On August 3, 2015, in Montgomery County, Pennsylvania, Recorder of Deeds v. MERSCORP, Inc.; Mortgage Electronic Registration Systems, Inc., 795 F.3d 372 (3d Cir. 2015), the United States Court of Appeals for the Third Circuit reversed a decision of the United States District Court for the Eastern District of Pennsylvania and held that Pennsylvania law does not create a duty to record assignments of mortgages. This ruling will enable Mortgage Electronic Registration Systems, Inc. (MERS) to continue to operate in Pennsylvania.
To put this decision in context, borrowers and lenders regularly name MERS as the mortgagee in residential mortgage loan documents, and, as a result, MERS is the named record holder of mortgages in county land records across the country. For a fee, entities engaged in the active residential real estate loan market register with MERS and avoid the cost and burden of recording their mortgage assignments in the public records every time they purchase or sell a note in the secondary market.
Instead, they simply maintain MERS as the mortgagee of record and have MERS indicate the transfer on its records. This has resulted in MERS being named 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 industry sources, as of May 2014, 90% of the top 100 loan originators and servicers used MERS, 26 million active loan registrations existed nationwide on the MERS system, and this accounted for 65% of all new mortgage originations at that time.
In response to the reduced recordings in Montgomery County, Pennsylvania caused by the widespread use of MERS there, the Recorder of Deeds for Montgomery County, Pennsylvania filed a class action complaint claiming that MERS failed to record mortgage assignments in violation of 21 Pa. Stat. Ann. §351, which requires the recordation of all Pennsylvania land conveyances. The district court agreed with the Recorder of Deeds and held 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 Pennsylvania county courthouse is a violation of §351. We summarized this decision in the August 2014 issue of Relating to Real Estate in an article entitled "Federal Court Strikes MERS System in Pennsylvania but Maryland Deeds of Trust Differ from Pennsylvania Mortgages.”
The Third Circuit Court of Appeals Decision and Its Implications
In its reversal, the Third Circuit removed the basis for the district court’s decision by holding that §351 does not create an obligation to record the assignment of a mortgage or a mortgage note; rather, §351 simply provides the consequences of a failure to record. As the Third Circuit noted, according to the Pennsylvania Supreme Court the primary purpose of Pennsylvania’s land recording statutes is to give the public notice of the person in whom title resides. The only consequence of a failure to record a conveyance under Pennsylvania law is that the conveyance is void as to any subsequent purchaser for value.
To further invalidate the Recorder of Deeds’ claims, the Third Circuit mentioned the district court’s acknowledgment that the validity of a conveyance in Pennsylvania does not depend on recordation. If recording all conveyances were required under §351, Pennsylvania courts would refuse to recognize unrecorded conveyances.
Because there is no duty to record a land conveyance in Pennsylvania, the Third Circuit denied the Recorder’s certification to the Pennsylvania Supreme Court for determination of whether §351 requires the recording of land conveyances and whether a county’s Recorder of Deeds may bring an action to enforce §351.
The district court’s decision could have turned the Pennsylvania residential loan investment market upside down because every secondary market transfer of a Pennsylvania mortgage note would have been required to be recorded in county land records. However, the decision of the Third Circuit saves the efficiencies created by MERS for investors in Pennsylvania residential loans.
With this decision the Third Circuit has aligned itself with other circuit courts that have decided that MERS can serve as the mortgagee of record without a recording office receiving a recording fee each time a mortgage note is transferred. See, e.g., Harris Cnty. Tex. v. MERSCORP, Inc., 791 F.3d 545 (5th Cir. 2015) (no recording fee required because Texas law imposes no duty to record); Union Cnty., Ill. v. MERSCORP, Inc., 735 F.3d 730 (7th Cir. 2013) (no recording fee required because Illinois law imposes no duty to record); Ramsey v. MERSCORP Holdings, Inc., 776 F.3d 947 (8th Cir. 2014) (no recording fee required because Minnesota law imposes no duty to record); Plymouth Cnty., Iowa v. MERSCORP, Inc., 774 F.3d 1155 (8th Cir. 2014) (no recording fee required because Iowa law imposes no duty to record); Brown v. Mortg. Elec. Registration Sys., Inc., 738 F.3d 926 (8th Cir. 2013) (no recording fee required because Arkansas law imposes no duty to record).
MERS Works with Maryland Deeds of Trust
The issues that confronted MERS in the Montgomery County, Pennsylvania case are not applicable in Maryland if deeds of trust are used.
In Maryland, either deeds of trust or mortgages may serve as instruments that create security interests in real property. 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.”
his means that mortgages may only be effectively assigned if the assignment is recorded among the land records. Hence, it is always possible to identify the mortgagee by performing a title search. The MERS system of off-record assignments would not work if a mortgage secures a loan in Maryland.
In contrast, when a deed of trust is used, the security follows the note, and nothing needs to be recorded to effectuate a transfer of the note. See the opinion of the Maryland Attorney General published at 63 Op.A.G. 87 (1978). Assignments of notes secured by Maryland real property are typically done off-record. Therefore, loans secured by Maryland deeds of trust are good candidates for the MERS system.
The Court of Appeals of Maryland sanctioned the use of MERS in Anderson v. Burson, 424 Md. 232, 35 A.3d 452 (2011). In Anderson, which involved an unindorsed deed of trust note, the Court praised the efficiency of MERS and mentioned the widespread industry use of the system. The Court cautioned 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. See Anderson and PNC Bank, Nat. Ass'n v. Braddock Properties, 215 Md. App. 315, 81 A.3d 501 (2013).
Furthermore, according to Deutsche Bank Nat. Trust Co. v. 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 in order to be the party entitled to enforce the note, the MERS system works in Maryland. MERS can serve as the beneficiary of record, and the note may be transferred without recording any assignments.
For the foregoing reasons, for Maryland real estate financings, deeds of trust are the security instruments of choice.
For questions, please contact Ed Levin (410) 576-1900.