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Does MERS Have Standing to Foreclose?: Neighborly Advice from Michigan to Illinois

January 31, 2012

Abstract:     

If one purchased real property during the last two decades with a loan from a trusted local bank, there is a good chance that bank is no longer listed in real property records as the legal holder of the loan. In fact, the chances are greater than one in two that a single Delaware corporation purports to be the legal holder of the mortgage securing that loan. As of October 2010, approximately sixty percent of all mortgage contracts in the United States appear in local records as being owned by Mortgage Electronic Registration System, Inc. (“MERS”). In total, this percentage equates to approximately sixty-five million mortgage loans. While the size of these numbers may be astounding, one can still expect the percentage, as well as the absolute number, of American homes registered under MERS’s corporate name to rise.

Considering the pervasiveness of MERS in the national real estate market, this Comment examines the legal implications of MERS’ role in the ownership of financial instruments fundamental to loan origination and subsequent loan repayment or foreclosure, and proposes a revised analysis of a leading Illinois case on the subject in light of the persuasive theory of loan notes and mortgage contracts as separate documents expressed by Michigan appellate courts. In order to provide an adequate perspective on the matter, Part I of this Comment gives a brief history of the mortgage recordation process, a description of how MERS operates, as well as a brief explanation of the traditional mortgage recordation and foreclosure practices in Michigan and Illinois. Part II considers two recent Michigan court cases, Residential Funding Co., LLC v. Saurman and Richard v. Schneiderman & Sherman, P.C., that reject MERS’ right to foreclose by advertisement, holding that MERS is the only the legal holder of the mortgage, and thus it has no right to the mortgage indebtedness. Part III will also examine an Illinois case, Mortgage Electronic Registration System, Inc. v. Barnes, in which an appellate court held that MERS did in fact have standing to bring a judicial foreclosure. Then, Part III will discuss why the Michigan cases were decided correctly, and will examine the reasoning in Barnes, providing an analysis in line with the Michigan cases’ theory of MERS’ loan and mortgage contract ownership which would deny MERS standing to foreclose upon a homeowner because it does not have an interest in the indebtedness. Part IV will recommend that, in an expectant future suit, Illinois courts should disallow MERS, Inc. from bringing judicial foreclosure proceedings because it lacks standing to bring such a suit, taking into account legal standing questions, legal formality, and homeowner protection rationales.

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