Title Standard Spotlight
Articles from The Massachusetts Focus
Newsletter of Stewart Title Guaranty Company, Massachusetts Offices
Winter 2007, Volume 6, Number 1
Title Standard Spotlight
by Ward P. Graham, New England Division Counsel
REBA Title Standard No. 72 – Dealing with Discharges, etc., of Mortgage Electronic Registration System (“MERS”) Mortgages
I'm sure all of you, at one time or another, have had to deal with a discharge, assignment, etc., of a so-called “MERS mortgage.” There are several questions that arise. First, “Who or what is MERS and what is a MERS mortgage?” Second, “Who is the proper party to be executing a discharge, assignment, partial release, subordination, modification or amendment of a MERS mortgage?”
Who Or What Is MERS And What Is A MERS Mortgage?
You will find about as much information about Mortgage Electronic Registration System, Inc., as you’d ever want by cruising their website at www.mersinc.org/. If you click on the “About Us” tab on the homepage, MERS offers the following succinct description of the MERS system:
MERS was created by the mortgage banking industry to streamline the mortgage process by using electronic commerce to eliminate paper. Our mission is to register every mortgage loan in the United States on the MERS® System.
Beneficiaries of MERS include mortgage originators, servicers, warehouse lenders, wholesale lenders, retail lenders, document custodians, settlement agents, title companies, insurers, investors, county recorders and consumers.
MERS acts as nominee in the county land records for the lender and servicer. Any loan registered on the MERS® System is inoculated against future assignments because MERS remains the nominal mortgagee no matter how many times servicing is traded. MERS as original mortgagee (MOM) is approved by Fannie Mae, Freddie Mac, Ginnie Mae, FHA and VA, California and Utah Housing Finance Agencies, as well as all of the major Wall Street rating agencies.
MERS becomes the mortgage holder of record in one of two ways. The first method is by an assignment from a lender or servicer to MERS. According to MERS, this method is usually associated with bulk transfers of servicing. The second method is with the “Lender” (i.e., usually the loan originating lender) naming MERS as the mortgagee of record as nominee for itself (and its successors and assigns) in the original security instrument (mortgage) at the time the loan is closed. MERS affectionately refers to this second option as “MOM”: MERS as Original Mortgagee. It is the second method, the so-called “MOM” mortgage, that you have been seeing and/or will continue to see most often.
In a standard form MOM mortgage, which is primarily a modification of the standard Fannie Mae form of mortgage with which you are likely familiar, the relationship between the borrower, the Lender and MERS is spelled out on the first and third pages of the mortgage form. On the first page, the borrower is specified by name and is referred to as “the mortgagor under this Security Instrument.” MERS is identified as follows: ““MERS” is Mortgage Electronic Registration Systems, Inc. MERS is a separate corporation that is acting solely as a nominee for Lender and Lender’s successors and assigns. MERS is the mortgagee under this Security Instrument. MERS is organized and existing under the laws of Delaware, and has an address and telephone number of P.O. Box 2026, Flint, MI 48501-2026, tel. (888) 679-MERS.” On the first page, the Lender is named together with its business address.
On the third page, the “MOM” mortgage gets more into describing the relationship between these parties. It provides:
This Security Instrument secures to Lender: (i) the repayment of the Loan, and all renewals, extensions and modifications of the Note; and (ii) the performance of Borrower’s covenants and agreements under this Security Instrument and the Note. For this purpose, Borrower does hereby mortgage, grant and convey to MERS (solely as nominee for Lender and Lender’s successors and assigns) and to the successors and assigns of MERS, the [mortgaged property].
TOGETHER WITH all the improvements now or hereafter erected on the property, and all easements, appurtenances, and fixtures now or hereafter a part of the property. All replacements and additions shall also be covered by this Security Instrument. All of the foregoing is referred to in this Security Instrument as the “Property.” Borrower understands and agrees that MERS holds only legal title to the interests granted by Borrower in this Security Instrument, but, if necessary to comply with law or custom, MERS (as nominee for Lender and Lender’s successors and assigns) has the right: to exercise any or all of those interests, including, but not limited to, the right to foreclose and sell the Property; and to take any action required of Lender including, but not limited to, releasing and canceling this Security Instrument. [Italics added for emphasis.]
It is primarily this latter paragraph that MERS asserts is the basis upon which it has the full rights of a traditional mortgagee to deal with the mortgage, not only for purposes of assigning, discharging, partially releasing, subordinating, etc., but also for purposes of foreclosing. Indeed, the Land Court Guidelines for MERS mortgages looks to the italicized language of this paragraph to determine if a MERS mortgage can be accepted for registration and can be noted as the mortgagee of record for registered land.
What is the problem that REBA Title Standard No. 72 was passed to correct?
