ATTORNEYS AT LAW

NEWSLETTER 

Representing the Mortgage Banking Industry Statewide in New York

Managing Nationwide Through Outsourcing

 Volume Seven, Issue One - February 2006 - Quarterly Newsletter

Court Rules on Recording of MERS Mortgages, Assignments and Discharges

“The Court Giveth and the Court Taketh Away”

By Margaret Tarab, Esq.

Three years after the Suffolk County Clerk declared that he would no longer accept instruments for filing that listed Mortgage Electronic Registration Systems, Inc. (MERS) as nominee for the lender, Supreme Court Justice James M. Catterson rendered a decision in the case of Merscorp, Inc. v. Edward P. Romaine, NYLJ 6-17-04, p.21, col. 1. In his decision, Judge Catterson writes that it is the duty of the CountyClerk to record MERS mortgages under New York’s Real Property Actions and Proceedings Law. However, Judge Catterson goes on to say that MERS assignments and discharges of mortgage are a violation of New York’s Real Property Law. The saga in New York started back on April 5, 2001 when (in response to an inquiry from the Nassau County Attorney’s office) the New York State Attorney General’s Office issued Informal Opinion number 2001-2. The opinion stated that the CountyClerk was under no obligation to record mortgages where MERS is listed as the mortgagee because doing so violated the terms of N.Y. Real Property Law Sec. 316 and frustrated the legislative intent of the Real Property Law. Relying on the opinion, the Suffolk County Clerk issued a directive on May 1, 2001 stating that his office would not accept MERS documents for recording where MERS has no legal interest in the mortgage. Merscorp commenced this action and simultaneously moved for a preliminary injunction to compel the Suffolk County Clerk to record MERS instruments. The Supreme Court denied the request for the preliminary injunction, which denial was reversed by the Appellate Division, Second Department. Merscorp.Inc., et al. v. Romaine, et al., 295 A.D. 2d 431, 743 N.Y.S 2d.562 (2d Dept. 2002).In the motions before Judge Catterson, Merscorp.sought a writ of mandamus to compel the Suffolk County Clerk to record instruments where MERS is listed as mortgagee and for judgment declaring that MERS documents are valid. In his ultimate decision, Judge Catterson gives some background on the origin of MERS, an explanation of how MERS operates, and also discusses the recording provisions of New York’s Real Property Law and the purpose behind the recording act (NY R.P.L. Sec. 316-a). Judge Catterson’s decision is then broken into two distinct parts: MERS Mortgages and MERS Assignments and Discharges. It is here where “the Court giveth and the Court taketh away.” MERS Mortgages: The Suffolk County Clerk took the position that labeling an entity such as MERS as “mortgagee” when that entity has no interest in the mortgage or underlying property, is misleading as MERS is not the true mortgagee, but a nominee of the mortgagee. The Clerk further argued that MERS’ lack of interest in the mortgage and\or the land renders the conveyance itself improper. The Clerk conceded that he had a duty to accept and record conveyances. However, he relied on an 1884 case, and argued that said duty did not extend to conveyances that are not “perfect in form”. (Putnam v. Stewart, 97 N.Y. 411, 416, 1884 WL 12453.) The Clerk defended his position that recording mortgage documents under MERS’ name “will corrupt the integrity of the public records and cause the public system to degenerate into a mass of unreliable and incomplete filings.” Merscorp., Inc. v. Edward P. Romaine, NYLJ p 21., col. 2. Judge Catterson was not swayed by the Clerk’s position. Rather, the Judge focused on the purpose of the recording act B to alert the public to the fact that a particular property is encumbered by a mortgage, regardless of who the mortgagee is. The MERS mortgages meet that criteria. Additionally, the argument that MERS is not a proper mortgagee is undone by NY Real Property Actions and Proceedings Law Sec. 1921(9)(a) which defines a mortgagee as a current holder of the mortgage or the agent of the current holder of the mortgage. Judge Catterson concluded that since MERS can legally be named the agent of the lender, under the RPAPL, MERS mortgages are not defective by their denomination as such. Accordingly, Judge Catterson found no legal basis for the Clerk’s contention that an agent must have an interest in either the mortgage or the property for it to act as an agent. The decision also addressed the Clerk’s reliance on the 1884 Putnam case regarding conveyances that are not perfect in form. The Putnam Court had stated, and Judge Catterson reiterated, that the CountyClerk’s role in the