Judicial Foreclosures in Kansas: Recent Developments Following the Subprime Mortgage Crisis
| Publication year | 2014 |
| Pages | 20 |
| Citation | Vol. 83 No. 8 Pg. 20 |
By David L. McCain Jr.
Although the Kansas economy seems to be improving, Kansans are still recovering from the financial market collapse of 2008. One of the primary causes of the collapse was the subprime mortgage crisis, which involved out-of-control subprime lending practices, mortgage backed securities, and collateralized debt obligations.[1] Because of the subprime mortgage crisis, states saw an increase in foreclosure filings.[2] Kansas was no exception. Thus, Kansas state courts began to see a variety of new and not so new issues relating to real estate foreclosures.
Nationally, the current pace of foreclosure filings has decreased over the past year.[3] That also is true in Kansas.[4] Nevertheless, Kansas courts still are being faced with a variety of legal issues stemming from foreclosure actions filed after the 2008 market collapse. This article will examine some of the recent foreclosure issues addressed by Kansas state courts since the beginning of the subprime mortgage crisis.
I. Development of MERS
Before turning to a discussion on our Supreme Court's Landmark decision, a general overview of the MERS mortgage registration system is in order. MERS is a national electronic database that tracks changes in mortgage servicing rights and beneficial ownership interest in loans secured by residential real estate.[5] In other words, MERS is similar to a "transfer agent"[6] because it stands in i the place of a lender during a real estate transaction and keeps track of mortgages so the lender does not have to record I them locally each time a mortgage is sold or otherwise assigned.
MERS is a member-based organization made up of thousands of lenders, servicers, sub-servicers, investors, and government institutions.[7] But MERS "does not originate, lend, service, or invest in home" mortgage loans. Instead, MERS serves only as the nominee or agent for the holder of a promissory note for loans registered on the MERS system.[8] Loan originators and secondary market players, pay membership dues and per-transaction I fees to MERS in exchange for the right to I use and access MERS' records.[9] Currently, MERS is involved in the origination of more than 60 percent of all mortgage ; loans in the United States.[10]
MERS was designed to improve the efficiency and profitability of the mortgage markets.[11] The primary market in the home mortgage industry mainly consists of consumer loans.[12] Usually, those loans are evidenced by a promissory note and secured by a security instrument, such as a mortgage or deed of trust.[13] The originator often sells the real estate loans on the secondary market to investors.[14]Once on the secondary market, loans may be sold numerous times or bundled into mortgage-backed securities.[15] When residential mortgages started to be securitized on the secondary market in the 1990s, many local recording officers struggled to keep pace with the increasing requests to record assignments and other associated transactions.[16]
Traditionally, each transfer of a real estate loan included an assignment of the security instrument (usually a mortgage or deed of trust) so that it could be recorded in the local register of deeds where the real property securing the note was located.[17] MERS created an electronic national recording system that mitigates chain-of-title problems that often resulted from the delays associated with filing in county recording systems.
Certainly, MERS provides a more centralized and efficient way to record mortgages than the old system of recording each transfer with a county register of deeds. Indeed, MERS gives each loan a unique identifier which is accessible online and organized in one nationwide system.[18] In addition, lenders and other members of the mortgage finance industry save money by recording mortgages under MERS' name rather than in the name of the lender because recording with MERS allows financiers to avoid local recoding fees.[19] Ultimately, those savings can be passed on to consumers, reducing mortgage lending costs.[20]
MERS, however, is not perfect. In fact, MERS has been criticized or sued for the following: evading county recoding fees,[21] creating potential clouds on the title of real property, insulating predatory lenders, and creating a decay in the accuracy of public real property records.[22] Those criticisms are justified. For example, decay in the accuracy of public real property records could make it more difficult for attorneys and title companies to determine whether a property has a lien, or the owner of the lien. Even so, the benefits of MERS seem to outweigh its burdens, and it's unlikely that the system will go away in the near future.
