When a mortgage is sold from one bank to another, an assignment—a document showing that the loan has been transferred—is typically 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 the banking industry created to simplify this process.
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, the lender is called the "beneficiary" or "lender." The mortgagee or beneficiary loans money to the “mortgagor,” who is the 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 entity to another. In a typical transaction, when the mortgagee sells the debt to another company, an assignment is recorded and the promissory note is endorsed (signed over) to the new owner.
MERS maintains a database that tracks mortgages for its members as they're transferred from bank to bank. By tracking loan transfers electronically, MERS eliminates the long-standing practice that the loan owner must record an assignment with the county recorder every time the loan is sold from one entity to another.
In some home loan 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 might be assigned to MERS, solely as a nominee, 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. Having the loan in MERS’ name, as nominee, in the land records saves time and recording costs because multiple assignments aren't necessary each time the loan changes hands.
MERS doesn't own the underlying debt. While MERS then acts as mortgagee, solely as a nominee for the loan owner, in the county land records, it doesn't actually own the debt or hold the promissory note.
A foreclosure is either judicial or nonjudicial, depending on state law and the circumstances. In some judicial foreclosure cases in the past, MERS, solely as a nominee for the loan's owner, was named as the plaintiff in the lawsuit. And MERS was previously sometimes listed as the beneficiary, solely as a nominee for the loan owner, in nonjudicial notices.
Courts are divided on the issue of whether MERS as a nominee may be listed as the plaintiff or beneficiary in foreclosure proceedings.
Some state courts have determined that MERS doesn't have standing to foreclose.
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 (or current loan owner) has such an interest in a foreclosure. In those states, because MERS acts solely as a nominee for the lender, it can't be a plaintiff in a judicial foreclosure. For instance, in 2010, the Maine Supreme Court held that since MERS doesn't own the promissory note, it lacks standing to begin foreclosure proceedings in that state. Consequently, MERS can't be the plaintiff in a foreclosure case in Maine.
Some nonjudicial states, like Washington, have determined that MERS doesn't 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't nonjudicially foreclose a deed of trust in that state because it doesn't own the debt.
In 2011, MERS changed its rules so that foreclosures may no longer be started in its name. So, before the foreclosure starts, MERS assigns the loan back to the lender (or the current owner of the loan). In a judicial foreclosure, the lawsuit is then typically filed in the name of the lender or current loan owner. In a nonjudicial foreclosure, the lender or current owner of the loan is 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, decided that MERS does have standing to foreclose in that state. 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. But 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, subject to a few exceptions in a some states, you generally won't see any more new MERS foreclosures, even in states that previously allowed them.