to start the action. And the court normally won’t allow you to start the foreclosure action for a couple of months, in order to give the mortgagor a chance to line up alternative financing or to sell the property himself, instead of at the firesale prices of a sheriff’s auction.
Yes. It varies from state to state. But Kansas is a judicial foreclosure state, Foreclosure.com | Foreclosures | Foreclosure Listings
New York, for reasons Billdo may be able to explain, has both non-judicial and judicial foreclosure, but non-judicial is seldom used. New York Foreclosure Law
Michigan also has both, but judicial is more expensive and time-consuming, so everybody does non-judicial foreclosure.
Here’s a list: HUD.gov / U.S. Department of Housing and Urban Development (HUD) |
This chart lists months to foreclose and whether deficiency is practical: http://www.all-foreclosure.com/procedures.htm
The basic legal structure is based power of sale clauses in mortgages. Foreclosure, LAWS Investment Homes & Real Estate | RealtyTrac The procedure typically requires written notice, publication for a period of time, and then sheriff’s sale. After the sale the mortgagor usually has a redemption period, during which he can pay the mortgage balance, plus interest, fees, etc. and regain title to the property.
Here is Michigan’s setup:
http://legislature.mi.gov/doc.aspx?mcl-600-3205b new section on loan modification rights
http://legislature.mi.gov/doc.aspx?mcl-600-3205c
Michigan Legislature - Section 600.3208 Publication
Michigan Legislature - Section 600.3216 sale
Michigan Legislature - Section 600.3240 redemption
They only need to go to court if they want a deficiency judgment.
As you can see, this is exactly what I was asking about. Of course foreclosure will be possible; my question was about keeping track of title, and whether the burden of doing it right will make mortgage securities unattractive as an investment.