The U.S. Court of Appeals for the Tenth Circuit recently held that the securitization of a home mortgage loan did not render a deed of trust unenforceable under Utah law, and did not deprive MERS the authority to foreclose, where the trust deed explicitly granted foreclosure authority to MERS.
A copy of the opinion is available at:
Plaintiffs-appellants, including borrowers who had executed a deed of trust to obtain a home mortgage loan (collectively "Borrowers"), filed a complaint alleging that defendant Mortgage Electronic Registration Systems, Inc. ("MERS") lacked authority to foreclose on their home because the debt had been securitized as part of a pool of asset-backed securities. The Borrowers argued that the securitization process had severed the debt from its security and thereby rendered the deed of trust unenforceable under Utah law. The Borrowers also alleged that the foreclosure on their home was improper, because the current investor-owners of the loan were unknown to them.
The district court rejected the Borrower's assertions, ruling that MERS had authority to foreclose as the deed of trust expressly established MERS as beneficiary and "nominee for Lender and Lender's successor's and assigns." Borrowers appealed. The Tenth Circuit affirmed.
As you may recall, Utah law provides that a transfer of a debt secured by a trust deed operates as a transfer of the security of the debt. Utah Code Ann. § 57-1-35. Borrowers argued that this provision operated to invalidate the trust deed once the debt and its security were purportedly severed in the securitization process.
Noting that it recently addressed the "split-note" theory in a case involving factually similar circumstances and one of the plaintiffs in this case, the Tenth Circuit ruled that MERS had the authority to foreclose, because the deed of trust securing the debt expressly granted MERS that authority. See Commonwealth Property Advocates, LLC v. Mortgage Electronic Registration Sys., Inc., ___ F.3d ___, 2011 L 6739431 (10th Cir. 2011).
Here, as in its earlier opinion, the court deferred to the Utah Court of Appeals, which had previously observed that Utah Code Ann. § 57-1-35 simply recognizes the principle that transfer of a debt does not disturb the underlying security for the debt. Commonwealth Property Advocates v. Mortgage Electronic Sys., Inc., 263 P.3d 397, 399 (Utah Ct. App).
Thus, as in its earlier opinion, the Tenth Circuit noted that even if the securitization process had divested MERS of its implicit authority to foreclose, the trust deed explicitly granted MERS that authority, and Utah Code Ann. § 57-1-35 did not operate to preclude granting such authority. Accordingly, the Court ruled that Borrowers' argument lacked a legal basis under Utah law, and that the district court had properly dismissed their law suit.
Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
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