Does the California Homeowner Bill of Rights Affect MERS’ Ability to Foreclose In California? Fact From Fiction.

In the current flood of mortgage litigation, plaintiffs often rely on a myth to avoid paying their debts. One of the most pervasive story’s on the internet these days involves the Mortgage Electronic Registration System, or “MERS” for short. Plaintiffs accuse MERS of being a “sham” entity, lacking authority to foreclose and only being used by lenders to engage in fraud against homeowners. A number of cases have addressed the issue of MERS ability to foreclose and with the passage of the California Homeowner Bill of Rights AB 278 and SB 900 (Eff. January 1, 2013) I thought it ripe for discussion.

One of the arguments homeowners make when MERS is involved, is one concerning MERS’ right to foreclose. Addressing that concern, coming out of the California Homeowner Bill of Rights starting in 2013, is the requirement that a servicer must inform a borrower of the borrower’s right to: request copies of the Promissory Note, Deed of Trust, payment history, and assignment of loan, if any, to demonstrate MERS right to foreclose; and additionally, provide certain protections under the Servicemembers Civil Relief Act, if the borrower is a service member or dependent. Civ.Code §2923.5.

Currently, Civ.Code §§2923.5 and 2923.55, apply to loans made from 2003 to 2007 on owner-occupied residences of one-to-four (1-4) units until January 1, 2013. Thereafter, the Civil Code protections will apply to ALL first trust deeds for owner occupied residences of one-to-four (1-4) units. See, California Homeowner Bill of Rights, supra.

As a result, a borrower will be able to request the information necessary to confirm that the servicer and their agent, MERS, has the right to foreclose.  Next, we must look to the courts for how they rule on the issue of MERS’ right to foreclose against homeowners in California provided the paperwork supports that right.

In Cervantes v. Countrywide Home Loans, Inc. (Ninth Cir.; Sept. 7, 2011), 656 F.3d 1034, the Ninth Circuit Court of Appeals joined other recent courts in dispelling the Myth of MERS.

In affirming the trial court’s dismissal with prejudice, the Court began by explaining that there is nothing inherently misleading, or improper, about MERS.  MERS is a private electronic database that tracks the transfer of the “beneficial interest” in home loans, as well as, changes in loan servicers. MERS was designed to avoid the need to record multiple transfers of deeds of trust by serving as the nominal record holder of the deed for the original lender and any subsequent lender. Accordingly, MERS holds legal title to the security interest conveyed even when the lender sells, or assigns, its beneficial interest in the loan. MERS serves a legitimate function. Further, the deed of trust—”an essentially private contractual agreement”—spells out MERS’ role. By signing it, the plaintiffs agreed to its terms, including those concerning MERS. So long as MERS acted consistently with the terms of the deed of trust, which it did, there can be no fraud.

Finally, the Ninth Circuit held that any amendment by plaintiffs would be futile. Even if MERS acted fraudulently or without authority—and it did not—plaintiffs admittedly defaulted on their loans. The lender was entitled to foreclose even if MERS was not. Try as they might, there is no mythical loophole recognized by law to avoid paying a mortgage debt.

In a more recent case, Herrera v. Federal National Mortgage Association (Cal.App. Fourth Dist., Div. 2; May 17, 2012) 205 Cal.App.4th 1495, [141 Cal.Rptr.3d 326], the California Court of Appeal joined other courts in rejecting the plaintiffs’ attempt to avoid their mortgage obligations on the grounds that Mortgage Electronic Registration Systems (MERS) is a sham. MERS is a private company that operates an electronic registry to track servicing rights and ownership of mortgage loans. Lenders use MERS to facilitate their transactions and avoid having to record assignments and pay recording fees relating to mortgages. The case is one of many that confirms that MERS has the authority to assign promissory notes and deeds of trust and that its use is legitimate in California.

