An interesting challenge is being played out in the federal court in Pennsylvania regarding the way most mortgage assignments are now handled within the land record system. Plaintiff, the Montgomery County Recorder of Deeds, commenced the litigation on behalf of herself and a proposed class of similarly situated Recorders of Deeds Offices in Pennsylvania against MERSCORP, Inc. and Mortgage Electronic Registration Systems (MERS). The Recorder claims that defendants have created a private system for tracking conveyances of interests in land which ignores the statutorily created recording system established by Pennsylvania law.
In a traditional transaction, a lender retains a promissory note in its own loan portfolio and may later transfer the note with a corresponding assignment of the mortgage which secures the debt. When the assignment is made, it must be recorded, for a fee, with the Recorder for the county in which the property is located. However, in recent years, many promissory notes have been subject to a complex process called “securitization”. When a note is securitized, it is transferred along with other notes into a trust which then issues securities backed by the trust to investors.
MERS is typically involved when the lender and the borrower name MERS in the corresponding mortgage as the mortgagee and nominee for the lender and its successors-in-interest. While the note may have many owners over time, recording formal assignments of the related mortgage are unnecessary because MERS members simply register the change in an electronic database. The system was designed to eliminate the need to physically prepare, deliver, record and track mortgage assignments. Unfortunately, that comes at a cost to Recorders, who rely on the revenue from the fees associated with recording mortgage assignments.
In the litigation, the Recorder, like others across the county, asserted claims for violations of the state recording statutes, which require recordation of all instruments involving a conveyance of a mortgage interest. The defendants argued that the Pennsylvania statute makes recording permissive and subsequently filed a motion to dismiss the Recorder’s claims. With the exception of a civil conspiracy claim which was dismissed, the Court denied the motion. In doing so, the Court held that the Pennsylvania recording statutes require that all conveyances, including mortgage assignments, must be recorded in the land records. As a consequence of the recording, the Court recognized that the Recorder will collect the recording fees that are squarely at issue in the litigation.
While the Court seemed to support the Recorder’s position on the motion to dismiss, it is unclear what the next chapter of the case will hold and whether the Court will certify a class that will include other Recorders throughout Pennsylvania. The Recorder’s challenge goes to the heart of how the securitization system works and more importantly, how MERS functions within that system. If the Court ultimately finds in favor of the Recorder on her claims, that system may be stripped of the efficiencies provided by MERS, but allow the Recorder to collect the substantial recording fees that she claims are vital to the operation of her office.