II. The Kansas Supreme Court's Landmark Decision
In recent years, courts across the United States have had to determine the role that MERS actually plays in the real estate foreclosure process. In Kansas, Landmark National Bank v. Kesler involved an attempt by MERS to set aside a default judgment. The debtor, Kesler, obtained a $50,000 loan from Landmark National Bank (Landmark). To secure the loan, Kesler provided Landmark with a real estate mortgage. The mortgage was duly recorded with the register of deeds in Ford County.[23]
Approximately a year later, Kesler obtained an additional loan of $93,000 from Millennia Mortgage Corp. (Millennia), which was secured by the same real property. A second mortgage was recorded in Ford County to secure the new loan.[24] The second mortgage listed MERS as "nominee" for the lender, Millennia.[25] Later, the second mortgage may have been assigned to Sovereign Bank (Sovereign). Sovereign may have taken physical possession of the promissory note, but the assignment of the second mortgage was not recorded.[26]
Eventually, Landmark filed a foreclose action naming both Kesler and Millennia as defendants.[27] Because neither defendant filed an answer, the trial court entered default judgment against them.[28] Subsequently, MERS joined Sovereign's motion to set aside or vacate the default judgment.[29] Citing K.S.A. 60-219(a), Sovereign argued that MERS was a contingently necessary party to the foreclosure action.[30] The trial court disagreed, holding that MERS was not a real party in interest and therefore Landmark was not required to name it as a party to the foreclosure action.[31]
On appeal, the Kansas Supreme Court affirmed. In reaching its decision, the Landmark Court reasoned that "the relationship that MERS has to [the lender and its assigns] is more akin to that of a straw man than to a party possessing all the rights given a buyer."[32] In other words, MERS as nominee simply serves as an agent to the lender and its assigns. Thus, it possesses "few or no legally enforceable rights beyond those of a principal whom the nominee serves."[33]
The primary holding of Landmark was straightforward: MERS had the rights and duties as an agent to its principal and it was not a contingently necessary party to the foreclosure action. While the Landmark decision explained the limited role MERS plays in the foreclosure process, parts of the opinion have been used to raise a variety of other legal issues in foreclosure actions.
III. Foreclosure Issues Arising After Landmark
Separation of Note and Mortgage
One of the primary issues that Kansas state courts have dealt with since Landmark involves the separation of the promissory note from the mortgage. For instance in U.S. Bank N.A. v. Howie, the debtor argued that a promissory note was irreparably severed from the mortgage because the promissory note and the mortgage were held by separate entities.[34] To support its argument, the debtor relied on the following language from Landmark:
The practical effect of splitting the deed of trust [or mortgage] from the promissory note is to make it impossible for the holder of the note to foreclose, unless the holder of the deed of trust is the agent of the holder of the note. [Citation omitted.] Without the agency relationship, the person holding only the note lacks the power to foreclose in the event of default. The person holding only the deed of trust will never experience default because only the holder of the note is entitled to payment of the underlying obligation. [Citation omitted.] The mortgage loan becomes ineffectual when the note holder did not also hold the deed of trust.[35]
The trial court rejected the debtor's argument, holding that even if the note and mortgage had been severed, any severance was cured by MERS' subsequent assignment of the mortgage to U.S. Bank.[36] On appeal, the Kansas Court of Appeals affirmed, relying on different grounds than the trial court.[37]Specifically, the Howie court determined that MERS, as the initial holder of the mortgage, was acting as an agent of U.S. Bank the holder of the note. Thus, the note and the mortgage were never severed, and U.S. Bank had standing to foreclose on the mortgage.[38]
The Court of Appeals was faced with a similar issue in MetLife Home Loans v. Hansen.39 In that case, the debtor and junior lienholder argued that ownership of the promissory note and mortgage had irreparably split when the note was endorsed and assigned between various banks.[40] Accordingly, the junior lienholder and debtor argued that the bank currently holding the promissory note either lacked an interest in the debtor's real property, or held an unsecured interest that was inferior to the junior lienholder's interest.[41] The Hansen court held that the bank holding the promissory note had standing to file a foreclosure action because, as a downstream assignee of the note, it retained a beneficial interest in the mortgage.[42]
A similar issue was raised in U.S. Bank N.A. v. McConnell.[43] There, the...
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