Legal analysts say the way Mortgage Electronic Registration Systems handles mortgage assignments during securitization should be changed, but they reject the idea that MERS is at risk of being completely dismantled.

"Although a few courts may identify perceived deficiencies with the use of MERS in certain contexts, the majority of courts presented with questions regarding the validity of the system continue to accept and uphold MERS’s role as a legitimate cog in the mortgage lending industry," attorneys with K&L Gates said in a new report.

The debate over MERS, a subsidiary of Merscorp, intensified this week when a New York appellate court invalidated a foreclosure, ruling MERS assigned the loan to a trustee without having possession of the underlying note from the originator. While the case struck a chord with MERS critics, legal analysts see the reality surrounding MERS litigation as one that is extremely nuanced and case specific.

While the New York appellate court recently invalidated one foreclosure, the opinion in that case varies from another New York appellate decision, which found MERS may proceed with a foreclosure since the lender transferred the actual note to MERS before the foreclosure action was filed.

Two recent decisions out of the U.S. District Court in the Eastern District of Southern Michigan also show courts reaching varying outcomes when dealing with MERS-related foreclosures.

Judge Marianne Battani recently denied a plaintiff's request to get a Michigan foreclosure case reheard on the grounds that MERS was not the actual foreclosing party. Another plaintiff in a separate case tried to use a different Michigan court ruling to show MERS wrongfully foreclosed on a property. The court rejected that motion, saying the party failed to present other facts that would weigh against the previous judgment.

William O'Connor, a partner and chairman of the Financial Services Practice at Crowell & Moring in New York, said the takeaway from MERS litigation is not "that MERS is a bad idea."

Instead, he believes the registration system, which jumped over state recording statutes to expedite the assigning of mortgages during a wave of securitizations, will have to change its operations model or be forced to restructure under the weight of coming legislation. O'Connor sees MERS perhaps being turned into a type of approved model for transferring mortgages, but one that complies with state recording and foreclosure statutes.

At the same time, O'Connor views the latest opinion out of New York as significant.

"The courts are saying: 'We have concerns about this system and whether its in compliance with strict state law requirements that are necessary to provide what we call record notice of who actually owns or holds a mortgage,'" O'Connor said.

O'Connor expects MERS to have its hands full as it tries to clean up lingering assignment issues. However, he said the long and expensive process will be similar to steps taken when clearing gaps in title.

"They are going to have to go out, and they are going to have to do the appropriate recordings," he said.

Attorneys at K&L Gates disagree with some of the generalizations about MERS' fate.

"Recently, a few courts have issued decisions that have led commentators to suggest that the direction of judicial opinions recognizing the validity of the so-called 'MERS system' may be reversing course," the attorneys said. "This is not, however, the first time the mortgage lending and servicing community has heard such suggestions."

"While some would portray these recent decisions as raising concerns with the role MERS plays in the lending industry and foreclosure process," the K&L Gates report said, "these decisions are generally limited in scope, are dependent upon state-specific law, or simply offer non-binding judicial commentary."

In a recent New York appellate decision — Aurora Loan Services v. Weisblum — attorneys did note that appellate level courts are closely probing the MERS model, suggesting its business structure is not entirely safe.

The case "is an effort to see problems with the MERS structure and how it has operated, so it has some level of importance," Anthony Laura, an attorney out of New York said at the time. "A couple of things that everyone needs to take away from this case (Aurora): It is a clear signal from this appellate court that it is scrutinizing the MERS structure."

Write to: Kerri Panchuk.