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No Split-Note Defense: MERS Can Foreclose on Homes

By Robyn Hagan Cain | Last updated on

We don't fault attorneys for resorting to creative arguments to halt foreclosure; it's an attorney's job to represent her client zealously. But when the Tenth Circuit Court of Appeals strikes down a legal theory, we try to clue you in so you don't waste your time making a similar argument in the future.

That brings us to today's now-defunct foreclosure theory: MERS can't foreclose on a home on Utah. According to a multiple Tenth Circuit opinions, that's simply not true.

In case this is your first foray into mortgage, let's discuss lingo. MERS -- the Mortgage Electronic Registration System -- is a private, electronic registry that tracks servicing rights and ownership of U.S. mortgage loans. MERS, which was created by the mortgage industry, streamlines the mortgage process by substituting electronic filings in place of traditional land recordings, and acts as nominee in the county land records for the lender and servicer.

In other words, lenders and servicers give MERS the power to foreclose on their mortgages.

Commonwealth Property Advocates, LLC, acting on behalf of a pair of Utah homeowners, sued MERS, claiming that MERS had no authority to foreclose on the borrowers' home because the borrowers' mortgage had been securitized and the investors, who actually own the debt, were unknown.

According to Commonwealth, the securitization process severed the debt from its security, which, under Utah law, rendered the trust deed unenforceable. The district court rejected this "split-note" theory, observing that the trust deed at issue specifically established MERS as beneficiary and gave MERS power to foreclose on properties.

The problem with Commonwealth's claim? While a Utah state court had previously endorsed the split-note theory, Commonwealth has not been as successful persuading the federal appellate court to adopt the same position. Commonwealth made the same argument to the Tenth Circuit last year. The Tenth Circuit rejected the argument the first time they heard it, too.

If you're representing a mortgagee in a Tenth Circuit foreclosure appeal, don't rely on the split-note theory to save your client's home.

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