Why Suing MERS for Wrongful Foreclosure Is Not Working In California
Many clients have approached our law firm requesting representation to sue MERS for wrongful foreclosure. However, based on how the California Courts have dealt with MERS litigation, we are not taking MERS cases as this time. This web page is intended to give clients a thorough explanation of MERS and MERS litigation.
Be warned that this is a comprehensive legal analysis that cites the case law involved – this is no light reading! The reason our firm is providing such an in depth legal analysis on our web page is because many homeowners have requested representation by our attorneys in MERS lawsuits and we have turned them down. We are refusing these cases not because we don’t want to work hard, but because we don’t want to take your money for a project for which we can’t deliver results.
Read on to learn more about why our firm believes these lawsuits are not practical in the current judicial climate.
What Is MERS?
Mortgage Electronic Registration Systems, Inc. (MERS) is a privately held company that operates an electronic registry designed to track servicing rights and ownership of mortgage loans in the United States. The purpose of MERS is to be a servicer of the loan; it allows the mortgage to be traded amongst MERS members without recording the assignment of the mortgage at the county recorder’s office.
By being the servicer of the loan, it stays in charge of dealings that arise out of the mortgage, regardless of whether the mortgage has changed hands since the loan originated. It keeps track of the assignments through its internal database — it assigns a unique 18-digit number to each loan so that it can be tracked through out its duration, from origination to securitization to pay off. Along with this Mortgage Identification Number, MERS also provides homeowners with a Servicer ID, which allows homeowners to contact the servicer of their loan regarding issues with the mortgage. The servicer of the mortgage handles the day-to-day task associated with managing the loan. Even after the mortgage has been repeatedly assigned, MERS stays as the servicer of the loan.
Why Is MERS in the News?
As home prices plummeted and unemployment increased, many homeowners could not afford to keep up with their mortgage payments. Having negative equity in their homes and unable to pay the mortgage, many homeowners faced foreclosure. However, many mortgages had been securitized and sold in the open market to investors. MERS was authorized by the lenders to conduct foreclosure against non-paying homeowners. Homeowners facing foreclosure brought lawsuits arguing the ability of MERS to foreclose on their property.
Common Arguments Brought By Homeowners Against MERS and the Court Reaction
The following are common arguments against MERS foreclosures and how Courts in California have dealt with those arguments. This explanation deals with Northern California specifically, since that is where our law firm offices are primarily located.
1. MERS CANNOT PRODUCE THE NOTE AND DEED OF TRUST, SO IT CAN’T FORECLOSE
To foreclose on a property one needs to show that it has the authority to do so. The Deed of Trust (DOT) and the Note must be present with any agency trying to foreclose. See Bellistri v. Ocwen Loan Servicing, LLC, 284 SW 3d 619, (Mo. Ct. App., 5th Div. 2009). Since many mortgages were securitized and sold away – no one person would have the deed of trust and the note – providing no one with a secured interest in the property. “The note and mortgage are inseparable; the former as essential, the latter as an incident. An assignment of the note carries the mortgage with it, while an assignment of the latter alone is a nullity.” Carpenter v. Longan, 83 US 271 (1873). Those possessing the DOT without the Note would leave no secured interest in the property. In many cases, the DOT was packaged away while the Note stayed with the servicer, in such cases other lenders who received the Deed of Trust without the Note would not be able to foreclose.
How the Court Denied This Argument
Homeowners have challenged MERS’ authority to nonjudicially foreclose by asking it to present evidence that it possesses the original note. They argue that without possessing the original note, MERS does not have the power to foreclose. However, California courts have repeatedly reiterated that possession of the note is not required to proceed with a nonjudicial foreclosure. See Nool v. Home Q Servicing, 653 F. Supp 1047, (E.D. Cal. 2009); see also Candelo v. NDEX West, LLC. 2008 WL 5382259; see alsoPhilips v. MERS, Inc. 2009 WL 3233865 (E.D. Cal 2009), quoting “it’s not even necessary for the party commencing the non judicial foreclosure to be in possession of the original note;” see also Pagtalunan v. Reunion Mortgage Inc., 2009 WL 961995, (N.D.Cal.2009). Looking into the exhaustive procedural requirements of the Civil Code, the eastern district said “there is no requirement for the production of the original note to initiate a non judicial foreclosure” Manlangit v. Natnl. City Mortg. Co., 2010 WL 2044687, (E.D. Cal. 2010) quoting Oliver v. Countrywide Home Loans, Inc., 2009 WL 3122573 (E.D. Cal. 2009). The northern district maintains the same stance, “Production of the original note is not required to proceed with a non-judicial foreclosure.” Pagtalunan v. Reunion Mortg. Inc., 2009 WL 961995 (N.D.Cal.2009), quoted again in several cases, for ex., Stemplewski v. SunTRUST Mortg., Inc., (N.D. Cal, 2010), Edwards v. Aurora Loan Services, LLC, (E.D. Cal. 2011).
