The typical mortgage is between a borrower and a lender, where the lender would make its money from the interest. This is often known as the primary mortgage market. Over time, lenders saw mortgages as an investment opportunity. Now, lenders will create collateralized debt obligations (CDO). A CDO is a conglomerate of several mortgages categorized by the risk associated those notes. These CDOs are then sold to investors who can select the CDO based on the level of risk. So, lenders now make its money from mortgage fees and the cash received from selling CDOs. The purposes of creating CDOs are (1) it minimized the risk from lenders and increased liquidity, and (2) investors can quickly and easily diversify their investment portfolio.
Mortgage-Backed Securities
As mentioned these CDOs, also known as mortgage-backed securities, have ratings to determine how risky the CDO is. A CDO with low risk have ratings of AAA, while higher risk CDOs have ratings of A or BBB. The most risky investments may not have a rating at all. Also note that the 2007 crash partially occurred because the ratings had poor investigative ratings, and the ratings were adjusted because CDO issuers were paying the rating agencies for better ratings.
MERS
MERS stands for Mortgage Electronic Registration Systems. This is a system formed by residential lenders designed to track ownership of mortgages as they are traded through the MERS system. The primary function and benefit of the system is that it eliminates the need to record the mortgage every time the mortgagee changes (when transfers occur through MERS members).
Culhane v. Aurora Loan Services of Neb.
708 F.3d 282
Facts
Culhane issued a promissory note on a home to a lender (Preferred) and then gave the mortgage to MERS as a nominee for Preferred and its successors and assigns. Preferred then assigned the note to Deutsch and Aurora serviced the loan. MERS then transferred the mortgage to Aurora.
When Culhane defaulted, Aurora sought to foreclose. Culhane argued the assignment to Aurora was invalid because the individual who signed the assignment agreement was signed by an employee. Additionally, Culhane argued that Aurora did not have the right to foreclose when Aurora only owned the mortgage (legal interest), but not the note or the right to receive the debt (beneficial half).
Analysis
By nature of MERS, an employee can sign no problem, so authority was granted. As such, there was ownership of the mortgage even though there was no ownership of the note. Even so, ownership of the mortgage, but not the promissory note, is still sufficient to have the right of foreclosure. This is true even if different parties hold the mortgage and the note.
Disclaimer
The content contained in this article may contain inaccuracies and is not intended to reflect the opinions, views, beliefs, or practices of any academic professor or publication. Instead, this content is a reflection on the author’s understanding of the law and legal practices.
