Could things change in Arizona in those cases involving mortgageswhere the beneficiary of the deed of trust is listed as MERS? It is possible. It has happened elsewhere such as recently in Michigan.
MERS stands for Mortgage Electronic Registration System (“MERS”). This is a system that was devised by the lending institutions during the flurry of financing that occurred during the first part of the past decade. The lenders realized that, at the speed at which they were selling and buying interests in mortgages and deeds of trust, the various county recorders across the country could not keep up with the volume.
Therefore, the lending industry banned together and formed MERS. Its purpose was twofold.
- The first purpose was for MERS to hold the bare legal title to the property until the debt obligation was paid off.
- The second purpose of listing MERS as the holder of the equitable interest was to keep track of the myriad of sales and assignments of the loans as they were sold between and among various financial and other institutions and bundled and securitized and sold throughout the world.
In a typical transaction the lender bank loaned money to a borrower who in turn owed an obligation of repayment back to the lender. Normally the bank becomes the equitable owner of the property but really the borrower owns the property subject to the interest of the lender who held the bare legal title. The mortgageor deed of trust would be recorded showing the interests of the parties. That changed with MERS.
Rather than showing the bank as the person with the equitable title (i.e. beneficiary of the deed of trust or mortgagee of a mortgage) to the property the banks listed MERS as the beneficial owner and recorded the first transaction with the local county recorder. But MERS never owed the debt and did not even keep possession of the promissory note. When the loan was bought and sold, the banks did not worry about recording those sales and assignments with the county recorder. MERS was alerted to the new transaction which most likely was a sale of the note and deed of trust to another financial institution. MERS kept track of the transactions in the MERS computer system. The participating lenders paid a membership fee to MERS to provide this service. This became especially important when loans started to become packaged and sold and fractional interests sold around the world. MERS tracked the enormous volume of transactions but none of those transactions showed up in the local records. The county recorder‟s offices were essentially bypassed. The original recording to MERS was all that was of public record.
When the mortgage bubble broke and especially foreclosures involving lawsuits starting arising with alarming frequency courts began to look at the situation. Some courts determined that MERS was bypassing the recording statutes.
The courts did not like that idea. Some courts noted that MERS was filing foreclosure actions but it was not the real party in interest. MERS did not own the promissory note or the deed of trust security. The courts began to say MERS is merely a “nominal” party and not the real party in interest. Some court thought that it was improper to allow MERSto do such foreclosures in the name of MERS as opposed to the party that actually owns the promissory note and deed of trust. Some courts started requiring MERS to trace every transaction and have the real party in interest bring the court action. Those courts determined that the latest owner of the loan should be the party bringing the action. That began to cause tremendous consternation for all the real owners of loans that were nominally held in the name of MERS.
So far states like Arizona that deal with deeds of trust as opposed to mortgages seem to not be affected by the MERS situation. However, recently a Michigan court took a new tact. Michigan, like Arizona, uses primarily a non-judicial process to “foreclose” on is loan documents. However, the Michigan Court of Appeals held that if MERS was involved the court would require the matter be conducted through a judicial lawsuit and MERS would be required to trace the transaction and produce the documentation to support the fact of who the real owner of the loan is. Thus the real party in interest would have to be involved in the suit. Often times due to the whirligig of purchases and sales documentation did not always keep up and got lost. That could cause the current owner to be unable to maintain a judicial foreclosure since part of such a lawsuit is to prove the plaintiff is the owner of the beneficial interest which is done by producing the original loan documents.
The Michigan court found that MERS did not own the debt because it had no interest in the promissory note. MERS is a mere nominee of convenience. Therefore the Michigan Court of Appeals held that MERS could not be the foreclosing party. The court said, that being the case, MERS had no right to initiate a deed of trust sale. Those are the same type of sales that are conducted in Arizona in virtually every foreclosure of a parcel of residential property. So could Arizona be next?
Will such a ruling soon affect the way deeds of trust are “foreclosed” in Arizona without the use of a judicial action? Itcould happen. We need to stay tuned.