- A quiet title action decides who owns the title to real property.
- MERS is a mortgage database that made moving mortgage servicing cheaper.
- MERS is at the center of many quiet title lawsuits.
What is a quiet title action and can it prevent a foreclosure?
Some judges are beginning to accept homeowner challenges to the banks standing to foreclose by using quiet title actions. As a result of MERS, banks have failed to physically record any assignments of the deeds of trusts or mortgages and the banks have not transferred the wet ink notes with those assignments. Banks have been caught robo-signing affidavits of lost documents and manufacturing documents to serve their legal needs. Is a quiet title affirmative defense viable to halt foreclosure?
Before I tackle your question, allow me to define several terms in your question.
Put simply, a quiet title action is a lawsuit where someone asks a court to decide who owns a piece of real estate. A document produced by the Philadelphia court (PDF) offers the clearest legal explanation I found:
An action to quiet title is a lawsuit brought in a court having jurisdiction over land disputes, in order to establish a party’s title to real property against anyone and everyone, and thus "quiet" any challenges or claims to the title. It comprises a complaint that the ownership (title) of a parcel of land or other real property is defective in some fashion, typically where title to the property is ambiguous. A typical ground for complaint includes the fraudulent conveyance of a property, perhaps by a forged deed or under coercion.
Unlike acquisition through a deed of sale, a quiet title action will give the party seeking such relief no cause of action against previous owners of the property.
In ancient times, (before 1995 or thereabouts) judges would read paper titles and deeds, weigh the arguments of both sides, and decide who gets the land. Decisions where based on paper evidence, technical points in state law, and a judge's understanding of property law that changed little since medieval times. Unfortunately, this is where simplicity and clarity end, because now we must turn to a discussion of MERS.
Mortgage Electronic Registration Systems (MERS)
Mortgage Electronic Registration Systems (MERS) is a private company created by the mortgage divisions of banks to function as an electronic database consisting of key terms of all US mortgage loans. As the MERS Web site puts it, "MERS was created by the mortgage banking industry to streamline the mortgage process by using electronic commerce to eliminate paper." There is much more to MERS than being an electronic registry, but first a discussion of why bankers wanted to create an electronic database when the old paper-based system had worked for 500 years.
Back when Jimmy Stewart starred in the 1946 movie, "It’s a Wonderful Life," banks made mortgage loans to local applicants and serviced the loans for the full 30-year term. My favorite part in the movie is Stewart’s famous speech that quells rioting townsfolk who are making a run on the Bailey Building & Loan. Stewart’s character explains the economics of mortgages and savings accounts using simple, concrete terms and examples. Local savings deposits underwrite local mortgage loans. This satisfies the rioters, which allows the Bailey Building & Loan to carry on. The mortgage world has changed since 1946, and if Hollywood were to remake "It’s a Wonderful Life" today that speech would be longer, confusing, and not satisfying emotionally.
Nevertheless, here is my attempt to update Stewart’s speech: In addition to banks originating mortgages, some companies do nothing but originate mortgages and then sell them to investors, such as retirement funds, Fannie Mae and Freddie Mac, foreign governments, and mutual funds. These investors determine the risk they are willing to take when funding a mortgage. Some tolerate more risk than others in exchange for a higher interest rate. Mortgage servicers collect the mortgage payments each month on behalf of the investors in exchange for a small fee. Mortgage servicers are typically national banks.
MERS allows the responsibility of servicing mortgages to shuffle around from bank to bank without shipping paper or manual processing. It also allows mortgages to be bundled and sold as investments — in other words, mortgage-backed securities. Today, 16 years after its creation, MERS keeps electronic records on 67 million mortgages, which is approximately 60 percent of all residential mortgages. MERS takes credit for saving banks millions in mortgage processing costs, expanding the mortgage business, and making loans available to more people.
Why this history lesson and digression into MERS regarding a question about quiet title actions? Countless lawsuits across the US have questioned whether an electronic registry satisfies state land recording laws. MERS argues it does. However, MERS does not keep the original mortgage or deed of trust (which establishes the right of the lender to foreclose) and the note (the personal promise the borrower makes to repay the loan) and instead leaves these in the hands of the mortgage originator or investor.
MERS is listed as the mortgage holder in local land records. When a homeowner defaults, in almost all states the mortgagee of record is the only party that can foreclose. However, MERS is just an electronic record keeper, and does not possess the original mortgage or notes. In some cases, MERS has told local employees at mortgage servicers to identify themselves as MERS officers when filing court documents. According to the MERS Web site, "If MERS commences a foreclosure action authorized upon instructions from the note-owner, the note will be endorsed in blank and will be in the possession of the MERS officer so that MERS is the holder of the note with the rights of enforcement."
For various reasons, including not recording its mortgage interest, or producing the original mortgage and note, the legal fundamentals underpinning MERS’s business model are under attack by homeowners alleging that MERS is not the mortgagee of record, and by state and county officials who bristle at the loss of record keeping control and fees lost to MERS.
As this was written in early 2011, quiet title actions (among other causes of action) have been filed across the US that involve MERS. How these will be decided will take months or years, and may be decided by the US Supreme Court.
Whether a quiet title action can halt or delay a foreclosure will depend on the circumstances in each case. Consult with an attorney in your state who has experience in real property law if you believe you have a cause of action regarding a quiet title.
I hope that the information I have provided helps you Find. Learn. Save.