Maine’s Supreme Court recently held that a foreclosing lender’s equitable interest in the mortgage does not by itself equate to ownership of the mortgage and does now allow courts to compel the mortgage’s assignment.* Beal Bank USA v. New Century Mortg. Corp., 2019 ME 150, ¶ 15. The opinion revives concerns over the viability of foreclosing Maine mortgages involving Mortgage Electronic Registration Systems, Inc. (MERS).
MERS operates as an electronic mortgage registry whereby borrowers taking out mortgage loans give the mortgage to MERS as nominee for the lender’s successors and assigns. Although MERS mortgages generally include standardized language, different model mortgages utilize different descriptions of MERS’s core functions and purpose. Typically, the different MERS language makes little substantive difference in its powers. However, where state courts interpret MERS’s authority based on specific language in the mortgage, as Maine’s courts do, foreclosing lenders should check their specific mortgage language before proceeding.
In 2010, Maine’s Supreme Court analyzed MERS language with the following description in the paragraph defining MERS: “For purposes of recording this mortgage, MERS is the mortgagee of record.” Mortg. Elec. Reg. Sys. v. Saunders, 2010 Me. 79, ¶ 9 (emphasis removed). Relying at least in part on this language, the court held that MERS lacked standing to foreclose because the borrower gave MERS the right to only record the mortgage. Four years later, the court extended its MERS analysis from Saunders to mortgage assignments from MERS, holding that the assignments transfer only MERS’s right to record the mortgage. See Bank of America, N.A. v. Greenleaf, 2014 Me. 89, ¶ 17. This can create problems for foreclosing lenders who often rely on assignments from MERS to demonstrate their ownership of the mortgage.
Maine’s Supreme Court recently confirmed that the original lender can ratify a prior MERS assignment to give it the same effect as if the original lender assigned its interests in the mortgage rather than MERS. U.S. Bank N.A. v. Gordon, 2020 Me. 33, ¶ 10. This allows foreclosing lenders to correct the chain of assignments with an assignment or other document from the original lender acknowledging the transfer. Similarly, language in later documents, such as loan modification agreements, sometimes separately conveys full rights in the mortgage to a subsequent entity other than MERS, validating mortgage assignments from those entities.
What can foreclosing lenders do when the original lender no longer exists, and no other documents can demonstrate a transfer of the original lender’s full mortgage interest to the foreclosing lender? Before writing off the asset or making other decisions about how to proceed, lenders should confirm that their specific mortgage includes the same relevant MERS language that Maine’s Supreme Court considered controlling in Saunders and its progeny. As discussed below, some MERS mortgages include key differences relevant to the Saunders analysis.
Proof of Mortgage Ownership
Maine law requires the lender to establish the following elements to foreclose a delinquent mortgage: (1) the existence of the mortgage; (2) proof of ownership of the mortgage and note, including all assignments and endorsements; (3) a breach of the condition in the mortgage; (4) the amount due on the note, including attorney’s fees and costs; (5) the order of priority and any amounts that may be due to other interested parties; (6) evidence of a properly served notice of default and a mortgagor’s right to cure per 14 M.R.S. § 6111; (7) proof of completed mediation (or a waiver or default of mediation); and (8) SCRA compliance affidavit. See Chase Home Fin. LLC v. Higgins, 2009 ME 136, ¶ 11.
For the second element (proof of ownership of the mortgage and note), most foreclosing lenders rely on their status as the mortgage note’s holder along with a chain of mortgage assignments from the original lender to the foreclosing lender. Under the MERS system, the borrower usually gives the mortgage note to the original lender while separately conveying the mortgage to MERS as nominee for the original lender and the original lender’s successors and assigns. See, e.g., Saunders, 2010 Me. 79, ¶ 8. In many judicial foreclosure states, MERS then assigns the mortgage to a subsequent note holder when necessary to permit foreclosure. Case law from Maine’s Supreme Court has long complicated this system.
