| Homeowners Challenge Mortgage Electronic Registration Systems (MERS) Ability To Enforce The Mortgages It Administers |
| Posted: January 28, 2010 |
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Homeowners have begun to successfully challenge mortgage servicers’ standing to foreclose in their own name. Rule 17(a) of the Federal Rules of Civil Procedure requires that an action be prosecuted in the name of the real party in interest. Homeowners, as detailed below in the Nevada cases, have begun arguing and have had some success challenging a mortgage servicer’s standing by asserting that the servicer is not the “real party in interest.”
In March 2009, Mortgage Electronic Registration Systems (MERS), filed suit in 27 different cases against Nevada homeowners. MERS serves as the mortgagee of record for lenders, investors and their loan servicers in the county land records. MERS was a system created to streamline mortgage transfers eliminating the need to file assignments in the county land records, which lowers costs for lenders and consumers by reducing county recording revenues from real estate transfers and provides a central source of information and tracking for mortgage loans.
The Nevada Bankruptcy Court held that MERS did not meet the requirements for standing pursuant to Federal Rule of Civil Procedure 17(a) and ruled against MERS in In re Mitchell, which was designated the lead case for the 27 separate cases before it. See In re Mitchell, No. 07-16336-LBR, 2009 W.L. 1044368 (Bankr. D. Nev. March 31, 2009). The homeowners argued that MERS was not the owner of the beneficial interest in the note or mortgage. In denying standing, the court found that MERS failed to present sufficient evidence to establish it had the right to bring the motions to lift the automatic stay itself or as an agent for the beneficial owners of the mortgages.
In December 2009, MERS appealed the bankruptcy court’s ruling against it to the U.S. District Court for the District of Nevada, arguing that it was a beneficiary under the deeds of trust. See In re Medina, No. 09-00670-KDF-GWF, 2009 WL 4823387, *2 (D. Nev. Dec. 4, 2009). The United States District Court affirmed the bankruptcy court’s order denying MERS’ standing. The court pointed to MERS’ admission that it does not actually receive or forfeit money when borrowers fail to make their payments. Additionally, the court determined that MERS was not a beneficiary under the agreement and was not a “real party in interest”. The court went on to hold that that because MERS was not a beneficiary under the agreement, it was required to show an evidence of an agency relationship. MERS failed to provide the requisite evidence because it did not show that it was the agent for the current beneficial owner of the mortgage. Instead it presented documents showing that it was the agent for the original lender. Id.
However, the United States Bankruptcy Court for the District of Hawaii addressed a similar issue in October 2009 in Countrywide Home Loans Inc. v. Wilkerson. Countrywide No. 09-00360 JMS/KSC, 2009 WL 3614526, *3 (D. Hawaii Oct. 27, 2009). In Countrywide, a servicer of a mortgage removed a prepetition foreclosure action to the bankruptcy court and moved for summary judgment. The bankruptcy court, later affirmed by the district court, held that the servicer provided sufficient evidence to establish constitutional standing when it produced a physical copy of the mortgage Id. at *4.
Initially, the servicer filed suit in its own name rather than in the name of the beneficial owner of the mortgage. As such, the same issues presented in Mitchell applied since the claim was not “in the name of the real party in interest.” Fed. R. Civ. P. 17(a)(1). However, in the Countrywide case, the beneficial owner of the mortgage took advantage of an opportunity to correct its agent’s mistake and ratified the actions of the servicer after the defendants objected to its lack of prudential standing. Wilkerson, 2009 W.L. 3613526 at *4. As a result, the district court found that the case could not be dismissed for lack of standing.
In reading these cases together, it is apparent that servicers and agents such as MERS have the ability to bring suit on behalf of the beneficial owner of the mortgage where there is sufficient evidence to prove that an agency relationship exists or where the beneficial owner of the mortgage is joined or ratifies. However, these cases serve as a warning that an agent such as MERS must be prepared to present specific, detailed evidence of its authority to act for its principal in bankruptcy cases.
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