As you might imagine, the best intentions of the lending industry in creating MERS and the off-record, electronic tracking of mortgage assignments, note holders and mortgage servicers are not always fulfilled. Indeed, it is not uncommon for discharges, assignments and other documents that are supposed to be executed by MERS in accordance with the MERS system itself and the conditions of membership to which every member lender is bound, to end up being executed by the off-record holder of the note who is usually not the original Lender named in the MERS mortgage or in an assignment to MERS.
In essence, the very lenders who set up and/or actively participate in the MERS system are the ones who ignore their own system and try to deal with their MERS mortgages on their own. This creates title issues because, under the MERS system and under the MERS mortgages themselves, MERS is the mortgagee and the only one entitled to deal with and execute documents associated with that mortgage. Even as it relates to foreclosures of MERS mortgages, MERS’s own guidelines require that the MERS mortgage be assigned to the then-current Lender (off-record holder of the note) in the event that such Lender wants to conduct the foreclosure itself.
Unfortunately, the same is true in order to perfect a discharge, assignment, etc., from the Lender, whether original or a subsequent off-record assignee or successor to the note. Either you need a confirmatory instrument directly from MERS or you need an assignment from MERS to the Lender that executed the instrument in question. In the case of a discharge or partial release, if you cannot, for some reason, obtain the confirmatory instrument or assignment from MERS, it would also be possible to look at using the curative procedures provided for in the New Mortgage Discharge Law (Chapter 63 of the Acts of 2006).
The other common issue that arises relates to MERS executing a discharge, assignment, etc., either without mentioning the original Lender or the current Lender at all or mentioning the current Lender who is not the original Lender. Given the terms of the “MOM” mortgage discussed above, this ought not to be much of a problem because of the plain language in the “MOM” mortgage concerning MERS’s ability to deal with the mortgage in these situations. However, many practitioners have been unsure as to whether a MERS discharge or assignment (the documents most commonly at issue) that fails to mention the original Lender or any Lender renders the instrument defective. Sometimes an issue arises where there is no nominor Lender recited in the original MERS mortgage or in an assignment of a non-MERS mortgage to MERS, although the latter certainly occurs more frequently than the former.
Title Standard No. 72
Recognizing that, under the terms of the MERS mortgage itself and by virtue of the assignment of a non-MERS mortgage to MERS, in either instance, MERS is the legal title holder of that mortgage, REBA has promulgated Title Standard No. 72 to deal with the issue of MERS mortgage related instruments executed by MERS but failing to mention the original Lender or any Lender. Title Standard No. 72, entitled “Mortgage Instruments - Identification of Nominor (MERS)” was adopted on May 8, 2006, and provides:
A recorded instrument executed only by Mortgage Electronic Registration Systems, Inc. (MERS) discharging, assigning, partially releasing, subordinating, modifying or amending a mortgage, which is held of record by MERS, either as original mortgagee or as assignee of said mortgage, is not on that account defective, whether or not a “Lender” is designated or defined in the instrument whereby MERS acquires such interest and regardless of whether the same lender, if designated in the acquisition instrument, or any lender, is recited in the subsequent instrument, provided that said subsequent instrument is otherwise satisfactory under G.L.c.183, §54B.
As a result of this new title standard, practitioners no longer need worry about the impact on an instrument executed by MERS that doesn’t mention the original Lender, the current Lender or any Lender at all. This title standard also confirms that, where MERS is the mortgagee but solely in the capacity of nominee for a Lender and the Lender, not MERS, is the note holder, the failure of the Lender to join in a discharge, assignment, partial release, etc., does not constitute a title defect.
Similarly, the title standard also confirms that it is not a title problem if the instrument by which MERS obtained its mortgage interest failed to specify the Lender for whom MERS will be acting as nominee. In the case of a “MOM” mortgage, the failure to name a Lender will likely be a mistake and this title standard helps to avoid the necessity of having to obtain a confirmatory mortgage or even a scrivener’s error affidavit for the simple reason that the very nature of a “MOM” mortgage makes identification of whoever the Lender is that MERS is nominee for at any given point in time irrelevant for purposes of MERS’s status as record mortgagee and for purposes of documents executed by MERS as record holder of the mortgage. In the case of a mortgage assignment to MERS failing to specify what Lender MERS is to be nominee for, the result is that MERS will hold the mortgage outright and can deal with it as any other record mortgagee could (although as to the actual nominor Lender, MERS has certain off-record contractual obligations under the MERS system by which it must abide).
Support from Land Court Guideline No. 42 Regarding MERS Mortgages
The Comment to Title Standard No. 72 not only provides its own brief explanation of the MERS system but also refers practitioners to a further discussion of MERS mortgages in Land Court Guideline No. 42, which was mentioned above. This Guideline provides additional support for the approach taken in the title standard.
