On November 28, 2011, the United States District Court for the District of Massachusetts issued a decision in Culhane v. Aurora Loan Services of Nebraska, regarding the legal standing of Mortgage Electronic Registration Systems, Inc. (“MERS”). In a case involving MERS’ legal capacity to hold and assign residential mortgages in Massachusetts, the Court upheld the MERS System, MERS’ legal title in the mortgage, its assignment of the mortgage to the loan servicer, and the servicer’s resulting power to foreclose under the statutory power of sale.

Under the facts of the case, the homeowner (“Culhane”) executed a promissory note to Preferred Financial Group, Inc. (“Preferred”), which was secured by a mortgage to MERS as nominee for Preferred. The mortgage was recorded. The note was subsequently transferred to Deutsche Bank Trust Company Americas (“Deutsche”), as trustee for a securitization, with Aurora Loan Services of Nebraska (“Aurora”) appointed as the loan servicer. When the loan went into default, MERS assigned the mortgage to Aurora and the assignment was recorded. Aurora gave the requisite notices of its intent to foreclose under the Massachusetts statute.

After several extensions and a failed attempt to modify the loan under the Home Affordable Modification Program (“HAMP”), Culhane brought an action against Aurora and filed a motion for a temporary restraining order to stop the foreclosure sale. The questions before the Court, in a motion for summary judgment by Aurora, were whether MERS had properly assigned the mortgage and, if so, whether Aurora otherwise had standing to foreclose under the statutory power of sale.

In brief, the issues considered were whether the note and mortgage could be separated; if separated, whether they needed to be unified prior to foreclosure; whether MERS had the power to assign the mortgage; whether MERS’ practice of appointing an employee of the assignee to sign the assignment on MERS’ behalf was permissible; and, finally, whether Aurora had standing to foreclose under the power of sale. The Court answered all of these questions in the affirmative:

• Under settled Massachusetts law, the mortgage does not automatically follow the note. Thus, the note and mortgage may be held by different entities. [Opinion, pages 19-20.]
• Because the mortgage can be foreclosed only by a mortgage holder who is also entitled to enforce payment of the debt secured by the mortgage, the note and mortgage must be unified in one holder prior to foreclosure. [Opinion, page 31.]
• Under the MERS contract, MERS had the authority to “exercise the rights of the note holder [only] ‘if necessary to comply with law or custom.'” Since Aurora (who was entitled to enforce payment of the debt as loan servicer for Deutsche) could not foreclose without also holding the mortgage, MERS’ assignment of the mortgage to Aurora was “necessary to comply with law.” [Opinion, page 45.]
• Although the automated appointment of an employee of the assignee to sign the assignment on MERS’ behalf was unorthodox, Massachusetts law requires only that the assignment be signed “by a person purporting to hold the position of … vice president,… secretary, … [or] assistant to … such office or position … of the entity holding such mortgage….” Since the MERS System produced a corporate resolution appointing the Aurora employee as MERS’ “vice president” or “assistant secretary” for the purpose of executing the assignment, an assignment executed by such officer would be effective. [Opinion, page 49.]
• Aurora, as holder of the mortgage and loan servicer for the note holder, had authority to foreclose on the mortgage. There was no flaw in the process (such as under the Ibanez decision, in which the servicer commenced foreclosure proceedings before the mortgage had been assigned), and the Court entered summary judgment for Aurora, authorizing Aurora to proceed with the foreclosure.

This decision – the first case in which a Massachusetts court has considered the role MERS plays in the mortgage process – is good news for MERS and its members. However, in one of the longest footnotes ever, the Court noted that it – as a federal court – was more constrained to follow the law as it currently exists than a Massachusetts state court would be. The Court engaged in a long analysis of how the securitization process undermines the checks and balances of the residential mortgage system, creating a situation in which no party – the homeowner, the note holder, the loan servicer, or MERS – has an economic incentive to maintain the property or, consequently, the community in which it sits. “So serious are these concerns that this Court has considered certifying the issue of the propriety of the MERS operation in this Commonwealth to the Supreme Judicial Court. …Upon reflection, however, certification is …’manifestly inappropriate … where … there is no uncertain question of state law whose resolution might affect the pending federal claim.’ …The situation might be different were Culhane’s home located in Brockton, Fall River, Holyoke, Lawrence, Lowell, New Bedford, or a number of other communities of the Commonwealth…. Here it suffices simply to raise these issues.” [Opinion, page 55.]

In light of the Court’s pointed comments in the footnote, it is important to note that Massachusetts Attorney General Martha Coakley filed suit against five national banks in Massachusetts Superior Court on December 1, 2011, alleging – among other things – that the defendants’ use of the MERS System (1) results in a lack of transparency as to the entities that have the legal authority to enforce mortgages; (2) unfairly conceals from borrowers the true identity of the holder of the debt; and (3) results in an unlawful failure to register assignments of mortgages and transfers of the beneficial interests in mortgages. This case, Commonwealth of Massachusetts v. Bank of America, NA, et al., may be the stage on which the next chapter of the MERS story plays out.