Mortgage Electronic Registration Systems (MERS)

The amount of money available for mortgages is increased by their securitization into mortgage-backed securities (MBS). However, the securitization process involves the reassignment of the mortgage from the loan originator to the securitization trust. To facilitate the transfer of titles among financial institutions and to save on the recording fee of $35 that is typically charged by the county courthouses where land title records are typically held, the financial institutions created a corporation to hold title to the mortgage that would allow electronic reassignment of beneficial owners to the mortgage. This corporation, created in 1995, is known as the Mortgage Electronic Registration Systems, Inc., commonly known as MERS (sometimes referred to as MERSCORP, Inc.), a corporation registered in Delaware and headquartered in Reston, Virginia.

MERS operates a computer database that includes information on servicing and ownership rights of mortgage loans. MERS is the mortgagee of record and agent of transfer for most mortgages because it eliminates the county recording fee - which averages around $35 - and enables the electronic registration of ownership interests and servicing rights in its database. MERS contains records for 50% to 60% of the residential mortgages in the United States.

The creation of mortgage-backed securities required several changes of ownership. Using county land records often required manual registration and the payment of recording fees for each change of title and many recording offices could not keep up with the deluge of recordings that were required for the securitization process. In the same way that a county land record would link a parcel of land with its owner, a record in the MERS database is substituted for the county land record so that recording fees can be avoided and the change of ownership can be registered electronically.

Many mortgages include boilerplate secured agreements that include the following clause: "MERS is a separate corporation that is acting solely as nominee for lender and lender successors and assigns. MERS is the mortgagee under this Security Instrument."

Loan originators, servicers, and other financial institutions pay MERSCORP membership fees and per transaction fees for access to the MERS database. According to testimony before the United States House of Representatives, Committee on the Judiciary, by Christopher L. Peterson, MERSCORP only tracks ownership rights if the financial institution reports the change of ownership, but that the institution is under no obligation to do so.

However, in a recent bankruptcy case (In re Agard, 10-77338, U.S. Bankruptcy Court, Eastern District of New York Central Islip), United States Bankruptcy Judge Robert E Grossman in New York ruled that MERS's membership rules did not, in fact, legally make it an agent of the banks and that MERS did not have the authority, as nominee or agent, to assign mortgages without the specific written directions by its principal. Furthermore, the judge said that state law requires that any transfers of titles of real property must be in writing. The judge also commented on the fact that MERS is simply a way to avoid the requirements of the traditional mortgage recording process.

My Opinion — MERS may be the Future

In the Congressional testimony referred to above, Christopher L. Peterson seems to laud the centuries-old public record keeping system. However, electronic records will no doubt be the trend of the future, since they can be changed much more quickly, and much more cheaply, since recording will not require the intervention of unionized state workers with fat pensions. The main problem with MERS seems to be some confusion as to whether MERS is a nominee or mortgagee and the obvious flaw of not recording all changes of ownership. Nonetheless, MERS will be forced to correct these deficiencies; otherwise, the financial institutions using MERS may suffer adverse legal consequences. The fact is MERS does not seem to be much different from a stockbroker acting as agent for a retail customer, holding the stock in the stockbroker's street name for the beneficial interest of the actual owner who is the retail customer.

Peterson also argues that many borrowers do not know who to talk to when they are having problems with their loan. However, the servicer, who is usually not the originating lender, should be able to provide any information about the loan and the borrowers should certainly know who the servicer is, since that is where they send their mortgage payment. MERS even has a webpage for homeowners who have questions about the mortgage. If the borrower needs to renegotiate a mortgage, then it is the servicer, not the originating lender, that can make changes to the loan agreement or offer some other remedy, if any. The MERS webpage also has links to other sites that may help borrowers with their mortgage. It even provides a procedure for disputing any information in a MERS record, although it is not clear how a borrower would even know what was in the record.

Peterson states "Some state Supreme Court justices are likely to resent turning over the county recorder's democratically maintained recording system enshrined in law by the democratically elected legislature to a bank-owned shell company." Although I do not know the details of how MERS actually works, it seems that the financial institutions are simply using contracts and contract law to overcome deficiencies imposed by government that is more interested in protecting union jobs than it is in providing cheap and efficient service for taxpayers, although this seems to be changing, since, according to the testimony, 480 jurisdictions now offer fully electronic recording of mortgages and mortgage assignments.

Peterson seems to believe that MERS is undermining democracy by circumventing the inefficiency of county governments privately rather than through the electoral process, but democracy never has direct control over how the government works, and reforms take years to effectuate. Furthermore, any reform that lowers the cost of government by eliminating unionized jobs will be strongly opposed by the unions.

MERS, and the financial institutions that use it, are simply using their freedom to contract to lower their costs of doing business. No doubt MERS will encounter legal problems as it comes under increasing scrutiny by the courts, but like any individual or corporation that tries to find its way through the maze of American law, it will adjust its operations as needed.

Peterson also argues that MERS contributed to the foreclosure crisis. I have argued for several years that the main cause of the credit crisis was allowing loan originators to pass their credit default risk to investors of securitized loans. While MERS lowers the cost of securitization, which is why the corporation was created, it did not legally allow the loan originators to pass on their credit default risk – the law allowed that.