Jackson v. Mortgage Electronic Reg. Sys., No. A08-397.

• Decision Date: 13 August 2009
• Docket Number: No. A08-397.
• Parties: Jewelean JACKSON, Ethylon Brown, William Brown, Brenda Doane, and David Williams, on behalf of themselves and all others similarly situated, Plaintiffs, v. MORTGAGE ELECTRONIC REGISTRATION SYSTEMS, INC., and Richard W. Stanek, in his official capacity as Sheriff of Hennepin County, Defendants.
• Court: Minnesota Supreme Court

770 N.W.2d 487

Jewelean JACKSON, Ethylon Brown, William Brown, Brenda Doane, and David Williams, on behalf of themselves and all others similarly situated, Plaintiffs, v. MORTGAGE ELECTRONIC REGISTRATION SYSTEMS, INC., and Richard W. Stanek, in his official capacity as Sheriff of Hennepin County, Defendants.

No. A08-397.

Supreme Court of Minnesota.

August 13, 2009.

Amber M. Hawkins, Galen Robinson, Colleen Daly, Legal Aid Society of Minneapolis, Minneapolis, MN; and William H. Crowder, Vildan A. Teske, Kathleen Finnegan Lamey, Crowder Teske, PLLP, St. Paul, MN, for plaintiffs.

Melissa Briggs, Eric Halperin, Daniel Mosteller, The Center for Responsible Lending, Washington D.C., of counsel for plaintiffs.

Robert J. Pratte, Sonya Braunschweig, DLA Piper U.S. LLP, Minneapolis, MN, for defendant Mortgage Electronic Registration Systems, Inc.

Myron Orfield, Geneva Finn, University of Minnesota, Minneapolis, MN, for amici curiae Myron Orfield, Minneapolis Urban League, Jewish Community Action, and ACORN Housing Corporation.

Marc D. Simpson, David A. Applebaum, Leonard, Street and Deinard, Minneapolis, MN, for amici curiae American Land Title Association and Minnesota Land Title Association.

OPINION

ANDERSON, PAUL H., Justice.

This case comes to us as a certified question from the United States District Court for the District of Minnesota. The reformulated question is:

Where an entity, such as defendant [Mortgage Electronic Registration Systems, Inc.], serves as mortgagee of record as nominee for a lender and that lender's successors and assigns and there has been no assignment of the mortgage itself, is an assignment of the ownership of the underlying indebtedness for which the mortgage serves as security an assignment that must be recorded prior to the commencement of a mortgage foreclosure by advertisement under Minn.Stat. ch. 580?

Our answer to the federal district court's question turns on the legal question of what constitutes an assignment of a mortgage within the meaning of Minnesota's foreclosure by advertisement statutory scheme. We answer the certified question in the negative, holding that transfers of the underlying indebtedness do not have to be recorded to foreclosure a mortgage by advertisement under Minn.Stat. §§ 580.02 and 580.04 (2006).

The facts of this case are for the most part undisputed. The four named plaintiffs are property owners whose property is in various stages of the mortgage foreclosure process. Each plaintiff's foreclosure was instituted on behalf of the defendant, Mortgage Electronic Registration Systems, Inc. (MERS).¹ The plaintiffs claim that MERS has failed to record assignments of their mortgages as required for foreclosure by advertisement under Minnesota Statutes §§ 580.02 and 580.04.

MERS is an electronic registration system that was created in the aftermath of the 1993 savings and loan crisis. MERS does not originate, lend, service, or invest in home mortgage loans. Instead, MERS acts as the nominal mortgagee for the loans owned by its members. The MERS system is designed to allow its members, which include originators, lenders, servicers, and investors, to assign home mortgage loans without having to record each transfer in the local land recording offices where the real estate securing the mortgage is located. MERS members pay subscriber fees to register on the MERS system, as well as other fees on each loan registered and each transaction conducted.

MERS was designed to improve the efficiency and profitability of the primary and secondary mortgage markets. The primary market in the home mortgage industry largely consists of mortgage loans made to consumers. The loans are evidenced by a promissory note and secured by a security instrument—typically a mortgage deed or deed of trust. The originating lender routinely sells the mortgage loans on the secondary market to investors such as the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac). Selling the loans provides income for the originator to finance more loans. Once on the secondary market, the loans may be sold several times or bundled into mortgage-backed securities.

