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First Circuit Upholds MERS Mortgage System Under Massachusetts Law

The First Circuit has affirmed a holding finding that the system under which mortgages are held in the name of Mortgage Electronic Registration Systems, Inc., commonly known as MERS, comports with Massachusetts law relating to mortgage transactions.  In the underlying matter, Culhane v. Aurora Loan Services of Nebraska, 826 F.Supp.2d 352 (D.Mass. 2011), Judge Young of the United States District Court had held that a mortgagor possesses standing to challenge the chain of assignment of his or her mortgage in defense to a foreclosure action, but further held that the MERS system of registration and transfer of mortgages is lawful.

MERS is an organization that allows for the transfer or mortgages among its member banks without the need for a new recording in the applicable registry of deeds for each transfer.  MERS appoints employees of its member banks as officers or secretaries of MERS, who then have the power to assign mortgages to other members, or from other members to themselves.  Throughout any transfer, MERS remains the nominal mortgagee of record for the benefit of the member bank currently holding the note.  As noted by the First Circuit, Culhane provided an emblematic fact pattern in cases challenging mortgage assignments through MERS.  The borrower signed a note for a home mortgage loan and granted the accompanying mortgage to MERS as nominee for the lender as well as its successors and assigns.  After the initial lender transferred the note and mortgage to another MERS member, MERS later assigned the mortgage to Aurora.  An Aurora employee and "certifying officer" for MERS executed the transfer.  Aurora, now the servicer of note and mortgagee of record, initiated foreclosure proceedings, and Culhane filed suit challenging the assignment of the mortgage from MERS to Aurora.

With regard to the MERS system itself, Culhane argued that MERS, as holder of only the bare legal interest in the mortgage, lacked the authority to transfer that interest.  The Court disagreed, noting that Massachusetts law has long recognized the separate, but related, beneficial interest in the note and legal interest in the mortgage.  The mortgagee acts as an equitable trustee for the noteholder, and absent a restriction against transfer of the mortgage or note in the loan agreements, that arrangement is valid.  Further, the original mortgage documents contemplated this separation of interests, as the mortgage was granted initially to MERS as nominee for the lender and its successors or assigns.  Finally, the MERS system of "certifying officers" employed by member banks also comports with Massachusetts law, which requires only a notarized, written execution by an officer with authority. As noted by the First Circuit, "While MERS's practice of appointing employees of member firms as certifying officers can be disparaged on policy grounds, such policy judgments are for the legislature, not the courts."  The full text of the opinion can be found here.

While it now appears that mortgagors have standing to challenge mortgage assignments in the First Circuit, such standing comes with significant limitations. Challenges are limited to transfers that are void as a matter of law, and challenges based on the MERS system have been effectively foreclosed.

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