MERS, the Black Hole of the Title Transfer World

In reading about the ongoing foreclosure mess, one acronym keeps coming up: MERS. That would be the Mortgage Electronic Registration System, Inc. - a Delaware based company that (for a fee) will agree to be listed as the mortgage owner in county records.

If that sounds odd to you - you don't know the half of it.

By way of Felix Salmon - I started reading a paper by the University of Cincinnati Law Review's Christopher L. Peterson: Foreclosure, Subprime Mortgage Lending, and the Mortgage Electronic Registration System.

Yeah, yeah, I know - but it's actually fascinating reading.

Here are the highlights. MERS is basically an umbrella corporation that interposes itself between normal title transfer registrations (and their resulting fees), maintains its own records of those transactions, and allows lenders to assume the role of MERS employees when they need to foreclose.

Here's a visual aid (from the paper):

This is a normal series of title transfers for a mortgage.
At number 1 is the original mortage where the homeowner and the loan originator make a deal.
At 2 - is where that bank sells the loan to some other bank or broker
At 3 is where that bank or broker sells the loan to Trust or special purpose vehicle (SPV) so it can be sold to large numbers of investors.

At each of these steps you'll notice that the transfer of the note (the actual contract saying what property is involved and who owes what to whom) is recorded in the county register (each time requiring a fee).

It should suprise no one that county records are frequently written ledgers on dusty old shelves.
But they are public records and rigorously maintained to avoid conflicting claims on the same piece of land.
Prof. Peterson goes on at length about the notoriously anal retentive standards of title registration. Title insurance exists to cover what error remains - but as anyone who as been to a real estate closing will tell you - these folks sweat the details.

This takes time, and annoys bloated financial industry types - who want to avoid paying fees and having to wait for the clerk's office to process their transfer.

So, they created a go between - MERS.

In its ultimate form, picture above, MERS is listed on the mortgage. They track subsequent transfers of the title (which are not recorded by the county) and no further fees are paid to the county no matter how many times the title changes hands. MERS remains on county record of the sale.

This is problematic for lots of reasons, but you can see why at first this system worked. The county and the homeowner see nothing unusual - because from where they are sitting nothing changes. The county records the original sale - and never sees the later deals. The homeowner is told to send checks to a servicing agency at the time of the deal, and that does not change.

MERS has served its primary purposes: cutting transaction costs and speeding up the process. It's been wildly successful:

With the rating agencies' stamp of approval, the use of MERS exploded in the early 2000s. By late 2002, MERS had recorded its name, instead of the actual assignee or mortgagee, in ten million residential home mortgages. As the subprime mortgage refinancing boom took off, MERS registered an average of 21,000 loans on its system per day. Only a year later, the total number of loans recorded in MERS's name doubled to twenty million. By May of 2007, this number had tripled again to sixty million loans. Sixty percent of all new mortgage loan originations are recorded under MERS's name, and more than half of the nation's existing residential loans are recorded under MERS's name.

MERS maintains a database of the subsequent transactions, which is available to its member institutions (but not to the public).

And that's the first problem. State laws require that subsequent sales of a property be recorded in THEIR records - and MERS is making that not happen.
MERS would (and does) say that this is not necessary, that MERS is still on the mortgage of record and that has not changed.

Peterson points out that this is bull$hit - because the laws are looking for the role you actually play - not what you call yourself. In other words, you can call yourself the mortgage holder - but unless you lent the homeowner money, are owed payments, or have the right to foreclose on their property - you're nobody. Here's Peterson again:

In thousands of cases around the country MERS's counsel continues to recite the statement that "MERS holds legal title to the mortgage" as though it were the fmance equivalent of some tantric mantra. Yet any meaningful economic analysis of this claim exposes it as a simple falsehood. MERS does not own the lien because it does not own the proceeds of the sale rendering disposition of the property seized in exercising the lien.

That's why MERS is increasingly in the news these days. The MERS system works well when loans get paid, even when a few don't. But when loans start to blow up left and right - sooner or later somebody's going to ask "Who the hell are these MERS guys? And how come they don't have the note?"

And that's when MERS guys will show up and say they're here to foreclose on a property. What will be weird about them is that they will look exactly like the guys who work for the XYZ Trust that the loan was sold to. This is because the MERS guys aren't MERS guys at all. Oh, they'll say they are employees of MERS, they'll even have paperwork that will say they are a "Secretary and Vice President of MERS" - but they've never been paid a cent by MERS. The opposite is true. They pay MERS so they can (and I'm not making this up - read the paper) enter their names into a web form on MERS's website and print out credentials for the express purpose of appearing in a foreclosure proceeding as agents of MERS.

Why would they do this?

Primarily, because MERS is listed on the mortgage of record. If a foreclosure proceeding was begun by XYZ Trust, they'd have to explain why XYZ trust isn't listed on the county register as owning the property. MERS does.

Better still, XYZ Trust - were they working as MERS legal designates under their own name - would fall under federal regulation for debt collection. Crucially, federal debt collection regs do not apply to original creditors. By pretending to be MERS agents at time of foreclosure, the XYZ Trust can assert they are the original creditor and go at a homeowner with hammer and tongs without fear of federal intervention.

So MERS operates as a flag of convenience for lenders at two critical points in the deal: first, as a way to avoid paying fees - and second as a way to avoid regulations when it comes to foreclosure proceedings.

Peterson points out another unfortunate service MERS affords its less than savory members:

When thinly capitalized originators churned out more and more securitized loans, claims against those lenders accumulated, while their assets did not. Once the projected costs of disgruntled investor recourse demands and borrower predatory lending lawsuits exceeded the projected costs of bankruptcy and reformation under a new corporate guise, originator management would predictably discard their corporate identity. 206 MERS made this easier by . offering a super-generic placeholder that transcended. the aborted life of lenders. MERS reassured investors that even when an originator goes bankrupt, county property records would remain unaffected and foreclosure could proceed apace. By serving as the true mortgagee's proxy in recording and foreclosure, MERS abetted a fly-bynight, pump-and-dump, no-accountability model of structured mortgage fmance.

All of this is over and above the lack of paperwork foolishness> The MERS database of transactions may assist creditors and homeowners in figuring out what loans went where - but only if they are permitted to see it.

More to the point - the appearance of MERS in county records as the mortgage holder of record is essentially a roadblock to public inquiry. Somebody sells you a house and the former owner was listed as MERS - your title insurance company is going to have a harder time figuring out if MERS really holds title, or if they've sold it to someone who has since gone bankrupt or resold it, or god knows what.

Which is not to say the end is nigh, but as Prof. Peterson points out in detail - when a private record system is used to supplant a public one - all kinds of bad things can occur.

I'll leave a summation of some of those things to wiser minds like Barry.