How the mortgage clearinghouse MERS became a villain in the foreclosure mess
At the time, mortgage documents were moved almost exclusively by hand and mail, a throwback to an era in which people kept stock certificates, too. That made it hard for banks to bundle home loans and sell them to investors. By contrast, a central electronic clearinghouse would allow the companies to transfer thousands of mortgages instantaneously, greasing the wheels of a system in which loans could be bought and sold repeatedly and quickly.
“Assignments are creatures of 17th-century real property law; they do not coexist easily with high-volume, late 20th-century secondary mortgage market transactions,” Phyllis K. Slesinger, then senior director of investor relations for the Mortgage Bankers Association, wrote in paper explaining the system.
On March 4, 1994, the MBA unveiled its plan to county recorders who were charged with keeping track of titles signifying the ownership of land. Not everyone was sold on the idea.
“There needs to be some outside control or oversight,” one recorder said, according to a transcript of the meeting.
Another said that if errors were put into the electronic system, “they’re really hard to track further down the road.”
Sixteen years down the road, the mortgage business is a mess. The electronic clearinghouse has become a reality; Virginia-based Mortgage Electronic Registration Systems, a registry with 67 million mortgages on file, has become part of the industry’s standard operating procedure.
Critics say promises to increase transparency and iron out wrinkles in record keeping haven’t panned out. The firm, which tracks more than 60 percent of the country’s residential mortgages but whose parent company employs just 45 people in a Reston office building, is now on the firing line.
MERS is facing lawsuits from across the country seeking unpaid county recording fees. Several state courts have rejected attempts by MERS to act on behalf of banks seeking to foreclose on delinquent mortgages. And Congress is weighing legislation that would bar home loan giant Fannie Mae from buying any mortgage listed in MERS, potentially a death knell for the registry.
Merscorp, the registry’s parent company, argues that it helps borrowers. Spokeswoman Karmela Lejarde said MERS has kept costs low, reduced the risk of record keeping errors and made it easier to keep track of loans.
“MERS plays an important role in building and sustaining confidence in the mortgage process,” Lejarde said.
But in the recent uproar over improperly prepared foreclosure paperwork, MERS has become the central villain.
“They’ve tried to turn the mortgage business into . . . a production line,” banking lobbyist Rick Hohlt said. “But in reality you’re dealing with humans. You’re not building cars or widgets.”
The blueprint
The impetus for a nationwide electronic database of mortgages originally came from the biggest players in the mortgage business – the MBA, Fannie Mae, Freddie Mac and Ginnie Mae – in the early 1990s.
“The original thought was that the process was one of the most manual, labor-intensive, town-hall-to-town-hall processes, and there was a kind of broad industry effort to improve on that,” said Daniel Mudd, former Fannie Mae chief executive and now chief executive of Fortress Capital, a private equity firm.
The savings and loan crisis had just passed and the mortgage business was picking up again. At the time, an unconventional entrepreneur named Angelo Mozilo was on the MBA board. Mozilo would eventually pay a $67.5 million to settle Securities and Exchange Commission allegations of fraud and insider trading. But back then Mozilo was one of the industry’s most admired executives, known for his inventiveness and technology investments at his firm Countrywide Financial, which in 1992 catapulted to first place among the nation’s mortgage originators.
Mozilo could not be reached for comment.
Mozilo began brainstorming with a young MBA technology expert, Brian Hershkowitz, about ways to computerize and centralize the way the industry did business.
“Angelo Mozilo loved to think about that,” Hershkowitz said, calling Mozilo “the inspiration” for what would eventually become MERS.
In the fall of 1993, the MBA began circulating a white paper, “a blueprint for the future” that Hershkowitz wrote outlining a new central registry for mortgages.
Hershkowitz, who would later join Mozilo at Countrywide, modeled the new system on a clearinghouse for stocks called the Depository Trust Co. That company not only kept track of the stock ownership but kept the physical certificates in a vault. Before the DTC had been created, brokers hired thousands of messengers to ferry certificates across New York City – a process that grew prohibitively expensive and inefficient as the volume of stock trades skyrocketed.
The mortgage industry was facing a similar problem. As interest rates sank, the number of new mortgages and refinancings soared. County recorders’ offices, which at that time were not automated, were having trouble keeping up.
MERS came in to existence at the perfect time. It allowed thousands of transaction to happen that would not otherwise been able to be completed. It allowed mortgage to be pooled and bundled into Wall Street products because assignments showing fractional ownerships in mortgages did not have to be recorded.
Unfortunately as the Foreclosure crisis hit, there became legal questions on who actually owned the mortgages and thus had standing in court proceeding against delinquent borrowers.
MERS doesn’t actually own the mortgage, it is simply a registry. So do they have enough standing to file a foreclosure on behalf of the end investors? Courts have said no. What about the Wall Street Investment Banks? This has become a problem as well because what is recorded at the Recorders office lists MERS as the owner not the Wall Street Bank.
So a system that was supposed to make things easier has actually made it more complicated.