Saunders, Greenleaf, and Beal
In Saunders, MERS filed a foreclosure action in its own name, seeking to foreclose the mortgage as the nominee for the note holder. Maine’s Supreme Court held that MERS lacks standing to foreclose under Maine law. Saunders, 2010 Me. 79, ¶ 15. The court specifically quoted the applicable language in the mortgage at issue there:
C) “MERS” is Mortgage Electronic Registrations Systems, Inc. MERS is a separate corporation that is acting solely as a nominee for Lender and Lender’s successors and assigns. MERS is organized and existing under the Laws of Delaware, and has an address and telephone number of P.O. Box 2026, Flint, MI 48501- 2026, tel. (888) 679-MERS. FOR PURPOSES OF RECORDING THIS MORTGAGE, MERS IS THE MORTGAGEE OF RECORD.
* * *
[Borrowers] mortgage, grant and convey the Property to MERS (solely as nominee for Lender and Lender’s successors and assigns), with mortgage covenants, subject to the terms of this Security Instrument, to have and to hold all of the Property to MERS (solely as nominee for Lender and Lender’s [***9] successors and assigns), and to its successors and assigns, forever.
* * *
[Borrowers] understand and agree that MERS holds only legal title to the rights granted by [Borrowers] in this Security Instrument, but, if necessary to comply with law or custom, MERS (as nominee for Lender and Lender’s successors and assigns) has the right:
(A) to exercise any or all of those rights, including, but not limited to, the right to foreclose and sell the Property; and
(B) to take any action required of Lender including, but not limited to, releasing and canceling this Security Instrument.
* * *
[Borrowers] grant and mortgage to MERS (solely as nominee for Lender and Lender’s successors in interest) the Property described [below].
Saunders, 2010 Me. 79, ¶ 9 (emphasis in original).
Relying on this quoted language, Maine’s Supreme Court found that “[t]he only rights conveyed to MERS in either the [borrower’s] mortgage or the corresponding promissory note are bare legal title to the property for the sole purpose of recording the mortgage.” The court noted that “[e]ach reference to MERS within the [borrower’s] mortgage describes MERS solely as the ‘nominee’ to the lender,” and it explained (quoting Black’s Law Dictionary 1149 (9th ed. 2009)) that “[a] nominee is a ‘person designated to act in place of another, [usually] in a very limited way,’ or a ‘party who holds bare legal title for the benefit of others or who receives and distributes funds for the benefit of others.’”
The Saunders court further noted that under the mortgage, the borrowers expressly gave the lender—not MERS—the rights provided for in the mortgage, and that the borrowers did not make any of the mortgage covenants to or in favor of MERS. Saunders, 2010 Me. 79, ¶ 10. Accordingly, the court determined that MERS did not qualify as a mortgagee under Maine’s foreclosure statute (discussing 14 M.R.S. §§ 6321–6325).
The Saunders court next considered MERS’s standing under traditional standing rules that require a plaintiff to “show that it has suffered an injury fairly traceable to an act of the mortgagor and that the injury is likely to be redressed by the judicial relief sought.” Saunders, 2010 Me. 79, ¶ 14. Noting again that “[t]he only right MERS has in the [borrower’s] mortgage and note is the right to record the mortgage,” the court held that “MERS lacked standing to institute foreclosure proceedings and could not invoke the jurisdiction of our trial courts.”
Maine’s Supreme Court later extended its Saunders ruling to mortgage assignments from MERS. See Greenleaf, 2014 Me 89. In Greenleaf, the court analyzed identical mortgage language as the language at issue in Saunders. As in Saunders, the court quoted the specific MERS language at issue, including the definition paragraph for MERS that read: “FOR PURPOSES OF RECORDING THIS MORTGAGE, MERS IS THE MORTGAGEE OF RECORD.” (Emphasis in original.)
Based on this specific language, Maine’s Supreme Court reiterated that “the mortgage conveyed to MERS only the right to record the mortgage as nominee for the lender.” Greenleaf, 2014 Me. 89, ¶ 15. Thus, the court found that “[w]hen MERS then assigned its interest in the mortgage . . . it granted . . . only what MERS possessed—the right to record the mortgage as nominee.” Accordingly, the record the foreclosure plaintiff provided to show ownership of the mortgage “demonstrate[d] only a series of assignments of the right to record the mortgage as nominee, but no more.”