In August 2007, the plaintiffs obtained a home loan from Indymac Bank secured by a deed of trust naming MERS as a beneficiary. In June 2009, MERS assigned the deed of trust to OneWest, which recorded a notice of default. OneWest then assigned the deed of trust to the Federal National Mortgage Association (Fannie Mae). Soon after, Fannie Mae purchased plaintiffs’ home at a non-judicial foreclosure sale. Plaintiffs then sued to set aside the foreclosure, alleging that MERS lacked the authority to assign the note and deed of trust. The trial court sustained Fannie Mae’s demurrer without leave to amend.

The court of appeal affirmed, holding that the deed of trust properly granted MERS the right to exercise all interests and rights held by the lender, including the right to assign the deed of trust and foreclose. The court noted that even if MERS lacked this authority, it was the lender—not the plaintiffs—who was prejudiced. The plaintiffs could not use MERS as an excuse to avoid their mortgage obligations, or set aside the foreclosure sale. Nor could they overcome the presumption that the foreclosure sale was valid. Moreover, the court noted the plaintiffs had not tendered the loan proceeds or cured the default, both of which were required to set aside any foreclosure sale.

In another recent case, Skov v. U.S. Bank N.A. (Cal.App. Sixth Dist.; July 3, 2012) 207 Cal.App.4th 690,  the Sixth District Court of Appeal reversed the trial court’s decision to sustain a demurrer against plaintiff Andrea Skov’s second amended complaint, holding that she had stated a claim for violation of Civil Code §2923.5, which requires a lender to contact a defaulted borrower to discuss alternatives to foreclosure before starting a non-judicial foreclosure by recording a notice of default. This opinion by the Sixth District Court of Appeal addresses (1) judicial notice, (2) MERS’ ability to foreclose, and (3) the pleading of a violation of §2923.5.

Skov defaulted on her $1.5 million residential mortgage loan, and MERS began foreclosure proceedings (and later assigned the Deed of Trust to U.S. Bank). Skov sued, alleging that “since U.S. Bank and MERS were not assignees of the original note… they did not have the right to exercise the power of sale.” Skov also alleged that U.S. Bank “did not contact or attempt to contact” Skov before recording a Notice of Default. The trial court sustained U.S. Bank’s demurrer.

On appeal, the Court first tackled the issue of judicial notice of the documents recorded as part of the foreclosure process. The designation of various parties as “beneficiary” and “lender” in those documents and statements contained in those documents – particularly the declaration of compliance with §2923.5 that accompanied the default notice – were important in evaluating Skov’s claims. Following Fontenot v. Wells Fargo Bank, N.A.(Cal.App. First Dist., Div. 1; August 11, 2011) 198 Cal.App.4th 256, [129 Cal.Rptr.3d 467], the Court held that “facts arising from the legal effect of the documents, such as the status of an entity as the beneficiary, trustee, or its agent,” were properly subject to judicial notice, but that “statements of fact . . , such as whether there was statutory compliance with section 2923.5,” were not.

Second, the Court rejected Skov’s claim that “MERS lacked authority to execute the notice of default and the assignment of the deed of trust, and thus, each of those foreclosure documents was void.” The Court noted that under Civil Code §2924, “[a] notice of default must be recorded by the trustee, beneficiary, or an agent of either,” and that MERS was the beneficiary, and that NDEx West properly signed the notice as MERS’ agent. In short, “MERS was authorized to assign the deed of trust and commence foreclosure.”

Third, the Court concluded that Skov had specifically alleged that U.S. Bank did not contact her to discuss her loan and foreclosure avoidance options and had, therefore, properly stated a claim under Section 2923.5. It held that the declaration of compliance in the Notice of Default, i.e., that “the requirements of section 2923.5 had been met,” did not trump Skov’s allegations and, as noted above, the Court could not take judicial notice of the facts stated in the declaration. Consistent with Mabry v. Superior Court (2010) 185 Cal.App.4th 208, [110 Cal.Rptr.3d 201] the Court held that §2923.5 provided a private right of action and was not preempted by the National Bank Act (so long as §2923.5 was “very narrowly construed.”)

Even with the passage of the Homeowner’s Bill of Rights in California, it does not appear that it will slow down MERS’ ability to foreclose under California Law.