recording of conveyances is merely ministerial and the Clerk has no power or authority to make legal determinations as to the validity of the underlying conveyances. Judge Catterson went on to state that the recording of MERS documents is not illegal, improper, confusing or misleading. The decision further addressed the last of the Clerk’s arguments B that MERS mortgages appear to be an attempt to separate the debt (the note) from the security interest (the mortgage) because the mortgage lists MERS as nominee for lender, but the note only provides the name of the lender. Again, Judge Catterson was not persuaded and concluded that MERS’ intention is merely to be listed as agent of the lender, not the actual owner and holder of the mortgage itself. So far, so good for lenders and fans of MERS. Read on: MERS Assignments and Discharges: One of the benefits to being a MERS member or a mortgagor with a MERS mortgage is the possibility of missed or incorrect assignments causing an unclear chain of title is avoided. This then reduces the costs for the preparation and recording of correction assignments. Overall, the use of MERS reduces the cost to the consumer and to the mortgage industry. Nevertheless, Judge Catterson decided that the MERS system of transferring an interest in a mortgage is a violation of New York’s Real Property Law. Per Judge Catterson’s decision, the purpose behind the recording act is to preserve and keep a record of conveyances. Judge Catterson states that this “is perverted if not completely obliterated” by MERS mortgages, where the underlying transfers of interest are not of public record. The danger in not having these transfers of public record is especially problematic when a satisfaction or discharge is presented. As there is no recorded chain of assignments, there is no way of determining if the entity executing the document is the holder of the mortgage. Citing Irvmor Corporation v. Rodewald, 253 N.Y. 472, 475, 171 N.E.2d 747,748 (1930), Judge Catterson writes that if MERS acts as agent for a lender for purposes of an assignment or discharge, and the principal is not disclosed, then MERS will become bound as the principal for the purpose of executing the instrument. However, MERS has no interest in the mortgage or the land, therefore both documents would be worthless since executed by an entity with no authority to execute same. Further, citing Real Property Law Section 321(3), Judge Catterson stated that a discharge or satisfaction must include the full assignment chain, thereby assuring that the satisfaction or discharge is executed by the entity who holds the mortgage and is entitled to execute the document. MERS satisfactions list only the last lender’s name, which Judge Catterson believes eliminates the protection of RPL Section 321 (1)(b). The fact that MERS provides a toll free number on its documents which provides information regarding the servicer of the loan, is not the same as the public record envisioned by the drafters of the Real Property Law. Accordingly, Judge Catterson concluded that the Suffolk County Clerk is under no obligation to accept MERS assignments and\or discharges for recording, as doing so would be in violation of the mandates of the Real Property Law. What this means to the mortgage industry: If this decision is adopted in other counties, the time and costs sought to be avoided when MERS was developed will once again be bourne by the mortgage industry, and ultimately by the consumer. Even more problematic, are those mortgages already given to MERS as nominee for a lender (perfectly valid under the first section of the decision) and then assigned multiple times without assignments having been recorded. These mortgages cannot be satisfied of record until multiple assignments are executed and recorded. The task of procuring these assignments would certainly be time consuming at best. In many instances, lenders may no longer be in existence and obtaining an assignment from them could virtually be impossible. There may be no way of finding who might have signing authority for such entity. While such a delay could prove costly to the mortgage industry, the consumer will ultimately be the one who suffers, as they will not be able to record a satisfaction or discharge of their mortgage. Judge Catterson’s decision does not address these scenarios that are likely to take place. Moreover, how foreclosure actions will fare remains to be seen. Where MERS is the named plaintiff, Lenders should be prepared to obtain and provide assignments out of MERS (as well as the ownership chain while in MERS). The costs and burdens facing the mortgage industry and the consumer are very real, but only time will tell.