After Saunders and Greenleaf, foreclosing lenders in Maine “continued to argue that a holder of a note secured by a mortgage has an equitable pre-foreclosure right to compel an assignment of the mortgage.” Fannie Mae v. First Magnus Fin. Corp., No. RE-2016-110, 2019 Me. Super. LEXIS 104 *3 (Penobscot C’ty Oct. 24, 2019). Unfortunately, Maine’s Supreme Court recently rejected that work-around. See Beal, 2019 Me. 150.
In Beal, the court considered Maine’s equitable trust doctrine that “one who takes a mortgagee’s title holds it in trust for the owner of the debt to secure the debt for which the mortgage was given.” 2019 Me. 150, ¶ 7 (quotations omitted). It rejected the plaintiff’s argument that it could compel the original mortgagee to assign it the mortgage because the original mortgagee held the mortgage in trust for the plaintiff. Noting that “the language of the mortgage was identical to that in [Greenleaf]”, the court held that applying the equitable trust doctrine in the situation presented “would be at odds with our holding in Greenleaf.”
These three decisions—Saunders, Greenleaf, and Beal—call into question the viability of mortgage foreclosures involving some MERS mortgages and assignments. However, they should not apply to all MERS mortgages in Maine.
Distinguishing Saunders, Greenleaf, and Beal
Importantly, Saunders, Greenleaf, and Beal all specified that the language in the mortgages at issue there included the identical “for purposes of recording this mortgage, MERS is the mortgagee of record” language. See Saunders, 2010 Me 79, ¶ 9; Greenleaf, 2014 Me. 89, ¶ 14; Beal, 2019 Me. 150, ¶ 3 n.4. Other courts in Maine to have considered issues affected by Saunders and its progeny have also expressly confirmed that the language is the same. See U.S. Bank v. Gordon, 2020 Me 33, ¶ 25 (Horton, J. concurring); Knope v. Green Tree Servicing, 2017 Me. 95, ¶ 3 n.1 (referencing specifically the “for purposes of recording this mortgage” language) (capitalization removed); First Magnus, 2019 Me. Super. LEXIS 104, *2 n.1.
However, not all MERS mortgages include the “for purposes of recording” language. For example, at least some MERS mortgages approved for use in Maine by the Fair Housing Association (FHA) instead read:
This Security Instrument secures to Lender: (a) the repayment of the debt evidenced by the Note, with interest, and all renewals, extensions and modification of the Note; (b) the payment of all other sums, with interest, advanced under paragraph 7 to protect the security of this Security Instrument; and (c) the performance of Borrower’s covenants and agreements under this Security instrument and the Note. For this purpose, Borrower does hereby mortgage, grant and convey to MERS (solely as nominee for Lender and Lender’s successors and assigns) and to the successors and assigns of MERS the following described property . . . .
* * *
Borrower understands and agrees that MERS holds only legal title to the interests granted by Borrower in this Security Instrument; but, if necessary to comply with law or custom, MERS (as nominee for Lender and Lender’s successors and assigns) has the right: to exercise any or all of those interests, including, but not limited to, the right to foreclose and sell the Property; and to take any action required of Lender, including, but not limited to, releasing or canceling this Security Instrument.
Mortgage, at 1–2 (emphasis added). These alternate MERS mortgages differ from the MERS mortgages discussed in Saunders and its progeny in key respects.
Whereas Maine’s Supreme Court interpreted the mortgage at issue in Saunders as limiting MERS’s status as nominee to “purposes of recording this mortgage,” the alternative MERS mortgages quoted above expressly confirm that the borrower grants the mortgage to MERS for the purpose of securing repayment of the debt to the lender. This distinction is important because even to the extent that Saunders and Greenleaf focused on MERS’s status as nominee, the term “nominee” by itself does not mean “party limited to recording a document.” Rather, Maine’s Supreme Court describes a nominee as “a person designated to act in place of another, usually in a very limited way.” Saunders, 2010 Me. 79, ¶ 10 (internal quotations omitted). Those limitations naturally arise from the contract itself, i.e., the specific mortgage language at issue.
The Saunders court construed the mortgage’s language there to mean that the borrower gave the mortgage to MERS as the lender’s nominee for the purpose of recording the mortgage. See Saunders, 2010 Me 79, ¶ 10. Yet under other MERS mortgages, the borrower conveys the mortgage to MERS for the purpose of securing repayment to the lender. The borrower further expressly agrees that the interest it gives to MERS—which it gives for the purpose of securing repayment—includes the right to exercise “any or all” of the lender’s interests “if necessary to comply with law or custom.” Those rights specifically include without limitation “the right to foreclose and sell the Property.”
