Around the country several courts have been ruling on some of the critical legal problems that have arisen as a result of the Foreclosure Crisis. The basic problem, trying to avoid legalese, is that for over one hundred years, it was bedrock law in the United States that a mortgage had to be "attached" to the loan it secured in order for it to be enforceable against the property that secured the note. In other words, the holder of the mortgage had to possess the note as well to foreclose on the home. For example, the United States Supreme Court case Carpenter v. Longan 83 U. S. 271 (1872) stated 139 years ago that "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." In other words, if the note is assigned without the mortgage attached to it, the person left holding the mortgage cannot foreclose on the property, and the note becomes unsecured. Fast forward to 2011.
In the 90s the lenders got together to solve a problem. The business of taking mortgages and putting hundreds of them all together in a security instrument, and selling shares of that pool of debt was a huge hit, and generated massive fees. The debt could be sold over and over just like bonds and a big market began to flourish. The problem was that every County in the United States taxes the transfer of mortgages on real property, and each mortgage transfer has to be recorded in the property records. So in order to avoid the taxes and the hassle and cost of recording all these profitable transfers of the notes, they invented MERS, the Mortgage Electronic Registration System. MERS was made the mortgage holder in a lot of mortgages, perhaps millions. In foreclosure they serve as the "nominee" of the bank that holds the note. The argument that this is illegal is a state by state issue, but the gist of it is that the MERS method of handling the mortgage and the debt is illegal because the mortgage and the note get separated and, under cases like the Carpenter case, the mortgage is null and void, and the loan is unsecured. MERS is not a bank, and cannot be a lender. Thus, the argument goes, MERS cannot foreclose on homes. This is a huge legal problem working its ways through courts in the fifty states. Courts have come out both ways, with MERS winning some and the homeowners winning others, particularly in New York and Massachusetts. Last week a big win for MERS occurred in California.
None of the appellate courts of Georgia have had an opportunity to opine on this legal issue. In his blog, well known Georgia real estate litigator Hugh Wood has discussed the arguments on behalf of the homeowner under Georgia law. In different cases MERS is the agent, assignee, or nominee of the lender. Mostly as the nominee. Wood has identified several terms of the Georgia law that are, in his opinion, fatal to MERS acting as a nominee for the lender. Click here and you can see the argument laid out in full. All of the cases about MERS and Georgia law appear to still be pending as of this writing. In the cases that have gone for MERS, it seems like the courts have basically stretched the meaning of nominee because of a results oriented notion that, notwithstanding the fact that MERS clearly breaks the longstanding law on mortgages and loans having to move together, there are just too many cases out there and too much turmoil in the real estate market to let the old law stop the runaway train. In other words, one could argue, MERS broke the law so many times that as a state policy issue we have to let it slide and get these houses moving through the market. This is another version of the "too big to fail" argument the banks succeeded in making to the executive and legislative branches, and now they are making it to the courts.
Of course, the loan is still in place, so the homeowner still owes the bank the loan, it is simply unsecured. What a bank could do is sue on the note and levy all of the assets, garnish the wages, and make life miserable on the debt holder unless they surrender the house. The bank can put a lien on the house after they get the judgment on the note, but that judgment lien all by itself cannot force the homeowner to leave involuntarily like a mortgage foreclosure. Sooner or later, the bank will get the house, or if the bank gets shut down, the FDIC. The only question is how long the homeowner gets free housing. A stubborn homeowner could stay in a house a long time, but it would be awfully difficult to stay afloat financially. If you live in the house it is not hard to find you. Most judgment debtors are hard to find, but not a judgment debtor on a residential mortgage that still lives in the house. Life would probably be simpler walking away from the house and renting something affordable, but for some people there is no place like home.