Each time a mortgage is sold from one bank to another, an assignment (which is a document that showing that the mortgage has been transferred) is prepared and recorded in the county land records. The assignment transfers all of the interest the original lender had under the mortgage to the new bank.
Mortgage Electronic Registration System, Inc. (MERS) is a company that was created by the mortgage banking industry to simply this process. Read on to learn more about MERS, how MERS simplifies the process, and how MERS is involved in the foreclosure process.
Understanding Mortgage Transactions
To fully understand MERS, you must understand the basic terms and documents involved in a residential mortgage transaction.
Mortgagee/beneficiary and mortgagor. A “mortgagee” is the lender in a mortgage. (In a deed of trust, it is called the "beneficiary.") The mortgagee or beneficiary gives the loan to the “mortgagor,” who is the homeowner/borrower.
Loan documents. The loan transaction consists of two main documents: the mortgage (or deed of trust) and a promissory note. The mortgage (or deed of trust) is the document that pledges the property as security for the debt, whereas the promissory note is the IOU that contains the borrower’s promise to repay the loan.
Loan Transfers. Banks often sell and buy mortgages from each other. An “assignment” is the document that is the legal record of this transfer from one mortgagee to another. In a typical transaction, when the mortgagee sells the debt to another bank, an assignment is recorded and the promissory note is indorsed (signed over) to the new bank.
What is MERS?
Mortgage Electronic Registration System, Inc. (MERS) is a company that was created by the mortgage banking industry. MERS maintains a database that tracks mortgages for its members as they are transferred from bank to bank. By tracking loan transfers electronically, MERS eliminates the long-standing practice that the lender must record an assignment with the county recorder every time the loan is sold from one bank to another.
MERS’ Role in the Mortgage Transaction
In some mortgage transactions, the mortgage will designate MERS as the mortgagee (solely as a nominee for the lender). These loans are referred to as MERS as Original Mortgagee (MOM) loans. (In a deed of trust, MERS is designated as the beneficiary, to act as a nominee for the lender.) In other cases, the loan may be assigned to MERS (solely as a nominee for the lender) at some point later in its life cycle after the loan closes.
MERS then tracks the transfers of the loan, acting as the nominee for each holder, eliminating the need for separate assignments when the loan is transferred.
Why lenders use MERS as a nominee. Since the loan is in MERS’ name in the land records, this saves time and recording costs because multiple assignments are not necessary each time the loan changes hands.
MERS does not own the underlying debt. While MERS then acts as mortgagee in county land records, it does not actually own the promissory note.
MERS’ Role in the Foreclosure Process
A foreclosure is either judicial or nonjudicial, largely depending on where the foreclosure action is initiated. In judicial states, the lender must foreclose through the state court system, whereas a nonjudicial foreclosure takes place outside of the court system. To learn more about the difference between judicial and nonjudicial foreclosure, and the procedures for each, see Will Your Foreclosure Take Place In or Out of Court?)
With judicial foreclosures, the lender files a lawsuit against the borrower and obtains a judgment. In some judicial foreclosure cases, MERS (solely as a nominee for the lender) is named as the plaintiff in the lawsuit.
In nonjudicial foreclosures, the lender provides limited notice of the foreclosure, usually by mailing, publishing, and/or posting the notice. MERS is sometimes listed as the beneficiary (solely as a nominee for the lender) in the nonjudicial notices.
Courts are divided on the issue of whether MERS may be listed as the plaintiff or beneficiary in foreclosure proceedings.
Some States Don't Allow MERS to Foreclose
In recent years, some state courts have determined that MERS does not have standing to foreclose on homes.
Judicial States and MERS Foreclosures
To file a lawsuit, a plaintiff must have legal standing, meaning it must have a direct interest in the outcome of the lawsuit. Some states have decided that only the lender has such an interest in a foreclosure. In those states, since MERS acts solely as a nominee for the lender, it cannot be a plaintiff in a judicial foreclosure. For example, in 2010, the Maine Supreme Court held that since MERS does not own the promissory note, it lacks standing to begin foreclosure proceedings in that state. Consequently, MERS cannot be the plaintiff in a foreclosure case in Maine.
Nonjudicial States and MERS Foreclosures
Some nonjudicial states, such as Washington, have determined that MERS does not have the right to foreclose in those states as well. The Washington Supreme Court ruled that MERS is not considered a beneficiary under state law. Therefore, MERS can no longer nonjudicially foreclose a deed of trust in that state since it does not own the debt.
MERS's Solution: No More Foreclosures in Its Name
In 2011, MERS changed its rules so that foreclosures may no longer be started in its name. Prior to the foreclosure, MERS will assign the loan back to the lender. In a judicial foreclosure, the lawsuit is then filed in the name of the lender. In a nonjudicial foreclosure, the lender will be named as the beneficiary in the foreclosure notices.
Other states have determined that foreclosure cases may proceed in the name of MERS. The Supreme Court of Minnesota, for example, has decided that MERS does have standing to foreclose.
Also, in a case in Nevada, a homeowner’s attorney argued that having MERS as a mortgagee was a fatal flaw in the mortgage process. He claimed that once a loan has different note holder and mortgage holder, it is permanently flawed and could not be foreclosed. However, the Nevada Supreme Court disagreed and ruled that mortgages involving MERS could be foreclosed after being assigned back to the lender.
Because MERS changed its rules in 2011, in theory there shouldn't be any more new MERS foreclosures, even in states that previously allowed them. However, homeowners may still see MERS foreclosures because:
- the foreclosure may have been initiated prior to rule change, and
- some attorneys may still list MERS on the foreclosure paperwork, despite the rule change.
For More Information
The laws governing MERS’ role in the foreclosure process vary from state to state. If you want to find out more about how MERS is treated in your state, consult with an attorney in your jurisdiction.