The Guideline expressly recognizes that “MERS becomes mortgagee of record in one of two ways: the first is by an assignment from a lender or servicer to MERS; the second is by being the mortgagee of record as nominee in the original security instrument when the loan is closed.” While the Guideline provides that a MERS mortgage must contain the language discussed above in order to entitle MERS to be considered the mortgagee, the Guideline also states that an assignment of a mortgage to MERS need not contain such language. Recognizing MERS’s legal title interest as the mortgage holder without the necessity of including the nominor Lender, the Guideline goes on the provide, “In either case the holder of the mortgage on the Encumbrance Sheet will be listed as Mortgage Electronic Registration System, Inc., without any reference to the institution for which MERS is holding the mortgage.”
This title standard is fairly limited in its scope but it should serve to remove uncertainty and doubts about the efficacy of the types of MERS instruments discussed in the standard and who is entitled to execute those instruments so as to eliminate disagreements among practitioners over these issues and, thereby, clear property titles dependent upon these instruments and facilitate the mortgage financing and conveyancing of those properties.
1 For a more elaborate description of the MERS system and how it works “behind the scenes,” there is an excellent overview in an article written by a company by the name of InnoVest Resource Management in April, 2003, and is, for the time being at least, available online at http://www.foreclosureforum.com/articles/0304MERS.html. This article also provides information on how to contact MERS if you’re looking for information on a MERS mortgage or the off-record holder of the note. For an even more detailed description of the MERS system and its background, see the Introduction portion of the MERS State by State Recommended Foreclosure Procedures Manual (2002 Ed.), which can be downloaded in Adobe “pdf” format from the list of MERS Manuals at their website by clicking on “MERS System” then “Manuals” from a drop-down list or by going directly to http://www.mersinc.com/MersProducts/manuals.aspx?mpid=1. [Back to Text]
2 For a copy of a sample of the MERS “MOM” mortgage, feel free to contact the Stewart Title Legal Department or you can access a copy on the MERS website by clicking on “MERS System” then “Forms” from the drop-down list and then scroll down the forms list to “Sample Mortgage” or try the following link to get there directly: http://www.mersinc.com/MersProducts/forms.aspx?mpid=1. This list of forms can also be accessed for locating sample forms for Discharges and Assignments involving MERS. [Back to Text]
3 MERS has had some problems in foreclosing MERS mortgages in the State of Florida, but that seems to be based upon the particular wording of the foreclosure statutes in that state, which require that the actual noteholder be the one to foreclose the mortgage, which, of course, MERS is not. MERS is appealing the Florida state court injunctions that have issued on a number of MERS mortgage foreclosures there. However, from my research, MERS does not seem to be having any problem in this regard in any other states, including Massachusetts. [Back to Text]
4 See Land Court Guideline No. 42. Note that the Land Court Guidelines for Registered Land promulgated in May, 2002, can be found at the following link: http://www.mass.gov/courts/courtsandjudges/courts/landcourt/green.pdf. [Back to Text]
5 Membership requirements and the conditions of membership can also be found on the MERS website. [Back to Text]
6 See MERS State by State Recommended Foreclosure Procedures Manual (2002 Ed.), p. 7. [Back to Text]
7 At first blush, MERS mortgages and the MERS system of off-record assignments of mortgage notes to assignees who are not the holder of the mortgage as well seem to violate our traditional notion that “the mortgage follows the note.” This notion is likely derived from cases such as Pineo v. White, 320 Mass. 487, 489, 70 N.E.2d 294, 296 (1946)(“The payment of the mortgage notes at or before maturity, or the due performance of any other condition that is expressed in the mortgage, terminates the interests of the mortgagee without any formal release or discharge and revests the legal title in the mortgagor.”), Negron v. Gordon, 373 Mass. 199, 204, 366 N.E.2d 241, 244 (1977)(“It is only for the purpose of securing the debt that the mortgagee is to be considered the owner of the property.”), and Maglione v. BancBoston Mortgage Corp., 29 Mass.App.Ct. 88, 90, 557 N.E.2d 756, 757 (1990)(“Although a mortgage vests title, that title is defeasible and is an off-shoot of the underlying debt. ‘[T]he debt,’ as the venerable maxim puts it, ‘is the principal and the mortgage an incident . . . .’ ”). However, this is really a function of identifying the contract between the parties and their respective rights and obligations under that contract. Baker v. James, 280 Mass. 43, 46, 181 N.E. 861 (1932)(The note, the mortgage and the trust instrument should be read and construed together in order to ascertain the contract made by the parties.”) Given the specific language contained in the MERS mortgage regarding the rights, obligations and powers of MERS, the Lender and the Borrower, the approach taken by the title standard and Land Court Guideline No. 42 in recognizing MERS as the mortgage holder of record for the purposes recited in the standard and the guideline is in no way repugnant to the traditional notion. [Back to Text]
8 See footnote 4 and the text accompanying it. [Back to Text]