Financial ‘innovation’ coming back to haunt the system is something we are familiar with.
But do welcome a new toxic acronym to the stable — MERS — that’s Mortgage Electronic Registration Systems Inc. It sounds innocuous enough. In its own words it’s “an innovative process that simplifies the way mortgage ownership and servicing rights are originated, sold and tracked.” But the Reston, Virginia-based company is rapidly gaining a reputation for complexity, rather than simplification.
Worth while, then, taking a look at this thing.
The MERS genesis
MERSCORP began in 1997, at the behest of mortgage industry participants like Fannie Mae, Freddie Mac and the Mortgage Banking Association (MBA).
The basic idea: to provide a centralised and electronic registry of every mortgage in the States, and to track beneficial interests, or ownership, in such mortgages. It’s not far off from the centralisation undertaken by the DTCC.
MERS is totally voluntary, but once appointed does act as the legal ‘nominee’ in public records for the lender and mortgage servicer. Which means MERS is effectively the ‘mortgagee of record’ on original mortgages and assignments of mortgage, and acts on behalf of the mortgage note-holder. (Recall that ‘mortgages’ are divided into mortgages/deeds of trust and promissory notes, or the actual IOUs.)
That’s an important point, and there’ll be more on this later.
In effect, MERS tags mortgage loans with 18-digit Mortgage Identification Numbers, or MINs — and then registers them in the MERS system. Today it holds over 60m mortgages, and some 60 per cent of newly-originated mortgages are registered with the database. It was, as others have already noted, the bedrock of the future mortgage securitisation industry. It made slice and dice possible.
It’s funny to note now, but at its beginnings, the biggest concern of MERS developers was that the system would not be widely adopted. To fix that potential problem, MERS had mortgage security instruments modified to contain MERS as the original mortgagee language. This standard was gradually adopted across the States, with Fannie, Freddie and various government agencies moving to accommodate the system.
This adoption of MERS helped create a booming secondary market in mortgages. Rather ironically, Lehman Brothers became the first firm to include MERS-registered loans in a mortgage-backed security (MBS) transaction, in early 1999.
The MERS benefits
Assignments of mortgages have been mentioned before. In short, these are documents which show that a mortgage has been transferred from the original lender or borrower to a third party. In other words, whenever a Bank of America-originated loan was securitised and sold to, say, Citi, there should be an assignment to show it.
Crucially though, MERS allows for mortgage rights to be traded without having to actually go down to county court houses and record additional assignments in public records. It cuts down on old-fashioned paperwork and it also cuts down on costs.
Back in 1999, when MERS was really getting off the ground, the assignment of mortgage recording fee ranged from $25 to $50 per loan. In contrast, registering a loan with MERS cost $3.50. Bargain! And the MERS boom promptly began.
Then the MERS problems
In recent weeks, in addition to the Robo-Signing scandal, MERS has come under the spotlight as part of the foreclosure freeze. A few state courts have claimed MERS does not have an actual stake in the proceedings, and therefore has “no standing to initiate the foreclosure action,” in the words of the Maine Supreme Court.
This is where things get a little tricky, not least because US mortgage law is a patchwork of state-specific rules and quirks. In most of the 50 states, plaintiffs in foreclosure proceedings have to be the owners of the notes. And remember, MERS acts as the nominee/mortgagee, but the company doesn’t always hold the note.
That means when a homeowner receives a foreclosure suit they usually see MERS on the documents, rather than say, Wells Fargo, Bank of America or JP Morgan. If they want to, they can use a “show me the note” strategy to fight the foreclosure suit.
MERS’ authority to act as plaintiff in foreclosure proceedings has thus been challenged numerous times in courts — with varying degrees of success. MERS itself has a handy rundown of some historic legal action, and the company is often able to argue that its status as nominee gives it the power to foreclose.
What appears to have happened in recent months, however, is that the balance of court judgements has shifted against the electronic system. At the same time, there are also accusations of more insidious breaks to the chain of title, missing assignments, and “eviscerat[ing] long-standing principles of real property law.”
Why the sudden change in MERS attitudes?
We can only speculate of course, but we’d guess the increasing mountain of US foreclosures has a lot to do with it — perhaps courts are keener to force banks to work with delinquent borrowers, rather than simply foreclose on them. The ever-increasing number of foreclosure advice websites might also be helping.
Nevertheless, answering the question could well hold the key to future developments in the foreclosure freeze. Witness on Thursday, for instance, the fact that President Obama has refused to sign-off a bill that would have helped banks force foreclosures.
As a side note, the legality of MERS seems to have been something of an issue from the start. A 1999 Moody’s briefing on MERS and its effect on MBS concludes that the system should have “no material impact” on the ability of servicers to foreclose, “although there will probably be some situations where foreclosures and the sale of [real-estate owned property] are delayed and where there are increased costs such as additional transfer taxes.” That’s exactly what we seem to be dealing with now.
The future of MERS and MBS
It’s a total mortgage mess. From a legal perspective you’ve got several threads of mortgage suits coming to a fore, from Robo-Signing to MERS challenges. You also have the original patchwork of state laws governing foreclosures. From a journalistic perspective, it’s a hot potato of many moving parts, and legal complications.
What seems clear for now is that these complications will cause a headache for MERS, and its 25 shareholders. Calls for MERS to simply be ‘switched off’ — which we understand is technically possible — have already been made. This presumably is the “nightmare foreclosure scenario,” where millions of securitised mortgages are simply “invalidated,” or become so gridlocked the effects ripple significantly through the MBS market.
The below links/sites recommended for more on MERS.
Related links:
MERS aids electronic mortgage program - Mortgage Banking, 1997
Yves Smith, Naked Capitalism
4ClosureFraud