On June 30, the U.S. District Court for the Eastern District of Pennsylvania ruled that assignments of mortgages are required to be recorded under Pennsylvania law, and in so doing toppled the MERS electronic recording system of residential mortgages in that state. Montgomery County, Pennsylvania, Recorder of Deeds v. MERSCORP, Inc. and Mortgage Electronic Registration Systems, Inc., No. 11-CV-6968 (E.D. Pa. 2014).
The court reached this result by finding that mortgages and assignments of mortgages are conveyances of real property, that a note and the mortgage that secures it are inseparable, that an assignment of a note is additionally a conveyance of the corresponding mortgage, and that any failure to properly record the assignment of the note in a county courthouse is a violation of 21 Pa. Stat. Ann. § 351.
Pending appeal, this decision potentially turns the current residential loan investment market in Pennsylvania upside down because, prior to it, borrowers and lenders regularly named the Mortgage Electronic Registration Systems, Inc. (MERS) as the mortgagee in residential mortgage loan documents.
As the named mortgagee, MERS was the record holder of mortgages in the county recorders’ offices. For a fee, persons engaged in the active residential real estate loan market could register with MERS and avoid the cost and burden of recording mortgage assignments in the public records every time they purchased or sold a note in the secondary market by simply maintaining MERS as the mortgagee of record and having MERS note the transfer in its private records.
As a result, MERS is named as the mortgagee in a huge proportion of residential mortgage loans across the country, and despite the number of times a particular note changes hands in the secondary market, the mortgagee of record (i.e., MERS) is rarely changed. According to an interview with Bill Beckmann, president and CEO of MERSCORP Holdings, in the May 2014 issue of MReport, 90 percent of the top 100 loan originators and servicers use MERS, accounting for 65 percent of all new mortgage originations. Over time, this has resulted in 26 million active loan registrations on the MERS system.
Unless Montgomery County Recorder v. MERS is reversed on appeal, going forward the transfer on the secondary market of every mortgage note secured by a mortgage on Pennsylvania property will have to be recorded in the public records. This practically eliminates the efficiencies that have been provided by MERS. Furthermore, MERS may be accountable for not recording mortgage conveyances that occurred in the secondary market in the past.
Deed of trust an alternative here
As opposed to the vast majority of other states, including Pennsylvania, real estate security instruments in Maryland may be either deeds of trust or mortgages.
The Court of Appeals of Maryland has stated that in many respects a deed of trust is a mortgage. See, for example, Manor Coal Co. v. Beckman, 151 Md. 102 (1926). In the case of a mortgage, title is vested in the mortgage lender (because Maryland is a title state). Furthermore, under §7-103 of the Real Property Article of the Maryland Code, title to the promissory note secured by a mortgage “conclusively is presumed to be vested in the person holding the record title to the mortgage.” This means that mortgages may only be assigned by instruments that are recorded among the land records. Hence, it is always possible to identify the mortgagee by performing a title search.
On the other hand, when a deed of trust is used, title is vested in a trustee or trustees for the benefit of the holder of the note. The trustee may remain the same even if the deed of trust note passes from one person to another, which changes the beneficiary of the deed of trust. Note assignments are typically done off-record, and they are not generally determinable from a title examination.
As noted by the Court of Appeals in PNC Bank, Nat. Ass’n v. Braddock Properties, 215 Md. App. 315, 81 A.3d 501 (2013), the rights to transfer deed of trust notes are governed in Maryland by the provisions of Title 3 of the Uniform Commercial Code, codified in Maryland as Md. Code Ann., Com. Law § 3-101 et seq.
The deed of trust difference
One important difference between a mortgage and a deed of trust can be illustrated by replacing the Pennsylvania mortgage with a Maryland deed of trust in the facts provided by the Montgomery County, PA Recorder case.
When the deed of trust is originally recorded, the named beneficiary would be MERS, and the noteholder would be the lender. In Maryland the failure to record a conveyance of a deed of trust note does not invalidate the conveyance because no statutory obligation to record the conveyance exists. Additionally, future holders of a deed of trust note do not need to be concerned with whether previous conveyances were properly recorded in order to exercise the rights of a holder.
The Court of Appeals of Maryland appears to have sanctioned the use of MERS. See, e.g., Anderson v. Burson, 424 Md. 232, 35 A.3d 452 (2011). In Anderson, a decision involving an unindorsed deed of trust note, the court praised the efficiency of MERS and mentioned the widespread industry use of the system. The court further explained that this efficiency has come at a cost to transferees in the form of possible misplaced documents and unindorsed notes. The decision, however, illustrates the flexibility afforded lenders using a deed of trust in Maryland.
Without an obligation on a person who owns a note to record an assignment, establishing a chain of title for a deed of trust note can be difficult, but this is often unnecessary because a person who owns a deed of trust note can enforce the rights of a holder under Com. Law § 3-101 et seq. For example, in Anderson the Court of Appeals stated that under the “shelter rule” a nonholder in possession could exercise the right to force the trustees to foreclose on a deed of trust note despite the fact that the note had been transferred several times without indorsement because the nonholder in possession of the note was entitled to enforce the rights possessed by its predecessors.
Furthermore, according to Deutsche Bank National Trust Company as Trustee v. Angela Brock, 430 Md. 714, 63 A.3d 40 (2013), the holder of a deed of trust note indorsed in blank is entitled to enforce the note, and the holder is not required to prove how such holder came into possession of the note.
Because it is unnecessary for a person to be the record holder of a deed of trust note to be the party entitled to enforce the note, the MERS system should work in Maryland. MERS can serve as the beneficiary of record, and the note may be transferred (numerous times if applicable) without recording any of the assignments.
For these reasons, deeds of trust are the security instruments of choice for Maryland real estate financings.
Edward J. Levin is chair of the Real Estate Practice Group at Gordon Feinblatt LLC and Travis W. Dalton is an associate in Gordon Feinblatt’s Financial Services Practice Group. They may be reached at [email protected] and [email protected] Copyright 2014 by Edward J. Levin and Travis W. Dalton. All rights reserved.