Traditionally, each mortgage loan transfer on the primary and secondary market included an assignment of the security instrument that could be recorded in the local land recording office where the real estate securing the mortgage loan is located. According to MERS, multiple assignments of the security instrument commonly caused confusion, delays, and chain-of-title problems. In an effort to streamline the assignment process, MERS essentially privatized part of the mortgage recording system. Participants in the mortgage industry can subscribe as members on the MERS system. A loan held by a member is registered in the MERS database. Once registered, MERS serves as the mortgagee of record for all loans in its system. More specifically, MERS is the nominal mortgagee for the lender and any successors and assigns. When the security instrument is recorded, the local land records list MERS as the mortgagee.

The benefit of naming MERS as the nominal mortgagee of record is that when the member transfers an interest in a mortgage loan to another MERS member, MERS privately tracks the assignment within its system but remains the mortgagee of record. According to MERS, this system "saves lenders time and money, and reduces paperwork, by eliminating the need to prepare and record assignments when trading loans."

There is limited information in the record on the language used for transfers of loans within the MERS system. Publicly available documents, namely pooling and servicing agreements filed with the Securities and Exchange Commission, suggest that when loans are transferred between MERS members, an assignment of the promissory note is executed but an assignment of the security instrument is not— although the original security instrument is physically delivered along with the promissory note.²

A side effect of the MERS system is that a transfer of an interest in a mortgage loan between two MERS members is unknown to those outside the MERS system. If, on the other hand, a MERS member transfers an interest in a mortgage loan to a non-MERS member, MERS no longer acts as the mortgagee of record and an assignment of the security instrument to the non-MERS member is drafted, executed, and typically recorded in the local land recording office.

When documentation is necessary, such as for an assignment to a non-MERS member, MERS does not draft or execute the paperwork on behalf of its members. Rather, MERS instructs its members to have someone on their own staff become a certified MERS officer with authority to sign on behalf of MERS. This procedure allows the member that owns the indebtedness to assign or foreclose the mortgage loan in the name of MERS, eliminating the need to either work through a third party or to execute an assignment of the security instrument from MERS back to the member.

When MERS began having mortgages recorded in its name as nominal mortgagee, questions arose in certain jurisdictions as to whether MERS had the authority to act on behalf of its members. See, e.g., MERSCORP, Inc. v. Romaine, 8 N.Y.3d 90, 828 N.Y.S.2d 266, 861 N.E.2d 81, 82-83 (2006). As a result of questions raised about the MERS system, the Minnesota Legislature passed an amendment to the Recording Act that expressly permits nominees to record "[a]n assignment, satisfaction, release, or power of attorney to foreclose." Act of Apr. 6, 2004, ch. 153, § 2, 2004 Minn. Laws 76, 76-77 (codified at Minn.Stat. § 507.413 (2008)). The amendment, frequently called "the MERS statute," went into effect on August 1, 2004. Id., § 2, 2004 Minn. Laws at 76-77. The MERS statute provides that:

An assignment, satisfaction, release, or power of attorney to foreclose is entitled to be recorded in the office of the county recorder or filed with the registrar of titles and is sufficient to assign, satisfy, release, or authorize the foreclosure of a mortgage if:

(1) a mortgage is granted to a mortgagee as nominee or agent for a third party identified in the mortgage, and the third party's successors and assigns;

(2) a subsequent assignment, satisfaction, release of the mortgage, or power of attorney to foreclose the mortgage, is executed by the mortgagee or the third party, its successors or assigns; and

(3) the assignment, satisfaction, release, or power of attorney to foreclose is in recordable form.

Minn.Stat. § 507.413(a).

MERS asserts that it is currently the nominal mortgagee on approximately two-thirds of all "newly originated" residential loans nationwide. There is evidence in the record which reflects that in 2006 MERS was the mortgagee of record in approximately 40% of the foreclosures processed in and around the Minneapolis/St. Paul metropolitan area. Michael Grover, Fedled research reveals need for better Twin Cities foreclosure data, 4 Community Dividend (2006), http://www.minneapol isfed.org/publications_papers/pub_display. cfm?id=2200.

MERS is the mortgagee of record for the named plaintiffs in this case. Each named plaintiff executed a promissory note in favor of the originating lender and a mortgage deed using the "Minnesota-Single Family-Fannie Mae/Freddie Mac UNIFORM INSTRUMENT WITH MERS" form. This mortgage deed form designates MERS as the mortgagee of record "acting solely as a nominee for Lender and Lender's successors and assigns." The form lists the original lender, secures performance to the lender, and grants MERS, solely as nominee, the power of sale. The form also contains language that reserves to the lender the power to protect, discharge, or invoke the power of sale.

After the plaintiffs defaulted on their loan payments, MERS instituted foreclosure by advertisement proceedings against the plaintiffs. The records at the local land recording offices and the notices of foreclosure sale...