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MERS Judge Sets Aside Bankruptcy Court’s Critical Ruling

Merscorp Inc., operator of the electronic-registration system for about half of all U.S. home mortgages, got a court to set aside a bankruptcy judge’s opinion criticizing its right to transfer the mortgages among members.

U.S. District Judge Joanna Seybert in Central Islip, New York, yesterday vacated part of U.S. Bankruptcy Judge Robert E. Grossman’s February 2011 decision in the bankruptcy of Ferrel L. Agard. Merscorp, based in Reston, Virginia, runs Mortgage Electronic Registrations Systems, or MERS.

“The issue of whether MERS had authority to assign the mortgage was no longer before the bankruptcy court,” Seybert wrote. “There was no longer a live case or controversy.”

Merscorp was created in 1995 to help county officials cope with the growing volume of mortgage transfers, the company has said. It tracks servicing rights and ownership interests in mortgage loans on its electronic registry, allowing participating banks to buy and sell the loans without having to record the transfer with the county. MERS helped Wall Street to quickly bundle mortgages together in securitized trusts.

“I thought it was a poor decision because it was decided only on procedural grounds,” George E. Bassias, a lawyer for Agard in Queens, New York, said of Seybert’s ruling in a phone interview today. “In my opinion she’s wrong on the procedure too.”

Foreclosure Sale

Agard filed for bankruptcy in September 2010, the day before her Westbury, New York, home was to be the subject of a foreclosure sale. The mortgage servicer, Credit Suisse Group AG (CSGN)’s Select Portfolio Servicing, asked Grossman to allow it to continue with the foreclosure. Grossman ruled that Select Portfolio should be allowed to do that.

Grossman then went on to say that Select Portfolio and U.S. Bancorp, which had been assigned the mortgage by MERS, wouldn’t have been given the relief had a state court not already granted a foreclosure judgment.

That was because MERS’s “nominee” status didn’t give it the authority to assign mortgages, Grossman said.

Seybert said that that part of the order “constitutes an unconstitutional advisory opinion and must be vacated.”

“What the judge wrote is dicta,” Bassias said, referring to Grossman. “Dicta means it’s not a binding decision. He’s specifying everything MERS does that’s wrong. This judge did not address whether what MERS does is right or wrong.”

Bassias said he didn’t oppose MERS’s appeal.

‘Blind Eye’

“We have long believed that those who sought to use the In re Agard decision against MERS were wrong to do so,” Janis Smith, a Merscorp spokeswoman, said in a statement. “Any future challenges to MERS’ business model will have to be done without citing to Judge Grossman’s now vacated opinion.”

In his decision, Grossman criticized MERS’s role in the mortgage process. “MERS and its partners made the decision to create and operate under a business model that was designed in large part to avoid the requirements of the traditional mortgage-recording process,” Grossman wrote. “The court does not accept the argument that because MERS may be involved with 50 percent of all residential mortgages in the country, that is reason enough for this court to turn a blind eye to the fact that this process does not comply with the law.”

The appeals are Agard v. Select Portfolio Servicing Inc., 11-cv-1826, and Mortgage Electronic Registration Systems Inc. v. Agard, 11-cv-2366, U.S. District Court, Eastern District of New York (Central Islip). The bankruptcy case is In re Agard, 10- 77338, U.S. Bankruptcy Court, Eastern District of New York (Central Islip).

To contact the reporter on this story: Thom Weidlich in Brooklyn, New York, federal court at tweidlich@bloomberg.net.

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net.

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