As discussed in previous posts (here, here and here), a hot topic in foreclosure law is whether a foreclosing mortgagee must also hold the promissory note secured by its mortgage.  The latest contribution to this area of the law is U.S. District Court Judge William G. Young’s decision in Culhane v. Aurora Loan Services of Nebraska, a 59-page review of the applicable statutes and case law, as well as a review of the operation and value of the MERS system and loan securitization.  Culhane concludes that the mortgage and note must be unified, and also holds that the loan servicer complied with this requirement. 

Judge Young opens by noting that, although the mortgagor, Culhane, is substantially behind in her mortgage payments, this does not make her “subject to having her home seized by whatever bank or loan servicer may first lay claim to it.”

The decision first reviews the power of sale, then turns to the question of whether the note and mortgage must be unified in one owner.  After a comprehensive discussion of cases on this topic applying Massachusetts law, Judge Young concludes that a note and mortgage may be separated, but that “reunification of the note and mortgage prior to the notice of [foreclosure sale] arises logically as a rule from the fact that a mortgage is ‘but an incident to the debt.'”  This reunification may be achieved by the mortgagee either holding the note itself, or establishing that it is servicing the loan on the note holder’s behalf.

The decision is particularly concerned with potential double liability for the borrower if the foreclosing party is not the noteholder: 

Foreclosure of a mortgage by an entity without the power to discharge the debt secured by the mortgage would create a degree of uncertainty as to the mortgagor’s remaining liability that this Court is unwilling to condone.

Taking issue with a number of decisions and commentators, Judge Young finds that MERS took only bare legal title to the mortgages granted to it, but that, in doing so, it was acting much like the trustee of a nominee trust under Massachusetts law (which is construed as a principal-agent relationship).  MERS’s standard mortgage form authorizes MERS to exercise the rights of the note holder “if necessary to comply with law or custom.”  Judge Young goes on the hold that “law or custom” necessitates that, before initiating a foreclosure proceeding, the mortgagee must assign its mortgage interest to the noteholder or its agent so that the proceeding is valid.  Conversely, since it is not the real party in interest, MERS cannot foreclose in its own name because it does not hold the debt.

Although “deeply troubled” by MERS’s assignment practices, Judge Young further concludes that assignments by its officers (including duly appointed employees of MERS’s member lenders) are binding and recordable under the terms of M.G.L. c. 183, § 54B.

Judge Young ends his analysis with what is essentially an invitation to the Supreme Judicial Court (SJC) to go beyond what he perceives as his limited powers as a federal judge, and to extend the common law in order to protect society from the many shortcomings of the securitized mortgage system.  These shortcomings include incentives favoring foreclosures over workouts, which he sees as not even serving the investors’ interests, as well as a disregard for the effect of the foreclosure crisis on communities.

That said, Judge Young notes that there is no evidence of MERS or servicer wrongdoing in the case before him, and holds that the note and mortgage were both timely assigned to the servicer.

It will be interesting to see how the SJC responds to Judge Young’s decision in Culhane, particularly his invitation to develop new law to address the evils of securitized mortgages.