Merscorp Inc., operator of the electronic-registration system that contains about half of all U.S. home mortgages, has the right to foreclose on defaulted borrowers in California, a state appeals court ruled.
U.S. courts have differed in recent years on whether Merscorp’s Mortgage Electronic Registration Systems, or MERS, unit has the right to bring a foreclosure action.
“Under California law MERS may initiate a foreclosure as the nominee, or agent, of the noteholder,” California Court of Appeal Justice Joan K. Irion in San Diego wrote in a Feb. 18 ruling.
Merscorp, based in Reston, Virginia, and owned by Fannie Mae, Freddie Mac, JPMorgan Chase & Co. and other mortgage- industry companies, said in a Feb. 16 announcement that it will propose a rule change to stop members from foreclosing in its name.
“It’s incorrect,” Ehud Gersten, the San Diego lawyer who brought the suit on behalf of the borrower, Jose Gomes, said of the ruling in a phone interview today. “I disagree with it completely.”
Gersten said he will appeal the decision.
Flood of Transfers
Merscorp was created in 1995 to improve servicing after county offices couldn’t deal with the flood of mortgage transfers, Karmela Lejarde, a MERS spokeswoman, said in an interview last year. MERS tracks servicing rights and ownership interests in mortgage loans on its electronic registry, allowing banks to buy and sell the loans without having to record the transfer with the county.
“The California decision validates the MERS process and procedures that we’ve used in nonjudicial states for many years,” Lejarde said in a statement today, referring to states such as California that don’t require court intervention to conduct foreclosures.
John L. O’Brien, the register of deeds for the southern part of Massachusetts’s Essex County, said in a statement yesterday that MERS has cost his district $22 million in recording fees, based on 148,663 MERS mortgages since 1998. O’Brien said he would forward that information to state Attorney General Martha Coakley. Coakley is investigating MERS, according to the Boston Globe in December. Amie Breton, a spokeswoman for Coakley, declined to comment.
Upheld Ruling
The California appeals court upheld a ruling that went against Gomes, who sued in 2009 to have the court declare that MERS couldn’t foreclose because the noteholder didn’t authorize it to. Gomes borrowed $331,000 in 2004 and was sent a notice of default in 2009, according to Irion’s decision.
The court, which heard arguments on the Gomes case the same day it released its decision, said that under the state’s “nonjudicial scheme” Gomes can’t bring such a lawsuit.
“Nowhere does the statute provide for a judicial action to determine whether the person initiating the foreclosure process is indeed authorized, and we see no ground for implying such an action,” wrote Irion, who was joined in her decision by the two other judges on the panel.
Asking MERS to demonstrate it has the right to foreclose “would be inconsistent with the policy behind nonjudicial foreclosure of providing a quick, inexpensive and efficient remedy” and would allow lawsuits to delay foreclosures, the judge wrote.
‘Speculative Suit’
Gomes didn’t allege any facts to suggest MERS lacked the right to foreclose, Irion said, calling his case “a speculative suit.” The state legislature would have to act to allow such litigation, she said.
Gomes also agreed, by signing the deed of trust securing the promissory note for the loan, that MERS had the authority to foreclose, the court said.
“Essentially, the Court of Appeal is saying that once somebody starts to foreclose,” borrowers “can’t seek any right from or question that person,” Gersten said in the interview. “The beneficiary under the deed of trust can authorize MERS to foreclose but they never did that. We don’t know who the beneficiary is.”
On Feb. 15, the appeals court ruled for MERS in a similar case brought by borrower Nancy G. Jimenez. Gersten, who also represents Jimenez, said he will appeal that decision.
MERS members have moved away from closing in MERS’s name because of confusion over its standing, Christopher L. Peterson, a law professor at the University of Utah in Salt Lake City who has written several articles on MERS, said in an interview last week.
‘Created Confusion’
MERS halted foreclosures in its name in Florida in 2006, according to rules on its website. Violation of the rule, which remains in effect, costs $10,000. Former Merscorp Chief Executive Officer R.K. Arnold said in a September 2009 deposition in an Alabama foreclosure case that MERS made that change because of a Florida court decision that “created confusion about whether we could” foreclose.
Merscorp announced Arnold’s retirement on Jan. 22.
The case is Gomes v. Countrywide Home Loans Inc., D057005, California Court of Appeal (San Diego).
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