Property Law Developments—Joseph William Singer

In Washington state, lenders typically use the deed of trust form for mortgages where the lender is the “beneficiary” of the trust and the “trustee” has the power to act to protect the beneficiary’s interest by foreclosing on the property if the borrower defaults on the note (the underlying loan). MERS is typically listed as the beneficiary of the deed of trust rather than the lender that actually issued the loan  (and signed the note) in order to avoid having to record future assignments of the mortgage; the deed of trust is recorded listing MERS as the beneficiary rather than the lender that issued the note to the borrower/homeowner. Interpreting the meaning of the word “beneficiary” in state foreclosure statutes, the Washington Supreme Court agreed with other courts that have held that MERS is not actually the beneficiary of the note and thus has no power to initiate a nonjudicial foreclosure of the property upon default of the payments. Bain v. Metropolitan Mortgage Group, Inc., 2012 WL 3517326 (Wash. 2012).

The court refused to say what the consequences of this ruling would be, although it did suggest that the proper party to bring the foreclosure is the current holder of the note who actually possesses the note or can demonstrate the chain of transactions that makes it the beneficiary of the note. The court also suggested that MERS might act as an agent of the actual beneficiary but only if it could identify the principal and prove that it had been granted agency power to act on behalf of that principal.

The court also held that the facts might present a violation of the state consumer protection act because MERS misrepresented itself as the beneficiary to the borrower, thus engaging in a deceptive business practice. Whether the statute was violated depended on whether the borrower could show that she was injured by the deceptive statement. This is a potentially explosive ruling because MERS’s entire business model depends on listing it, rather than the lender, as the “mortgagee” or “beneficiary” of the deed of trust. On the other hand, the court finds no consumer protection violation unless the borrower can show injury and MERS could avoid causing injury by keeping track of who holds the note and revealing that information to the borrower. This would represent a significant change in MERS’s original business model since it typically only would reveal to borrowers the identity of the loan servicer, not the current holder of the note and not the chain of assignments from the original lender.