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Caraballo v. Homecomings Financial

United States District Court, S.D. New York

May 21, 2014

HOMECOMINGS FINANCIAL, et al., Defendants.


J. PAUL OETKEN, District Judge.

This is a predatory lending case involving a home in the Bronx, New York (the "Property") that Plaintiffs Rene Caraballo and Carmen Torres purchased with financing from Defendants, a collection of financial services entities.[1] Plaintiffs have moved for partial summary judgment declaring that the mortgage filed against the Property is void and unenforceable.[2] For the reasons that follow, that motion is denied.

I. Background

A. Origination of the Note and Mortgage

Plaintiffs acquired the Property on May 14, 2007 for a purchase price of $397, 500. To finance this purchase, Plaintiffs obtained a $397, 500 purchase price loan from Defendant Homecomings Financial LLC ("Homecomings") and executed a Note for this amount ("the Note"). The Note was secured by a Mortgage which identified Defendant Mortgage Electronic Registration Systems, Inc. ("MERS") as the mortgagee of record "solely as nominee for [Homecomings] and [its] successors and assigns."[3] The Note granted Homecomings a right to be paid under the terms of the Note while the Mortgage purportedly granted MERS a security interest in the Property.[4]


This case follows a flurry of litigation questioning the legal status of mortgages held by MERS. In 1993, as mortgage securitization became widespread, mortgage-industry participants created MERS to facilitate quick, low-cost transfers of mortgage interests. MERSCORP, Inc. v. Romaine, 8 N.Y.3d 90, 96 (2006). Under the public recording system, each transfer of a note triggered fees and the potential for "delays... by local recording offices, which were [subject to]... complex local regulations and database systems that had become voluminous and increasingly difficult to search." Bank of New York v. Silverberg, 926 N.Y.S.2d 532, 535 (N.Y.App.Div. 2d Dep't 2011). MERS allowed member companies to avoid these fees and delays by "appoint[ing] MERS to act as their common agent on all mortgages they register in the MERS system." Id. (citing Romaine, 8 N.Y.3d at 96). With MERS as the mortgagee of record, MERS members could exchange property interests without the need to publicly record the transfers. In short, "MERS is a private, contractual superstructure that is grafted onto the public landrecord[ing] system." Adam J. Levitin, The Paper Chase: Securitization, Foreclosure, and the Uncertainty of Mortgage Title, 63 Duke L.J. 637, 677 (2013).

"By May of 2007, ... sixty million loans... [representing] more than half of the nation's existing residential loans [were] recorded under MERS's name." Christopher L. Peterson, Foreclosure, Subprime Mortgage Lending, and the Mortgage Electronic Registration System, 78 U. Cin. L. Rev. 1359, 1373-74 (2010). MERS's workforce of around fifty employees "perform [only] corporate and technology support functions." Levitin, 63 Duke L.J. at 679. This workforce "does not lend money, ... receive payments on promissory notes, ... [or] service loans by collecting loan payments." Silverberg, 926 N.Y.S.2d at 536. Rather, MERS is an umbrella organization that holds mortgages in name only as a purported nominee of its members. The servicing and foreclosure of MERS-registered mortgages is performed by a force of over 20, 000 "employees of mortgage servicers, originators, debt collectors, and foreclosure law firms" who are nominally designated MERS employees, although they receive no income or benefits from MERS. Christopher L. Peterson, Two Faces: Demystifying the Mortgage Electronic Registration System's Land Title Theory, 53 Wm. & Mary L. Rev. 111, 120-21 (2011).

"MERS's members are nominally required to report transfers of mortgage servicing rights to MERS, but MERS does not actually compel reporting." Levitin, 63 Duke L.J. at 678. One study found that MERS's records failed to correctly identify beneficial ownership of 58 percent of its mortgages. Id. at 679 n.168. "This leaves borrowers and the local county or municipal recording offices unaware of the identity of the true owner of the note...." Silverberg, 926 N.Y.S.2d at 536.

When the collapse of the mortgage market triggered a nationwide flood of foreclosure actions, many questions were raised about the legal rights that are conferred by MERS-recorded mortgages. This case asks one such question: specifically, whether any entity holds a valid security interest in a property after the MERS-assigned mortgage securing that property is purportedly separated from the underlying note.

II. Legal Standard for Summary Judgment

Summary judgment is appropriate when "there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56. A fact is material if it "might affect the outcome of the suit under the governing law, " Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986), and a dispute is genuine if, considering the record as a whole, a rational jury could find in favor of the non-moving party, Ricci v. DeStefano, 557 U.S. 557, 586 (2009) (citing Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986)).

The initial burden on a party moving for summary judgment is to provide evidence of each element of his claim or defense illustrating his entitlement to relief. Vt. Teddy Bear Co. v. 1-800 Beargram Co., 373 F.3d 241, 244 (2d Cir. 2004). If the movant makes this showing, the burden shifts to the non-moving party to identify specific facts demonstrating a genuine issue for trial, i.e., that reasonable jurors could differ about the evidence. Fed.R.Civ.P. 56(f); Anderson, 447 U.S. at 250-51. The court should view all evidence "in the light most favorable to the nonmoving party and draw all reasonable inferences in its favor, " and a motion for summary judgment may be granted only if "no reasonable trier of fact could find in favor of the nonmoving party." Allen v. Coughlin, 64 F.3d 77, 79 (2d Cir. 1995) (citation omitted). At the same ...

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