While MERS has served to illustrate the utter recklessness of the securitization industry, in that its promoters apparently believed that they could implement it nationwide and simply force state law to comply. But as the banks have found out, the law is not always so obliging.
Today, Washington State, which is a non-judical foreclosure state, gave MERS a serious setback. Its finding in Bain v. Metropolitan Mortgage, that MERS may not foreclose in Washington, is not as bad as it sounds, since MERS instructed in servicers to stop foreclosing in its name in 2011. But the reasoning of the ruling is far more damaging. And the court has opened up new grounds for litigation against MERS in Washington, in determining that it false claim to be a beneficiary under a deed of trust is a deception under the state’s Consumer Protection Act (whether that can be proven to have led to injury is a separate matter).
The case came before the Washington Supreme court because it was asked by a Federal district court to address three certifying questions:
Is MERS is a lawful beneficiary with the power to appoint trustees within the deed of trust act if it does not hold the promissory notes secured by the deeds of trust? If no, then:
What is the legal effect of Mortgage Electronic Registration Systems, Inc., acting as an unlawful beneficiary under the terms of Washington’s Deed of Trust Act? and
Can consumers claim violations of the state’s Consumer Protection Act based on MERS having incorrectly claimed it was a beneficiary of a deed of trust?
The answer to the overriding question was indeed “no”. The court’s immediate objection was straightforward. MERS claims not merely to be an electronic registry of deeds, but also to be a beneficiary of the deed of trust. However, as the court points out:
Traditionally, the “beneficiary” of a deed of trust is the lender who has loaned money to the homeowner (or other real property owner). The deed of trust protects the lender by giving the lender the power to nominate a trustee and giving that trustee the power to sell the home if the homeowner’s debt is not paid. Lenders, of course, have long been free to sell that secured debt, typically by selling the promissory note signed by the homeowner. Our deed of trust act, chapter 61.24 RCW, recognizes that the beneficiary of a deed of trust at any one time might not be the original lender. The act gives subsequent holders of the debt the benefit of the act by defining “beneficiary” broadly as “the holder of the instrument or document evidencing the obligations secured by the deed of trust.”
These days, that “instrument or document evidencing the obligations secured by the deed of trust” is a promissory note, a borrower IOU. But MERS executives have said consistently in depositions that MERS has nothing to do with the borrower notes. So under Washington law, it can’t be the beneficiary of the deed of trust and hence can’t foreclose.
The court also rejected the idea that MERS could act as an agent of the lender/noteholder:
But Moss also observed that “[w]e have repeatedly held that a prerequisite of an agency is control of the agent by the principal.” Id. at 402 (emphasis added) (citing McCarty v. King County Med. Serv. Corp., 26 Wn.2d 660, 175 P.2d 653 (1946)). While we have no reason to doubt that the lenders and their assigns control MERS, agency requires a specific principal that is accountable for the acts of its agent. If MERS is an agent, its principals in the two cases before us remain unidentified.12 MERS attempts to sidestep this portion of traditional agency law by pointing to the language in the deeds of trust that describe MERS as “acting solely as a nominee for Lender and Lender’s successors and assigns.” Doc. 131-2, at 2 (Bain deed of trust); Doc. 9-1, at 3 (Selkowitz deed of trust.); e.g., Resp. Br. of MERS at 30 (Bain). But MERS offers no authority for the implicit proposition that the lender’s nomination of MERS as a nominee rises to an agency relationship with successor noteholders.13 MERS fails to identify the entities that control and are accountable for its actions. It has not established that it is an agent for a lawful principal.
As an aside, the funniest bit of MERS’s argument was a dressed up “deadbeat borrower” pleading:
MERS argues, strenuously, that as a matter of public policy it should be allowed to act as the beneficiary of a deed of trust because “the Legislature certainly did not intend for home loans in the State of Washington to become unsecured, or to allow defaulting home loan borrowers to avoid non-judicial foreclosure, through manipulation of the defined terms in the [deed of trust] Act.”
The court was not moved and basically said it was the banks’ fault if they got themselves in the position of not being able to foreclose:
One difficulty is that it is not the plaintiffs that manipulated the terms of the act: it was whoever drafted the forms used in these cases.
But the ruling goes further and picks at the foundations of the MERS system, and not just its role in foreclosures. Most state hew to the view of the 1867 Supreme Court decision, Carpenter v. Longan, that the mortgage cannot be separated from the note, that the mortgage is a “mere accessory” of the note and has to travel with it. The Washington Supreme court focuses on the fact that MERS inserts a new party:
As MERS itself acknowledges, its system changes “a traditional three party deed of trust [into] a four party deed of trust, wherein MERS would act as the contractually agreed upon beneficiary for the lender and its successors and assigns.” MERS Resp. Br. at 20 (Bain). As recently as 2004, learned commentators William Stoebuck and John Weaver could confidently write that “[a] general axiom of mortgage law is that obligation and mortgage cannot be split, meaning that the person who can foreclose the mortgage must be the one to whom the obligation is due.”
The court later states that it is not clear whether MERS split the note and the mortgage; if MERS really is the agent for the noteholder, it is likely no separation occurred.
The court also took a dim view of the diffused responsibilities within the MERS system:
While not before us, we note that this is the nub of this and similar litigation and has caused great concern about possible errors in foreclosures, misrepresentation, and fraud. Under the MERS system, questions of authority and accountability arise, and determining who has authority to negotiate loan modifications and who is accountable for misrepresentation and fraud becomes extraordinarily difficult. The MERS system may be inconsistent with our second objective when interpreting the deed of trust act: that “the process should provide an adequate opportunity for interested parties to prevent wrongful foreclosure.”
The Supreme Court effectively punted on the second question, which was what would be the legal effect of MERS being an unlawful beneficiary under the state’s Deed of Trust Act: “…resolution of the question before us depends on what actually occurred with the loans before us and that evidence is not in the record.”
On the final matter, of whether MERS being an unlawful beneficiary would give rise to claims under the state’s consumer protection laws, the court said it could, depending on the facts of the case:
…we answer the question with a qualified “yes,” depending on whether the homeowner can produce evidence on each element required to prove a CPA claim. The fact that MERS claims to be a beneficiary, when under a plain reading of the statute it was not, presumptively meets the deception element of a CPA action.
The Seattle Times amusingly quoted the MERS attorney complaining that the court respected the law:
Douglas Davies, the local attorney who represented MERS, said the court imposed “the literal language of a dated statute,” reaching a decision that didn’t benefit either borrowers or lenders.
“The Supreme Court has created a chaotic situation and essentially left it to a taxed legislature to come up with a solution,” Davies said in an e-mail late Thursday. “The only certainty that will come from this decision is a plethora of lawsuits that will overburden an already burden[ed] judicial system.”
Funny, the state attorney general apparently didn’t think so, since he wrote a brief supporting the borrower.
Perhaps most interesting is that MERS has taken to settling cases where it gets wind the court might rule against it, deliberately skewing the record to create the impression that its procedures and legal structure enjoy more acceptance from courts than they actually do. Given its recent conservatism, I wonder what led them to hazard a high profile loss. It might be that Washington’s deed of trust is distinctive enough that they thought they could take the chance, in that they could take the position that its implications for other states are very limited. We’ll see soon enough if that assumption is valid.