A ruling last month from a Federal District Court in Pennsylvania ruled that MERS members have violated the law by failing to record assignments when mortgages are conveyed between MERS members.
The lawsuit, filed by Montgomery County, Pennsylvania Recorder of Deeds Nancy J. Becker, alleged that the MERS system, which tracks mortgage assignments in its private registry to avoid recording mortgage assignments in the public record, is incompatible with Pennsylvania law, by virtue of a compulsory recording statute which states that "All deeds, conveyances, contracts, and other instruments of writing wherein it shall be the intention of the parties executing the same to grant, bargain, sell, and convey any lands, tenements, or hereditaments situate in this Commonwealth, upon being acknowledged by the parties executing the same or proved in the manner provided by the laws of this Commonwealth, shall be recorded in the office for the recording of deeds in the county where such lands, tenements, and hereditaments are situate.". Montgomery County asserted that MERS needs to record an assignment each time a mortgage is assigned.
MERS countered that in its system mortgages aren't actually assigned-- only the notes are assigned in its system, and MERS as the "nominee" mortgagee remains the same.
But the court rejected this argument, and issued an order in July that MERS is "obligated to create and record written documents memorializing the transfers of debt/promissory notes which are secured by real estate mortgages in the Commonwealth of Pennsylvania for all such debt transfers past, present and future."
Alternatively, MERS had argued that mortgage assignments did not fall into any of the categories of transactions which require recording under Pennsylvania law. But the court disagreed, finding that mortgages are considered conveyances in Pennsylvania-- a mortgage in Pennsylvania conditionally conveys a property to a mortgagee, and a release of mortgage conveys the property back to the mortgagor, unlike in many other states, where a mortgage is conceptually considered to be a lien, not a conveyance.
If MERS does not comply with the court's order to record past and future assignments, the same court had previously ruled that county recorders in Pennsylvania have a right to file quiet title actions to compel parties who have assigned a mortgage without recording it to record an assignment. In theory, such quiet title actions could result in MERS mortgages being invalidated en masse, although a court would likely be very reluctant to apply such a drastic remedy and would give MERS every opportunity to bring itself into compliance by recording assignments.
While the district court ruled in Montgomery County's favor, it did not rule as to what MERS will have to pay to remedy its past violations. This issue will be resolved at a trial to be held at a later date. Specifically, the trial will decide what damages MERS must pay to recorders for its past violations, if anything. Montgomery County's position has been that MERS and its members were unjustly enriched by county recorders-- county recorders provided a system of recording mortgage interests which MERS needed to use, but did not fully pay for when it "layered" its registry "on top of" the public record but did not pay for the public record through mortgage assignment recording fees. If the trial results in a finding that MERS was unjustly enriched, MERS may have to pay back recording fees on mortgages even where mortgages have been released and there is no present need to record assignments to preserve an active interest.
The case has already been certified by the court as a class action covering all Pennsylvania counties, and evidence is likely to be presented at trial supporting damages in most if not all Pennsylvania counties. Montgomery County alone identified over 100,000 non-compliant MERS mortgages and over $15 million in estimated unpaid recording fees.
No matter what a jury trial for damages determines, the outcome of this ruling and the jury trial are appealable.