Thus, under some MERS mortgages’ alternative language, the borrower grants MERS a mortgage interest allowing it to exercise the lender’s right to foreclose for the purpose of securing repayment. In other words, the mortgage bestows on MERS a contractual right to foreclose, or more importantly for this articles purposes, a contractual right to take any action “necessary to comply with law or custom” to secure repayment to the lender through foreclosure.
Maine’s Supreme Court has repeatedly recognized that MERS can assign only the mortgage rights it has. See, e.g., Greenleaf, 2014 Me. 89, ¶ 16. In Saunders and its progeny, the mortgages at issue limited those rights to “purposes of recording,” at least according to Maine’s Supreme Court. 2019 Me. 79, ¶ 9. The language in other MERS mortgages does not limit the rights to the purpose of recording; it limits them only to any interests necessary to comply with law or custom to secure repayment to the lender.
Moreover, MERS’s lack of standing to foreclose should not impact this analysis. Maine’s Supreme Court acknowledges that its standing analysis is separate and distinct from the question of mortgage ownership. See Greenleaf, 2014 Me. 89, ¶ 22 n.13. This suggests that MERS’s lack of standing to foreclose should not limit its ability to assign its contractual rights under the mortgage to a party who could demonstrate standing.
Under Maine law, MERS lacks standing to foreclose because it does not qualify as a mortgagee under the applicable statute and because it does not suffer an injury sufficient to give the court jurisdiction. See, e.g., Saunders, 2010 Me. 79, ¶¶ 10, 14–15. However, because standing and ownership are separate issues, Maine law could still allow MERS to assign its contractual rights under the alternative MERS mortgages, including its right “to exercise any or all of [the lender’s] interests, including, but not limited to, the right to foreclose.”
Put differently, MERS can assign whatever interest it has in the mortgage to another party. See, e.g., Greenleaf, 2014 Me. 89, ¶ 16. For MERS mortgages that do not limit MERS’s authority to recording purposes, those interests include rights beyond just recording. If MERS assigns those interests to a subsequent note holder who can establish standing, then the note holder should properly acquire all the same interests in the mortgage that the original lender had, and no legal mechanism should preclude the note holder from foreclosing.
Notably, this analysis fully comports with Maine’s traditional understanding of a nominee as holding “bare legal title for the benefit of others.” Saunders, 2010 Me. 79, ¶ 10. As nominee, MERS holds legal title to the mortgage interests for the benefit of the lender and the lender’s successors and assigns. When MERS assigns that legal title to the party for whom it holds it—i.e., the lender’s successor and assign—MERS’s legal title merges into the beneficiary-assignee’s interests, and the beneficiary-assignee acquires full rights under the mortgage. Where the mortgage limits MERS’s interest to “purposes of recording” under Maine case law, MERS can only transfer that limited interest. See, e.g., Greanleaf, 2014 Me. 89, ¶ 17. However, mortgages that do not limit MERS’s interest to recording purposes should not create similar impediments to foreclosure.
The impact of different MERS mortgage language under Saunders and Greenleaf appears untested in Maine courts. Until the Beal decision, lenders could still seek foreclosure under the position that the original lender holds any mortgage interest MERS itself could not assign in equitable trust for the party to whom MERS assigned its interests, meaning the foreclosing lender could compel a mortgage assignment from the original lender and continue with the foreclosure. See Beal, 2019 Me. 150, ¶ 8. Now that Maine’s Supreme Court has shot down the equitable trust argument, however, foreclosing lenders must seek alternative arguments to enforce their mortgage rights. Before they decide how to proceed, they should check their Maine mortgage to see how it describes MERS’s main purpose.
* Kevin M. Hudspeth serves as of counsel to Maurice Wutscher LLP, a national financial services law firm, where he practices in the appellate, consumer credit, and regulatory compliance groups. He has extensive experience with real estate litigation in Ohio, Illinois, and other jurisdictions throughout the country. He regularly advises attorneys and clients about contested foreclosure issues arising in multiple states.