What is MERS?

Real Estate Lawyer

The Mortgage Electronic Registration System (MERS) was developed to keep track of transfers of and modifications to loans nationwide. MERS generally does not transfer any mortgage rights, as it only tracks changes in servicing rights and ownership interests. Anytime the loan is transferred, MERS tracks it electronically. Under this system, the lender no longer needs to record an assignment with the county recorder. This system also prevents the need to physically deliver the note. 

Further confusing the identity of MERS is MERSCORP, Inc., which is the operating company that owns and manages the MERS system and other MERS products. MERSCORP, Inc. is in turn owned by twenty-three companies.

Using the MERS system, MERS is identified as the beneficiary of the deed of trust. MERS is usually called a beneficiary “as nominee” for the note’s holder, though MERS itself does not own the note. MERS can also assign its beneficial interest to other parties. (Intengan v. BAC Home Loans Servicing LP (2013) 214 Cal.App.4th 1047, 1055.) In addition, a MERS deed of trust usually has language allowing MERS to initiate foreclosure and assign the deed of trust. Homeowners must be aware of what MERS can do and the role MERS plays in their mortgage. Our friends at Underwood Law Firm dive deeper into the MERS system and its role below.

MERS and Foreclosure

The ability for MERS to foreclose on property has often been challenged in many states. In response, some state courts have repeatedly upheld the authority of MERS to initiate nonjudicial foreclosure. If MERS is named as beneficiary on the deed of trust in MERS, then MERS has the authority to give notice of default and sale. 

The controlling case on this issue is Gomes v. Countrywide Home Loans (2011) 192 Cal.App.4th 1149. In Gomes, Jose Gomes took out a mortgage to buy property. (Id., at 1151.) He signed a note secured by a deed of trust with KB Home Mortgage Company as the lender and MERS as beneficiary. (Id.) In the deed of trust, there was a provision stating that MERS had the right to foreclose and sell Gomes’ property. (Id.) 

Gomes defaulted on his loan and an agent for MERS called ReconTrust sent Gomes a notice of default and sale. (Id.) This started the nonjudicial foreclosure process on Gomes’ property. (Id.) Countrywide Home Loans, who was acting as the loan collector, also sent a Gomes a declaration regarding the default. (Id., at 1152.) 

Gomes sued ReconTrust, Countrywide, and MERS asserting several causes of action. (Id.) The main cause of action at issue was wrongful initiation of foreclosure. (Id.) At this point, Gomes did not know who owned the note because he believed KB Home Mortgage Company had sold the note on the secondary mortgage market. (Id.) 

Gomes argued that the current owner of the note, whoever it was, did not authorize MERS to initiate foreclosure, and so MERS did not have the authority to initiate foreclosure. (Id.) The defendants demurred, which the trial court sustained. (Id., at 1153.) The trial court then entered judgment in favor of the defendants. (Id.) Gomes appealed the trial court’s judgment. (Id.)

On appeal, Gomes argued that the nonjudicial foreclosure statutes allowed him to bring an action to determine if the person initiating foreclosure had such authority. (Id., at 1155.) The Court of Appeal was not convinced, holding that Gomes had no right under the nonjudicial foreclosure statutes to bring a lawsuit to determine whether MERS was authorized by the note’s holder to initiate foreclosure. (Id., at 1156.) The Court of Appeal ruled the trial court properly demurred Gomes’ lawsuit. (Id., at 1157.)

The Court of Appeal, however, did not stop there. The Court of Appeal concluded that even if Gomes could bring a lawsuit to determine whether MERS had authority to initiate foreclosure, Gomes agreed to MERS’ authority to initiate foreclosure by signing the deed of trust. (Id.) The deed of trust contained a provision specifying that MERS had the authority to foreclose on the property. (Id.) The Court of Appeal held that in signing the deed of trust and agreeing that MERS had authority to foreclose, Gomes could not pursue a lawsuit claiming that MERS did not have authority to foreclose. (Id.) The Court of Appeal affirmed the trial court’s judgment. (Id., at 1159.)

