Post-Silverberg, MERS in New York
In today’s world of mortgages many banks and lending institutions subscribe to the convenience of Mortgage Electronic Registration Systems, Inc. (hereinafter MERS). MERS is a national database registry system for participating lending institutions, which avoids the many different local recording regulations and processes that have grown to be burdensome and costly for banks. MERS allows a lending institution to assign its powers to MERS, most commonly that of recording and assigning of residential mortgages, so that a lending institution need not worry about personally performing those tasks in accordance with the many different and changing local recording processes. In these mortgages MERS is a delegated nominee of the mortgagee, and MERS is able to perform certain functions as nominee as were agreed to at closing between the borrower and bank. (There are always dozens of different riders and agreements that are signed at a closing, in addition to the note and mortgage, so it is imperative to understand each one entirely before signing.)
MERS intended to streamline and reduce the delays of recording, transferring, and assignment of ownership interests. The MERS system also facilitated the pooling of many loans into packages that could be sold to investors as securities. Additionally, MERS participants can avoid the local recording fees of all their mortgages because MERS keeps record of the mortgage in its national database. Unfortunately, the immediate benefits to using MERS have direct consequences that adversely impact borrowers and the recording localities.
Since MERS is always the mortgagee of record when recording or transferring the loans there is no ability for the owner to understand who the true owner of the note is. MERS’ national database is not part of local county records and the database only tracks transfers of the mortgage. Furthermore, the localities are deprived of recording fees which are depended upon as a source of revenue. Ultimately, MERS in theory is a great concept, but unfortunately, it only benefits lending institutions while forcing local governments and borrowers to bear the costs and burdens.
New York Standing Requirements to Foreclosure
In a majority of mortgages in New York, MERS is the system the banks utilize to transfer the mortgage. As a result, MERS mortgages always leave open the possible defense that can be made, which is lack of standing. In New York, in order to proceed with a mortgage foreclosure, the foreclosing institution must possess both the note and mortgage at the time of commencing the foreclosure. This is called standing and is required to commence a foreclosure proceeding. Many lending institutions that commence foreclosure proceedings are not the original lenders, but acquired the ability to foreclose through what is called an assignment of the note and mortgage.
A valid assignment can be effectuated by either physical delivery of the note or by a written assignment of the note before commencement of a foreclosure proceeding. Silverberg v. Bank of New York, 86 A.D.3d 274, 281 (2011). Assignees proceeding to foreclose upon a note may do so even though they were only assigned the note, but not the mortgage. This is so because the mortgage, as a matter of law, passes as an incident to a note’s assignment. Id. at 280. However, if a lender assigns only the mortgage, but not the note, then this plaintiff lacks standing, which is required to commence a foreclosure proceeding. Id. at 538. The plaintiff foreclosing on the note needs to either physically possess the note or have a valid assignment of the note. In sum, if a note is not properly assigned, then the future assignee may not have standing to maintain a foreclosure proceeding until that assignment is effectuated.
In one particular case, a borrower argued there was an invalid assignment of the note and mortgage because MERS never actually held the note. It is important to note that MERS is not required to possess the note; only the plaintiff foreclosing is required to possess the note or a valid assignment of such. See Rachel Sherman, Court in Suffolk County New York Holds that Bank that Held Note and Mortgage by Way of Assignment from the Original Lender and MERS had Standing in Foreclosure Action, REFin Blog (January 29, 2013), http://refinblog.com/court-in-suffolk-county-new-york-holds-that-bank-that-held-note-and-mortgage-by-way-of-assignment-from-the-original-lender-and-mers-had-standing-in-foreclosure-action.
The court dismissed this argument and declared that there was a valid assignment by MERS because the mortgage document language named MERS as the mortgagee of record, and the mortgage granted MERS the rights associated with the lender, which included the right to “‘exercise any and all’ of the interests granted by the borrower under the mortgage, ‘including but not limited to, the right to foreclose and sell the property; and to take any action required of the lender.” US Bank N.A. v. Flynn, Misc.3d 802, 829 (N.Y. Sup. Ct. Suffolk Cnty. 2010). The court held that MERS did not have to hold the note, but merely needed the authority to transfer the same, which it had. Id.
Include Defenses in the Answer
Before proceeding further into recent New York case law on MERS assignment standing issues, it is important to inform homeowners that this lack of standing defense can be waived! U.S. Nat. Ass’n v. Said, 38 Misc. 3d 1214(A) (N.Y. Sup. Ct. 2013); See CPLR § 3211 [e]; U.S. Bank, N.A. v. Denaro, 98 AD3d 964, 965 (App. Div. 2d Dep’t 2012); Wells Fargo Bank Minnesota, N.A. v. Mastropaolo, 42 AD3d 239, 244 (App. Div. 2d Dept 2007). If a homeowner does not assert lack of standing in an answer or in a pre-answer motion to dismiss, then courts consider this defense waived by the homeowner.
Thus, it is imperative to remember to include this defense, if proper, in the homeowner’s answer or any pre-answer motions to dismiss. As an aside, there is currently legislation struggling to pass the New York Senate. This proposed legislation may change the law and possibly carve out an exception, solely in mortgage foreclosures, to allow homeowners to assert the lack of standing defense at any time during the foreclosure process. See 2011 NY Assembly Bill A629D.
