Luther, Collier, Hodges & Cash, LLP – Attorneys at Law

ALABAMA – Securities – MERS Recording Permitted

The Supreme Court of Alabama has had to parse the complexities of mortgage securitization with the basics of English grammar to review the mortgage securitization process using the MERS database.

MERS is a private database designed to streamline the process of transferring ownership of interests on the secondary mortgage market. MERS lists itself as the mortgagee of a mortgage in county records to skip the step of recording each time a transfer is made, tracking for itself who the true interest holder is. The result is lower interest rates for the mortgagors, and low-risk investment pools for investors.

In this case, Deutsche Bank was the trustee for some residential mortgage-backed securities in Walker County, and was using the MERS system to track transfers in interests for its trust. Walker County and a local probate judge represented a class of other counties and probate judges throughout the state in challenging the use of the MERS system, arguing that the use of MERS was depriving counties of fee payments, as investors in mortgages would otherwise need to record their interests for a fee each time a transfer was made. The plaintiffs further argued that recording was mandatory with each transfer of interest in the properties under Ala. Code § 35-4-50, which stated, “Conveyances of property, required by law to be recorded, must be recorded in the office of the judge of probate.”

The parties’ main disagreement stemmed from the interpretation of the clause “required by law to be recorded” in § 35-4-50 as being restrictive, supported by Deutsche Bank as meaning conveyances that are required to be recorded must be recorded in the office of the probate judge, or nonrestrictive, supported by the plaintiffs as meaning conveyances which are required to be recorded. The trial court had found that, given the placement of the commas in the sentence, the legislature intended the clause as being nonrestrictive, thereby requiring recording with each transfer in interest, and doing away with the MERS system. The Supreme Court conceded that the commas alone indicated a nonrestrictive interpretation, but noted other sections of the code, prior case law, as well as the canon of construction against superfluous language indicated a restrictive reading was more appropriate. Thus, the Court ruled that the transfers of interest in property are not required to be recorded, and that the use of the MERS system is permissible under Alabama law.

Deutsche Bank National Trust Company v. Walker County et al. (June 28, 2019).

Read the full opinion here…

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