MERS Mortgages May Be Invalid

A mortgage loan has at least two parts: a note and a mortgage instrument. The note evidences the debt and the mortgage instrument provides an interest in real property as collateral for repayment of the debt. In a non-MERS mortgage loan transaction, the borrower signs a note payable to the lender and a mortgage instrument giving the lender an interest in the property. In a MERS mortgage loan transaction, the borrower signs a note payable to the lender but the mortgage instrument gives the mortgage interest to MERS instead of the lender. This splitting of the note and mortgage may make the mortgage interest invalid, which would make the mortgage loan an unsecured debt.

To see why, it’s helpful to consider a non-MERS loan where the original lender attempts to assign, or sell, only the mortgage interest and not the underlying debt. The original lender in a non-MERS loan owns the debt and has the mortgage interest in the property. It is a fairly universal principle that where a party tries to assign only the mortgage interest, without the underlying debt, the transaction is a nullity. It can’t be done. The putative assignee gets no mortgage interest in the property and acquires no right to foreclose. Logic suggests that if the original lender can’t transfer a mortgage interest to a party that does not have the debt, neither can the borrower. MERS does not make, buy or sell loans. Its sole function is to receive the mortgage interest. Thus, in a MERS mortgage transaction, the mortgage interest is purportedly created in a party that does not also have the underlying debt. This, as we’ve seen, cannot be done.

Of course, MERS and the bank will claim that MERS takes the mortgage interest only as the lender’s “nominee,” whatever that means; MERS mortgages do not define “nominee.” They do, however, usually say things like “MERS is the mortgagee under this security instrument” and “MERS holds only legal title to the interests granted herein.” They also usually purport to give MERS the right to foreclose. This gives the borrower a good argument that the mortgage instrument certainly purports to vest the mortgage interest in MERS. At worst, MERS mortgages are ambiguous on the point, which under the well-known contra proferentem rule, requires the mortgage to be interpreted against the party claiming the mortgage interest.

The Connecticut Supreme Court will be considering this argument regarding the invalidity of MERS mortgages in a case most likely to be heard in the Fall 2011.