Silverberg and What it Means for Homeowners
In Silverberg, the court discussed how a MERS mortgage assignee did not have the power to foreclose on the borrower’s property because MERS was never the actual holder of the note. Additionally, a subsequent consolidation agreement in that case only specified that MERS had authority, as assignee, to record and assign the mortgages, not the notes. Therefore, absent MERS providing proof it had title to, or the power to, subsequently assign the note, the assignee lacked standing to foreclose on the property.
Interestingly there is no consensus, post-Silverberg, as to whether a MERS mortgage by its very nature is per-se defective. Some courts distinguish Silverberg by looking at the documents as a whole as well as the surrounding circumstances to determine whether MERS had authority to assign the note and mortgage. These courts focus on the general intent of the lender and borrower to determine MERS’ authority in the particular transaction.
For example, Deutsche Bank National Trust Company v. Pietranico, 928 N.Y.S. 2d 818 (Sup. Ct. Suffolk Cnty. 2011) upheld a MERS mortgage assignment where the subsequent lender acquired the note, but did not physically possess the mortgage. The borrower argued that her mortgage, which was a part of a Pooling and Servicing agreement (PSA), was not validly assigned to the plaintiff now seeking foreclosure. The court dismissed the borrower’s argument because the court found that so long as there is proper assignment of the note, the lender need not physically possess the mortgage as well because MERS holds the mortgage as a common agent for any of its members who presently hold the note. Furthermore, the court explained that according to the principle-incident rule that the mortgage would pass, as a matter of law, to the subsequent note holder.
The court noted that the prevailing principle of general intent between the parties should control. See also IndyMac Federal Bank, FSB v. Meisels, 961 N.Y.S. 2d 358 (Sup. Ct. Kings Cnty. 2012) (noting that a proper assignment need not adhere to a special form or language, but need only contain language that shows an intent to bestow a right to transfer). The court stated that the PSA in conjunction with the MERS agreement and mortgage document, which the borrower and lender signed and agreed to, allowed MERS to hold the mortgage and act as a common agent for a subsequent lender note-holder seeking to foreclose. The growing trend of cases that argue in favor of splitting up the note and mortgage due to defective assignments would thus leave “the note unsecured and ‘confer[ ] an unwarranted windfall on the mortgagor.’” Id. at 836.
On the other hand, there are other courts, more in conformity with Silverberg, which require express provisions in a MERS agreement or mortgage which authorizes MERS to assign and transfer the mortgage, and more importantly, the mortgage note. In re Lippold, 457 B.R. 293 (Bankr. S.D.N.Y. 2011); See HSBC Bank USA, N.A. v. Taher, 932 N.Y.S.2d 760 (Sup. Ct. Kings Cty. 2011) (limiting MERS assigning powers to those expressly enumerated in the MERS agreement); Agard v. Select Portfolio Servicing, Inc., 2012 WL 1043690 (E.D.N.Y. 2012) (noting that MERS is not given authority to assign a mortgage merely from the facts such as naming MERS as a “nominee”, MERS’ membership rules, or New York’s agency laws).
The court in Lippold explained that MERS only had the authority to assign the mortgage, as evidenced by the mortgage document, but not the power to assign the note. Further, the plaintiff-assignee failed to offer any proof that the plaintiff-assignee possessed the note. Thus, the court noted that although the alleged assignment attempts to assign the note and mortgage, MERS never had the authority to transfer the note, and thus the assignment is a nullity.
Similarly, the court in U.S. Bank Nat. Ass’n v. Dellarmo, 942 N.Y.S.2d 122, 125 (N.Y. App. Div 2d Dep’t 2012), held that much like in Silverberg, here a plaintiff does not have standing to foreclose when it did not have a proper assignment of the note. The court dismissed the plaintiff’s suit because MERS had attempted to assign the mortgage without the note. As the court reiterated, Silverberg and the prevailing New York law is that an assignment of the mortgage without the note is a nullity. The valid note holder, as the court discussed, determines who has power to commence a foreclosure proceeding.
The general consensus is that homeowners may be able to contest these MERS mortgages where the note was never actually assigned, either physically or through a valid written assignment, before the date the lending institution commences a foreclosure action. Although a valid assignment of the note will allow MERS assignees to subsequently commence foreclosure actions, Silverberg provides some optimism to distressed homeowners by recognizing another possible defense, among many, in the foreclosure proceeding.
Post-Silverberg case law has been on both sides of the fence. Some courts scrutinize the MERS agreement and hold that general language bestowing authority upon MERS is insufficient to grant MERS the power to assign the note and mortgage. On the other hand, other cases have established that by looking at all of the documents as a whole the court can determine whether the general intent of the parties was to bestow MERS with authority to assign a note and mortgage in a particular transaction. Post-Silverberg case law is all over the map, MERS mortgages and the outcome of each individual case depends on which side of the fence that particular courtroom subscribes to.
The main thing to remember about foreclosure proceedings is that there are opportunities for valid defenses in many different stages of the proceeding. These defenses may delay the proceedings, or in some instances, dismiss them. While a delay of a foreclosure proceeding may not be viewed as a victory to some homeowners, it does put significant pressure on the lending institutions to make more favorable modification agreements to the borrower during the foreclosure process or risk losing the potential ability to foreclose altogether.
The Law Office of Ronald P. Weiss, P.C. can help you, our consultations are free, the advice may be invaluable.
Contact us by phone at (631) 271-3737, or e-mail us at [email protected] for a free consultation to discuss your legal options in terms of stopping or preventing foreclosure.
Article By: Patrick E. Fedun Jr. for the exclusive use by Law Office of Ronald D. Weiss, P.C.