County drops lawsuit over mortgage recording
Washington County has called to a halt a class-action lawsuit it filed against an electronic loan registry system and a host of banks the county claimed failed to properly record property transfers during the process of creating mortgage-backed securities and avoided paying millions of dollars in recording fees to county governments.
D. Aaron Rihn, one of the attorneys representing the county, filed a notice of voluntary dismissal of the case Aug. 9 in U.S. District Court. The procedural move brings the federal case to a close.
“It’s our intent to get the matter back in state court, where we feel it belongs,” Rihn said.
The lawsuit was filed in Washington County Court March 31 against Mortgage Electronic Registration Systems Inc., or MERS, identified in court documents as a private, members-only mortgage loan registry based in Reston, Va.; MERSCORP Holdings Inc., its owner; and various other entities involved in the mortgage-backed securities industry.
The county alleged the defendants caused counties to miss out on more than $100 million in estimated recording fees statewide, created “gaps in the record of ownership” and raised “doubts about the accurate satisfaction of mortgages.”
By the time Washington County dropped the case, defendants had moved it to U.S. District Court in Pittsburgh and filed a number of motions asking for a ruling to dismiss it, citing an opinion issued by the U.S. Third Circuit Court of Appeals in August 2015.
A lower court had ruled in favor of Montgomery County in a case it brought against MERS and affiliated institutions, but federal appellate judges reversed the earlier decision.
In one brief, some of the defendants in Washington County’s lawsuit contended the previous ruling shows that state law “does not impose a duty to record. It merely provides the holder of a mortgage with the option of recording that mortgage to preserve his or her rights against subsequent bona fide purchasers.”
Along with MERS and MERSCORP, Washington County named Bank of America of Charlotte, N.C.; Bank of New York Mellon of New York City; Bank of New York Mellon Trust Co. of Los Angeles; Citibank of Sioux Falls, S.D.; CitiMortgage of O’Fallon, Mo.; Deutsche Bank National Trust Co. of Los Angeles; Deutsche Bank Trust Company Americas of New York City; HSBC Bank U.S.A., North America, of McLean, Va.; HSBC Finance Corp., formerly known as Household International Inc. of Mettawa, Ill.; JPMorgan Chase Bank of North America, Columbus, Ohio; Wells Fargo Bank of North America, Sioux Falls, S.D.; and West Penn Financial Service Center Inc. of Pittsburgh, all identified in court papers as members of the electronic registry, as defendants.
“The central purpose and intent behind the MERS concept was to enjoy all of the benefits of the land title recording system, while avoiding the administrative burden and expense of publicly recording mortgage assignments in each county and paying the associated recording fees,” the lawsuit stated.
Lenders’ use of the registry began in the mid-1990s as securitization, which requires at least three mortgage assignments and often involves more, came into vogue.
During securitization, “an investment bank, for example, purchases several mortgages and pools them into a trust or other vehicle, then issues marketable securities backed by the mortgage loans in the trust,” according to the lawsuit.
Mortgage loans in Pennsylvania involve a promissory note – which contains the borrower’s promise to repay the loan – and the mortgage, which acts, “in part, as a lien on the real estate providing the lender security for repayment of the note,” according to the lawsuit.
Members of MERS can agree with borrowers in residential mortgages to list the registry as the mortgagee of record.
“The original mortgage is then recorded in MERS’ name in county land records while the promissory note is bought and sold any number of times among MERS members without the preparation or timely recording of corresponding mortgage assignments in the appropriate county recorder of deeds office,” the lawsuit stated.
When lenders do record mortgage assignments in transfers of property notes, “they usually do so only well after the 90-day deadline imposed” by state law to file a document known as a “satisfaction” or to facilitate foreclosure proceedings because of default.
Before the county dropped the lawsuit, some defendants pointed out in a motion that 22 courts across the country had adopted positions agreeing with the Third Circuit’s.
Among the county’s demands were injunctive relief and lost recording fees.