Appellate Division Ruling Holds Bank Lacks Standing to Foreclose on Residential Mortgage Loan

Bank of New York v. Silverberg et al., 86 AD3d 274 (2d Dept. 2011)

On June 7, 2011, the Appellate Division, Second Department, dismissed a mortgage foreclosure proceeding based on payment default after holding that the plaintiff bank lacked standing to sue because it could not prove it was the owner of the underlying mortgage note.  The Bank obtained its interest in the mortgage as an assignment from Mortgage Electronic Registration Systems, Inc. (“MERS”), a national mortgage registry used by a variety of lenders to track ownership interests in mortgages, which are often sold or otherwise transferred multiple times and packaged into securities, trusts, and other investment vehicles.

MERS was created in the early 1990s to track mortgage ownership interests and to save its members the time and costs associated with local county recording procedures.  As in the case of the mortgage at issue in Silverberg, lenders who participate in the MERS system identify MERS in the loan documents as the lenders’ nominee and as a mortgagee for purposes of the lenders’ successors and assigns.  Should the mortgage be transferred to another MERS member, MERS keeps track of the transfer but remains the mortgagee of record in local county recording offices, eliminating the need for MERS members to pay local recording fees to record such transfers.  The MERS system was a key facilitator of the pooling of and securitization of mortgage loans.

In Silverberg, as is typical in many MERS mortgages, while MERS was a nominee and mortgagee of the lender for recording purposes, it never held any interest in the underlying mortgage note.  The defendants argued, therefore, that lacking ownership of the note, MERS could not have assigned the note, and thus assignee Bank of New York had no ownership interest in the note and, consequently, no right to bring a foreclosure proceeding based on a payment default.

The Appellate Division agreed.  The court noted that while an assignment of a mortgage note carries with it an implicit assignment of the underlying mortgage, longstanding New York precedent held that “a transfer of the mortgage without the debt is a nullity, and no interest is acquired by it.”  As a result, “the foreclosure of a mortgage cannot be pursued by one who has no demonstrated right to the debt.”  Here, MERS only had rights with respect to the mortgage, not the loan.  Therefore, because an assignee can only acquire rights actually held by the assignor, the Bank of New York held no interest in the loan, and thus lacked the power under New York law to bring a foreclosure proceeding.

The Appellate Division distinguished this case from another recent MERS-related decision, Mortgage Elec. Registration Sys., Inc. v. Coakley, 41 AD3d 674 (2007), in which it held MERS did possess standing to initiate a foreclosure proceeding.  In Coakley, as opposed to Silverberg, however, the original lender had both nominated MERS as mortgagee, and also transferred the underlying note to MERS.

Comparing the outcomes in Coakley and Silverberg highlights how important it is for homeowners facing the possibility of foreclosure to understand the way their loans and mortgages were initially structured, as well as what has happened to them post-origination.  When foreclosure proceedings are initiated, the answers to these questions could mean the difference between homeowners remaining in or losing their homes.