The Appellate Court further generally reaffirmed MERS’ ability to initiate a lawsuit in Gomes by going through the history of the statutory nonjudicial foreclosure scheme and reaffirming its requirements to be exhaustive. “By asserting a right to bring a court action to determine whether the owner of the Note has authorized its nominee to initiate the foreclosure process, homeowners are attempting to interject the courts into this comprehensive nonjudicial scheme.” Id. at 1154. Since the statutory scheme does not require possession of the original note, the courts have consistently rejected the notion that the party initiating the nonjudicial foreclosure has to present evidence of possessing the original note. Any change to the statutory scheme has to come through the legislature, which has made no action towards changing the scheme. Under California law, there is no requirement for the party initiating the foreclosure to show by proof of evidence that it possesses the original note in order to foreclose a property.
2. MERS IS NOT A BENEFICIARY OF THE LOAN SO IT CAN’T FORECLOSE
If both the Deed of Trust and the Note recognize the lender as the beneficiary, then MERS is just a servicer of the loan. When the mortgage is securitized and sold, then the subsequent investors may not be aware that their mortgage-backed securities contain a non-paying mortgage. However, MERS, as the servicer of the loan, may be aware of the deficiency. Homeowners argue that MERS does not have an actual, justiciable interest because it’s not a beneficiary of the loan. Only the owner of the security interest has a justiciable interest on which relief can be granted. Since MERS is a servicer it only provides clerical duties and cannot sue without showing any harm to it.
The reasoning behind this stems from Rule 19 of the Federal Rules of Civil Procedure that the owner of the mortgage has to be necessarily joined to the suit. Otherwise the beneficiary can sue after MERS has collected and res judicata would not stop the suit. That would make the homeowner liable to two parties for his single debt. Hence, the beneficiary of the trust is a necessary party to the suit and the rules of joinder require his involvement. F.R.C.P. Rule 19. Since MERS does not track the loan amongst individual investors – it may not be able to join the individual investors as necessary parties leaving the Court with no party to who relief may be granted.
How the Court Denied This Argument
Homeowners have also challenged MERS’ ability to initiate a non judicial foreclosure by arguing that MERS is not a real party in interest and it’s just a servicing agent. They argue that MERS is just a record keeper — it has clerical duties and it does not have standing to foreclose. However, courts have consistently found that MERS has standing to foreclose as the nominee of the lender. See Manlangit, 2010 WL 2044687 (E.D. Cal. 2010); Pfannelstiel v. MERS, Inc. 2009 WL 347716 (E.D. Cal. 2009). California Civil Code Section 2924, subdivision (a)(1) states that a “trustee, mortgagee, or beneficiary, or any of their authorized agents may initiate the foreclosure process.” (Gomes, 192 Cal. App. 4th at 1157-58; emphasis in original). The code specifically authorizes an agent of the trustee, mortgagee or beneficiary to initiate a foreclosure.
Courts have consistently found that MERS is an authorized agent of the lender or trustee and have allowed it commence non judicial foreclosures. See for e.g. Morgera v. Countrywide Home Loans, Inc. (E.D. Cal. 2010), see also Gomes (2011). In many instances, the DOT specifically lists MERS as a beneficiary – in which case borrowers have contractually given the power of sale to MERS. In those cases, a look at the DOT would end the dispute as to whether MERS has the ability to foreclose, because the DOT expressly gives MERS the ability to do so. However, MERS can initiate foreclosure simply because it’s a servicing agent.
Looking into the exhaustive nonjudicial foreclosure requirements in California Civil Code, the eastern district said, “there is not stated requirement in California’s non judicial foreclosure scheme that requires a beneficial interest in the note to foreclose.” Manlangit, 2010 WL 2044687. Even if MERS only does clerical duties, it still has the authority to commence nonjudicial foreclosure because it need not have a beneficiary interest to foreclose. Simply being an authorized agent gives MERS the ability to initiate foreclosure. See Castaneda v. Saxon Mortgage Servs, Inc. 687 F. Supp. 2d 1191, 1198 (E.D. Cal 2009). In Gomes, the appellate court held that under California law, MERS may initiate a foreclosure as the nominee, or agent, of the noteholder. Gomes, 192 Cal. App. 4th at 1157-58. Hence, California courts looking to the statutory scheme have found no requirement that MERS needs to have a beneficiary interest to foreclose.
