That was the holding of the Wisconsin Supreme Court in an opinion issued on Thursday in Dow Family, LLC v. PHH Mortgage Corporation, 2014 WI 56. The facts of the case are similar to thousands of foreclosure cases prosecuted in Wisconsin every year, but with a couple of interesting twists, which we summarized in a prior post. Essentially, in 2009 the owner of the property, Dow Family, LLC, had relied on the sellers’ inaccurate representations that a mortgage had been satisfied. When PHH Mortgage sought to foreclose that mortgage, Dow looked for ways to contest the foreclosure.
Only one of Dow’s arguments caught the Supreme Court’s attention. When PHH commenced the foreclosure, the mortgagee of record was MERS, as nominee for U.S. Bank, the original lender. Dow contended that PHH could not foreclose because the mortgage had not been formally assigned to it. PHH relied on the doctrine of equitable assignment.
Relying principally on an 1859 case, Croft v. Bunster, 9 Wis. 503 (*457), the court held that the security for a note is equitably assigned when the note is assigned, without the need for a separate, written assignment. The court noted that Wisconsin’s UCC governing secured transactions codifies the doctrine of equitable assignment in Wis. Stat. § 409.203(7).
Dow also argued that the statute of frauds prevents application of the doctrine. Every assignment of an interest in property must be recorded, unless the assignment is otherwise effected in law or equity. The court held that equitable assignment works by operation of law, satisfying the statute of frauds.
Finally, and perhaps most importantly, the court sidestepped any consideration of the MERS system. Dow had argued that the system, in which MERS holds the mortgage as nominee for the holder of the note, is fundamentally flawed. The court held that the issues regarding MERS were not material to the opinion.
Although she joined the conclusion that the mortgage was valid and had been equitably assigned, to whomever held the note, Chief Justice Abrahamson questioned the propriety of the MERS system. She said that there is a “disparity that exists between the recording statute and the modern-day electronic mortgage industry” and invited the legislature or other litigants to address the MERS system.
This decision is a major victory for lenders, who have been regularly relying on the doctrine of equitable assignment in these circumstances. The decision makes good sense in today’s mortgage-lending marketplace. Despite the volatility of the market in the past few years, it is still common for loans to be bundled and sold on the secondary market. The notes, as negotiable instruments, are often bought and sold several times before a default. Not requiring mortgage assignments to be recorded each time makes the loans more marketable, ultimately benefitting consumers.
And borrowers already know who holds their mortgage note because other laws require lenders to provide of a loan assignment. See, e.g., 15 U.S.C. § 1641(g). Recording the mortgage only provides notice to the world that the property secures a debt. Indeed, the facts here demonstrate that Dow had plenty of notice that this condo secured a note given by the Sullivans.