Gomes demonstrates how MERS can initiate foreclosure, even if the property owner does not know who owns the note. Additionally, a deed of trust involving MERS will typically include a provision authorizing MERS to initiate foreclosure. Even if the owner’s note is passed around and no one knows where the note ends up, MERS will ultimately still be able to foreclose the property.

MERS and Quiet Title

Parties seeking quiet title against a lender must name MERS in the lawsuit. Parties must do this even though MERS technically only has status as nominee of the true lender. Otherwise, there can be severe consequences for the property owner bringing the lawsuit.

In Paterra v. Hansen (2021) 64 Cal.App.5th 507, Natalie Paterra made an agreement with Affiliated Financial Professionals (AFP) where Paterra would retain possession of the property, but she would transfer title to AFP. (Id., at 516.) In return, AFP would take out a loan on the property, make payments on Paterra’s previous mortgage, and return the property after paying off AFP’s loan. (Id.) Unknown to Paterra, AFP conveyed the property to various third parties in several transactions, including one where a third party named Clarion signed a deed of trust with MERS as the beneficiary. (Id.)

Paterra then sued for quiet title, bringing the lawsuit against multiple parties. (Id., at 517.) The trial court entered judgment in Paterra’s favor, including a judgment against Clarion. (Id., at 524.) Afterwards, MERS assigned the deed of trust to another party, ABS. (Id.) Paterra then sued for quiet title against ABS and MERS, and the trial court ruled in her favor. (Id.) ABS moved to vacate the first judgment against Clarion, which the trial court denied. (Id.) ABS then appealed the trial court’s judgment. (Id., at 525.)

The Court of Appeal ruled that the trial court erred in denying ABS’ motion to vacate and the trial court’s judgment against Clarion was void. (Id., 529.) One reason was that Paterra did not name MERS as a defendant in the first quiet title action. (Id.) The quiet title statute requires the plaintiff to name known parties with adverse claims on the property. (Id., at 537.)  

Paterra was seeking quiet title against Clarion, a lender, so the Court of Appeal concluded that she was also required to name MERS in the lawsuit, since MERS had a known adverse claim related to Clarion’s claim. (Id., at 538-539.) The Court of Appeal ruled that Paterra’s failure to name MERS voided the trial court’s quiet title judgment against Clarion. (Id., at 539.)

Paterra is illustrative of how important it is for parties to understand MERS’ role in a property owner’s mortgage. Even with quiet title lawsuits, which at first glance may not seem to have anything to do with MERS, parties must be aware of how MERS is involved. Otherwise, the judgment itself could be voided. 

An Example

“Shawn” is a homeowner who is down on his luck. He decides to take out a loan. In taking out the loan, Shawn signs a note owned by a bank. Shawn also signs a deed of trust with MERS as the beneficiary. The deed of trust includes a provision allowing MERS to foreclose and sell the property.

At some point, the bank sells the note to an unknown third party. Eventually, Shawn defaults on his loan. As a result, MERS delivers notice of default and trustee’s sale, which starts the nonjudicial foreclosure process. 

Shawn wishes to challenge MERS’ authority to initiate foreclosure, as the note’s current owner is unknown. Shawn, however, agreed to MERS’ authority to initiate foreclosure in the deed of trust. Even if the deed of trust did not have such an agreement, Shawn would not be able to bring a lawsuit challenging MERS’ authority to initiate foreclosure, per the ruling in Gomes. 

How Can An Attorney Assist You?

MERS is an electronic system that keeps track of loans. This is a system used all over the country. Many deeds of trust will include MERS as a beneficiary. While MERS does not own the note, MERS still has certain authority as beneficiary. It is important for homeowners to understand how the presence of MERS can affect their mortgages.

As each case is unique, litigants would be well-served to seek experienced counsel familiar with the ins and outs of property taxes and the law surrounding them. A real estate lawyer can help. If you are seeking to buy out your co-tenant’s interest in your property, are worried about whether you are subject to a tax-reassessment, or if you just have questions, reach out to an experienced attorney today.


Welts, White & Fontaine, P.C.

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29 Factory Street Nashua, New Hampshire 03060
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