A New York state appeals court overturned a ruling in favor of the Mortgage Electronic Registration Systems, finding Bank of New York did not have standing to initiate a foreclosure.
The June 7 decision, issued by the Supreme Court of the State Of New York Appellate Division, reversed the lower court’s ruling and granted the borrower’s motion to dismiss the May 2008 foreclosure lawsuit against Stephen and Fredrica Silverberg.
The case is unique in that Bank of New York and Countrywide, the servicer of the loan, could not produce a correctly endorsed promissory note showing Bank of New York’s ownership as trustee.
The Silverbergs took out two mortgages on their Greenlawn, N.Y. home, which were later consolidated into one loan. Countrywide was the named lender and note holder on the consolidation agreement but it was MERS—not Countrywide—that executed the document, in its capacity as the mortgagee of record and Countrywide’s nominee.
Prior to the commencing of the foreclosure, the mortgage was assigned from MERS to Bank of New York through a “corrected assignment of mortgage,” (as opposed to the typical “assignment of mortgage” filed to put a mortgage in the name of a trustee or servicer).
The court agreed with the Silverbergs that the consolidation agreement broke the chain of ownership of the notes to BNY, preventing BNY from proving its standing in court.
“Hence, although the consolidation agreement gave MERS the right to assign the mortgages themselves, it did not specifically give MERS the right to assign the underlying notes, and the assignment of the notes was thus beyond MERS's authority as nominee or agent of the lender,” the four-judge panel ruled, in a decision written by Justice John Leventhal.
“Therefore, assuming that the consolidation agreement transformed MERS into a mortgagee for the purpose of recording—even though it never loaned any money, never had a right to receive payment of the loan, and never had a right to foreclose on the property upon a default in payment—the consolidation agreement did not give MERS title to the note, nor does the record show that the note was physically delivered to MERS,” the opinion adds.
The consolidation agreement specifies the note holder, not the mortgagee, as the successor to the lender’s right to receive payment and to foreclose. When BNY became the mortgagee of record, it “merely stepped into the shoes of MERS” and “did not acquire the power to foreclose by way of the corrected assignment,” the court said.
In a written response, Janis Smith, vice president of corporate communications for MERS’ parent company, Merscorp Inc., attributed the Silverbergs’ favorable ruling to an “evidentiary defect because the note produced to the court in the foreclosure proceeding didn’t have the proper endorsements.”
“The Silverberg decision does not undermine MERS’ ability to serve as the mortgagee,” Smith said, adding, “We support the need to have the proper documentation when initiating foreclosure.”
Allegations of Countrywide’s mishandling of promissory notes are nothing new. In August 2009, a veteran senior litigation manager at Countrywide’s servicing unit testified in a New Jersey courtroom that it was
A spokesman for Bank of New York referred requests for comment to Countrywide, which is now owned by Bank of America. A BofA spokesperson declined to comment. The Silverbergs could not be immediately reached for comment.
Challenges to MERS have come before this court in the past, including a 2007 ruling in favor of MERS. BNY and Countrywide argued that the previous decision gave mortgagees the right to foreclose—an argument the court rejected.
In Mortgage Elec. Registration Sys. Inc. v Coakley, the court’s ruling in favor of MERS “was dependent upon the fact that MERS held the note before commencing the foreclosure action,” Leventhal said.
“In sum, because MERS was never the lawful holder or assignee of the notes described and identified in the consolidation agreement, the corrected assignment of mortgage is a nullity, and MERS was without authority to assign the power to foreclose to the plaintiff,” the opinion reads. “Consequently, the plaintiff failed to show that it had standing to foreclose.”
While the details of this case are atypical from most foreclosures, the court acknowledged “the impact that this decision may have on the mortgage industry in New York, and perhaps the nation.”
“Nonetheless, the law must not yield to expediency and the convenience of lending institutions,” the ruling said. “Proper procedures must be followed to ensure the reliability of the chain of ownership, to secure the dependable transfer of property, and to assure the enforcement of the rules that govern real property.”
