-- Daniel OLeary
A recent New York Supreme Court decision calls into question how mortgages are transferred and reported in securitizations and could have sweeping implications for mortgage foreclosure timelines, according to lawyers and market players.
The Appellate Division of the Second Department of New Yorks Supreme Court ruled last week in favour of the borrower in the Bank of New York versus Stephen Silverberg. In its ruling, made official Tuesday, the four judges of the court ruled the transfer of Silverbergs mortgage from Countrywide Financial, the mortgage originator, to Mortgage Electronic Registration Systems (MERS), was invalid under state law. The decision effectively overturned the previous judicial foreclosure, which occurred in September 2008.
Originators use MERS to transfer mortgage notes from their balance sheet to securitization vehicles. The firm acts as the mortgagee for 32 million active loans, according to Bill Hultman, senior v.p. and corporate group manager at MERS.
In its decision, the court said the MERS system freed its members from paying the recording fees that would otherwise be furnished to the relevant localities. This leaves borrowers and the local county or municipal recording offices unaware of the identity of the true owner of the note.
William O'Connor, New York-based partner at Crowell & Moring, said under New York law people should be able to know who their lender is. That wasnt the case with the Silverberg mortgage, OConnor said. The market may have to re-think the way MERS works, he said, saying the court had cast a shadow over the system of mortgage transfer and reporting. The decision could add more pressure to foreclosure timelines, along with the robo-signing issue, further upsetting cash-flows in RMBS, he said.
Extra costs and time could also be added if bankers are forced to take a more traditional stance to reporting transfers, OConnor said. Theyll have to employ lawyers and other people to handle the extra work, he noted.
The impacts on the mortgage industry in New York and the nation were acknowledged in the courts decision. Nonetheless, the law must not yield to expediency and the convenience of lending institutions, the decision stated. 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.
Daniel Rubock, senior v.p. at Moodys Investors Service, said the agency is still trying to gauge the decision and how it could affect the market. Its a troubling decision that could be interpreted narrowly by lower courts in other foreclosure cases, he said. But it could also be used more broadly, which was more worrying. The Silverberg case was unique, as it consisted of two mortgages consolidated into one instrument, he said. This is not a precedent that should be applied to all foreclosure cases, Rubock said.
In a statement MERS said it agreed with the courts decision. There was an evidentiary defect as the note produced to the court in the foreclosure proceeding did not have the proper endorsements to prove Bank of New York was the holder of the note, the firm said.
Hultman said the firm will challenge any lower court decision that used this case incorrectly as precedent. Cant say the lower courts wont make a mistake, but well appeal that decision, he said. Theres an opportunity for judges to misread this case, but judges should follow the law. Hultman said the firm had no intention to appeal the Silverberg decision.
A spokesman at Bank of New York did not return phone calls.