  MOVE OVER GREEN GOBLIN-

HERE COMES MANUFACTURED HOUSING IN NEW YORK

By Craig Wolfson, Esq. and Cynthia A. Nierer, Esq.

 Look! Up in the sky! Is it a bird? Is it a plane? No! It’s Manufactured Housing Man! Coming this fall to the big screen is the super hero (with the large neon green “MH” on his chest) who saves lenders and servicers from the woes of manufactured housing! Alright—so it’s not Spider Man, the Hulk or Cat Woman. But—it would allow the mortgage industry to take a break from reality all the same! The very words—manufactured housing—is enough to make any lender or servicer shudder. But the reality is that manufactured housing is just as easy to handle as real property. Or, maybe the better statement is that manufactured housing is no more difficult to deal with than real property—the issues are just different. And, if one looks closely, sometimes there are even benefits when dealing with a manufactured home that one doesn’t have with real property matters. Sometimes. Most everyone is aware of the first true hurdle that has to be dealt with—the determination of whether the manufactured home is attached to the land or not. If it cannot be definitively determined whether or not the home is mobile, a determination by the Court is necessary. There is no clear definition of what an attached manufactured home is. The Courts look to various items but the essential question is: has the manufactured home been permanently modified so as to alter its character as a mobile building? The answer will determine whether you proceed with a “regular” foreclosure or if you have to move forward with a replevin action to obtain possession of the manufactured home. Once you can move forward with your legal action another unique feature of manufactured housing becomes apparent. Unlike real property foreclosures (in which case law is in abundance) there are very few published decisions pertaining to manufactured homes. Thus, the practitioner has little authority to rely on in his/her Court pleadings. However, this can be an advantage. It is an opportunity for the mortgage industry and the creative attorney to chart the course and establish precedent! One of the more unique aspects of the replevin process is found when we are dealing with a manufactured home located on an Indian Reservation. In the upstate New York area there are many Indian Reservations. Upstate New York is also the area within the State that harbors the majority of our manufactured homes. Here we need to work with both the Indian Sheriff and the CountySheriff (which, in some cases, have completely different or competing requirements) and both the Tribal Court and the State Court (which requires compliance with two entirely different Court systems). Another unique aspect of the replevin process is the importance of the Department of Motor Vehicles (DMV). In order for the bank to proceed with a replevin there must be a filed lien (a copy of same is required in order to proceed). In some cases this is evidenced by a Uniform Commercial Code filing with the Secretary of State. In most cases, the manufactured home liens are filed with the DMV. Obtaining a copy of the Notice of Recorded Lien from the DMV can be a lengthy process. From the initial request up until the time that we obtain the copy of the Notice of Recorded Lien it can take six to eight weeks. However, even the DMV cannot alter the short timeframe from receipt of the file to the completion of the action. Despite the delay if DMV needs to be involved, most cases are completed in less than six months. As anyone familiar with New York timeframes knows, this is a welcome difference from the average 8-12 months a typical mortgage foreclosure can take. Related to the shorter timeframes is the fact that very few borrowers contest the action. The borrowers seem much more willing to turn over the manufactured home to the bank and abandon the subject premises. One can only speculate as to why— perhaps it’s due to the small loan amount and/or the lack of equity. But at some point, many manufactured home owners just walk away. Of course we run into some interesting scenarios that require out of the box thinking. We recently had a situation where the Sheriff refused to seize a manufactured home just because there were six rottweillers tied up in front of the home. No one at the Sheriff’s office, the local animal control office, or the CountyAttorney's office were willing to deal with the homeowner’s “security system”. We returned to Court, and requested that the Judge issue a directive which required the Sheriff to take any means necessary to remove the dogs to allow our client access to the premises. The Sheriff then complied. What is important to note about this scenario is that it really had nothing to do with the fact that we were dealing with a manufactured home. This same situation would have occurred even if we were dealing with a single family house. While I am by no means minimizing the difficulty of dealing with manufactured housing I think it is important to realize that it isn’t impossible to deal with. Much of it is just different. And since there is no “Manufactured Housing Man” running around in leotards saving the mortgage industry we have no choice but to learn, fight and save ourselves.