When a bank wants to repossess or foreclose a property from a bankruptcy filer, it must be relieved from the automatic stay (given by 11 USC §362) by the court. The lenders can resume their collection activities once they get permission from the court.
Select Portfolio Servicing (SPS) wanted to foreclose a mortgage on a property of a Chapter 7 debtor which was in the trust hold of First Franklin Mortgage Loan Trust. The debtor had objected to the SPS’s motion for automatic stay relief, saying that the Mortgage Electronic Registration System (MERS) was unable to prove an enforceable right towards the property because of a lack of enforceable and valid interest in the mortgage.
There are many requirements of recording for secured loans in the states, “Perfection” being one of the most common terms. In order to attach a lien to the subject property, it must be perfected. “Perfection” and “Recorded with the County (or state)” are synonymous with one another. In case of improper recording, the lien does not get attached to the property and is unsecured like a credit card. This means that there will be no mortgage payment and no taking of the homestead by the lender.
The recording of liens and any subsequent assignments of interest was done by the banks for years. However, the banks started selling mortgage notes a number of times by 1995. Consequently, a publicly-traded company, MERS, came into being which offered a new solution for the issue of assignment recording to the bank: proper recording of the initial lien and then assigning the interest to MERS. The buying and selling of the mortgage notes in the house will then be done by MERS without assignment recording. The nomination of servicers for the collection of unpaid mortgage notes will also be done MERS. The things became much easier for the lenders because of this method.
The New York court had considered the issue and had blatantly stated, “This Court does not accept the argument that because MERS may be involved with 50% of all residential mortgages in the country, that is reason enough for this Court to turn a blind eye to the fact that this process does not comply with the law.” The entity, requesting permission for foreclosure, must be the note and mortgage holder as per the court’s requirement. However, in this case, MERS and the U.S. bank lacked the evidence of valid holding of the note or mortgage. They couldn’t even prove valid recording of transfers with the county or state which is required to remain secure. The court of New York also made it compulsory for all MERS involving loans to prove their ownership of both mortgage and note before asking permission for relief from the automatic stay.
Moreover, there are huge implications involved beyond this single bankruptcy case. In case, notes and mortgages are lost and MERS is found to be an invalid way of lien assignment, it will cause an absence of basis of perfection for thousands of loans and all those mortgage liens will become unsecured debts. In such circumstances, the borrowers in Florida would be able to file a Chapter 7 bankruptcy, get the unsecured mortgages discharged and keep their house. However, the banks would be severely affected and would also suffer a loss of millions of dollars of home backed loans.
To learn more about secured assets and MERS in bankruptcy, contact the Recovery Law Group (best in Los Angeles & Dallas, TX) at www.recoverylawgroup.com or on 888-297-6203.