3. SECURITIZATION MAKES THE HOME UNSECURED, SO FORECLOSURE IS NOT POSSIBLE
Homeowners also argue that securitization creates an unsecured debt. There’s no specific creditor who by himself or herself would have a security interest. The lien created by the mortgage has been securitized away, leaving no one person with a lien on the property. The investors just have unsecured debts, and no one person has the ability to foreclose.
How the Court Denied This Argument
Homeowner plaintiffs “contend that none of the defendants have the authority to foreclose because their loan was packaged and resold in the secondary market, and none of the defendants can affirmatively prove they have an interest in the note. The argument that parties lose their interest in a home when it’s assigned to a trust pool has been rejected by many district courts.” Hafiz v. Greenpoint Mortg. Funding, Inc., 652 F. Supp. 2d 1039, (N.D. Cal 2009); Bentham v. Aurora Loan Servs. 2009 WL 288032 (N.D. Cal 2009); Oliver v. Countrywide Home Loans, Inc. 2009 WL 3122573 (E.D. Cal 2009). Contentions that the homeowner does not have to pay because the mortgagee because the mortgage was sold in a secondary market ring a hollow bell with the court. “A mortgagor of real property can not without paying his debt quiet title against the mortgagee.” Miller v. Provost, 26 Cal.App.4th 1703, 1707 (1994). Insisting that MERS, or lenders, do not have the authority to foreclose because they packaged and sold the mortgage is a circuitous way of pleading Issue 1 again. It asks them to produce evidence that they have the Note and the DOT. However, Issue 1 analysis clearly iterates that there is no such requirement and cites several authorities for support.
Analysis of Other Issues of General Concern
Many homeowners have thrown allegations at MERS, and mortgage lenders in general, accusing them of fraud and breach of the covenant of good faith and fair dealing, which is implicit in any contract. Generally, these accusations are added on after the principal issue concerning DOT’s and the authority of the lender or the servicer to foreclose. California courts have been generally dismissive of such complaints and each is discussed in brief below.
Breach of Implied Covenant of Good Faith and Fair Dealing
As a general rule, every contract imposes upon each party a duty of good faith and fair dealing in its performance and enforcement. “The implied covenant is a supplement to an existing contract, and thus it does not require the parties to negotiate in good faith prior to any agreement.” McClain v. Octagon Plaza, LLC, 159 Cal.App.4th 784, 798, (2008); Hafiz, 652 F. Supp at 1046 (N.D. Cal. 2009). In many cases homeowners have looked at the predatory lending practices of lenders and alleged a breach the covenant of good faith and fair dealing.
In Hafiz, the complaint included, for instance, ““failure to disclose to plaintiff that she was likely to default because of the lack of affordability of the loan.” Even if such allegations could be construed as legally colorable claims, they still speak to the formation of the contract, rather than its performance or enforcement, and are thus defective.” Id. Breach of the covenant of good faith and fair dealing is a legal term of art and refers only to such breaches during the enforcement of the contract. Pre contractual negotiations are excluded from it. A complaint that the lender practiced unfair lending practices during pre contractual negotiations does not provide a legal remedy based on a breach of the implied covenant of good faith and fair dealing, which is implicit in every contract.
The elements of a fraud claim are: (1) defendant misrepresents or conceals material facts; (2) with knowledge of the falsity of the representations or the duty of disclosure; (3) with intent to defraud or induce reliance; (4) which induces justifiable reliance by the plaintiff; (5) to his or her detriment. Hahn v. Mirda, 147 Cal.App.4th 740, 748 (2007). In order to prevail, the plaintiff must allege and prove that he or she actually relied upon the misrepresentations and, in the absence of fraud, would not have entered into the contract or transaction. Mega Life & Health Ins. Co. v. Superior Court, 172 Cal.App.4th 1522, 1530 (2009). FRCP 9(b) provides that in all averments of fraud or mistake, the circumstances constituting fraud or mistake must be stated with particularity. For a complaint to plead fraud, it must point with specificity which incidents it’s referring to and cannot generally claim fraud. The complaint must show scienter with particularity.
In Hafiz, (N.D. Cal. 2009) and in Edwards v. Aurora Loan Services, LLC, (E.D. Cal. 2011), courts held that for fraud to be constituted from non disclosure of certain loan provisions – there needs to be a fiduciary duty between the lender and the borrower. “Furthermore, … it is well-settled [in prevailing law] that lenders and creditors are ordinarily not fiduciaries of borrower-customers.” Nymark v. Fed. Heart Savings and Loan Ass’n. 231 Cal.App.3d 1089 (1991). Non disclosure of loan provisions is an omission which may be actionable only if there is a duty owed by the lender to the borrower. However, no such duty exists between lenders and borrowers.