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What's missing from Delaware's settlement with MERS?

newsandinsight.thomsonreuters.comJuly 17, 2012

By Alison Frankel

When Delaware Attorney General Beau Biden filed his suit against the Mortgage Electronic Registration Systems last October, I wrote that the complaint should cause shivers in the securitization industry. Biden's suit didn't just assert that MERS didn't have standing to bring foreclosure actions, it also claimed that MERS-held mortgages had been improperly bundled into mortgage-backed securities, since insufficiently documented loans were erroneously transferred to securitization trusts. If Biden was right, I said at the time, the entire model for mortgage-backed securitization would be threatened.

It looks like Biden was wrong. On Friday, Delaware agreed to a settlement with MERS that makes absolutely no mention of Biden's securitization allegations. (And, for that matter, it doesn't seem to require much of MERS beyond what the bank-created registry has previously agreed to do.) That's because, in the words of MERS spokeswoman Janis Smith, "There is absolutely nothing at all to the premise that MERS is responsible for securitization failures."

According to MERS, the flaw in Biden's reasoning (and that of New York Attorney General Eric Schneiderman) is that it doesn't account for the distinction between mortgage notes and mortgage liens. Mortgage notes are the actual debt obligations that are transferred to MBS trusts in securitization deals. Mortgage liens, on the other hand, are rights to the underlying property. MERS typically holds title to mortgage liens whose notes have been securitized. In response to assertions of incomplete transfers in MBS deals, MERS and its lawyers at Morgan, Lewis & Bockius have repeatedly argued that title to the liens does not have to be transferred to securitization trusts along with the notes.

In the Delaware case, Chancellor Leo Strine of Chancery Court never reached a ruling on MERS's motion to dismiss, so we don't know how he would have analyzed the AG's securitization allegations. (He was, according to my Reuters colleague Tom Hals, very skeptical of some of the AG's other claims.) But last May the 4th Circuit Court of Appeals, in a case called Horvath v. Bank of New York, rejected a homeowner's claim that a securitization trustee could not foreclose on his property because it held only the note and not the mortgage lien, which was held by MERS. The appeals court clearly distinguished between notes, which are transferable debt interests, and mortgage liens, and found that one does not have to accompany the other in a securitization. (In Massachusetts, the state's highest court recently ruled that to initiate foreclosure, lien owners must also hold mortgage notes, or at least be assigned the right to act by noteholders. But that's another story.)

Unless some other court takes a different view of MERS's place in the securitization process -- which is basically the passive role of holding title to mortgage liens -- MERS is ready and able to aid securitization if the market for residential mortgage-backed securities ever rebounds, according to spokeswoman Smith. "The status quo for the MERS business model remains in place," she said. "MERS can continue to play the role it plays as mortgagee."

I emailed a spokesman for the Delaware AG but didn't hear back.


Back to July 2012 Archive

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