MERS {Mortgage Electronic Registration System}, although operating behind the scenes, was an important and necessary cog in the "secondary mortgage market". by Gene DeNardo
(libertarian)
Sunday, September 12, 2010
There were many things that contributed to our current housing crisis and most all of them have been given some attention. But, there was one culpable development that has until lately remained hidden behind the scene and that was the formation of a corporation by the mortgage industry itself that was instrumentally in expediting the entire process.
MERS was and is an institution that allows the Mortgage Backed Security industry to circumvent the recording and title transfer process that normally accompanies the transfer of housing property mortgages. Mortgage Electronic Registration System is a firm that houses a computer program that frees the secondary market mortgage industry from the restraints of brick and mortar and allows the MBS to operate solely in the realm of high finances.
MERS records and tracks a mortgage from its inception to its final destination. MERS becomes in a quasi legal sense an agent {the term "nominee" has been used in their documents} for any party that becomes involved in the mortgage with the exception of the original homebuyer.
MERS was spawned by Fannie Mae Corporation in the mid nineties. Fannie Mae at that time was a GSE {government sponsored enterprise} and enjoyed the market advantage of carrying the "implicit guarantee" of the United States government. As we have witnessed, the guarantee was real more than implicit and Fannie Mae is now owned by the US Treasury Department.
If you have given any thought to the actual mechanics of the housing mess, you may have wondered just how the industry keeps track of the mortgage holder when the mortgage papers themselves are bundled, bought and sold repeatedly like a cheap shirt. Fannie Mae came up with the ingenious idea of a corporation that would retain the needed information and eliminate the need to legally record each subsequent transfer of ownership. That idea became MERS.
MERS was a creation of the secondary mortgage industry and to prove that, one need look no further than the list of shareholders. [link edited for length] Besides Fannie and Freddie {which also qualify MERS as partially public owned}, the list includes GMAC, Chase, Merrill Lynch, Washington Mutual {oops!}, etc. The Board of Directors is no different. MERS is the bastard child of the mortgage industry.
Without MERS, the mortgage backed security would be a more expensive, more cumbersome and a less competitive security. MERS allows investors to concentrate on the security itself and dismiss the underlying house and required paper work and title complications that so occupy the resources of average folks. And, MERS allows the transaction to take place expediently, at the click of a mouse, rather than an extended process of filing each individual mortgage transfer down at the county clerk's office. Not to mention the omission of the modest recording fees which aggregately would be quite substantial given the millions of mortgages and thousands of MBS transactions. Title insurance fees would not be so modest.
In a true free market, firms similar to MERS might supplant state recording of property titles. But, we would also expect to see competition among firms of this nature. MERS avoids competition not only by being founded by what is now a government corporation, Fannie Mae who services and guarantees over 50% of all mortgages in the United States, but also by being a requirement of Fannies for any banker and broker who wishes to sell a mortgage to Fannie. The quasi public spider weaves his quasi private web.
The mortgage is originated at the bank and then given an ID number through the MERS system. The deed is recorded traditionally at the county recording office but the mortgagee {mortgage owner} is filed as MERS. Fannie Mae purchases the mortgage from the bank and binds it up with numerous others in a MBS. The security can be bought and sold as many times as any profit can be made {lately most of the buying is by the Federal Reserve} without any bother dealing with title registration. Everything is recorded within the MERS system.
Perhaps, what may be most convenient about this system, other than transaction speed, comes into play when properties in a MBS default and require foreclosure. Certainly no corporate investor operating who knows where would be interested in holding a security in which they would have to personally foreclose through the courts on folks who live in who knows where else on 5% {the current foreclosure average} of the mortgages currently in the investor's portfolio.
So far, with exceptions, MERS has been able to represent, through an agent, whoever may own the MBS at the time of foreclosure. However, quite a bit of challenging litigation has come up. Some has been to dispute the paper trail of titles that may or may not be complete, often depending on court interpretation of MERS legal role and what paperwork is actually presented.
Other cases have attempted to prove that MERS has no legal right to a place on title in the first place, since they haven't paid for any property, nor will they receive payment, nor do they truly "represent" the holder. The use of the term "nominee" has also been questioned. The assignment of the right to foreclose or sell to a corporation whose primary purpose is recordkeeping has also been brought up. You can imagine the many other issues that this relationship conjures in the courtroom, mainly due to the fact that, well, traditionally it is not a legal entitlement or representation.
While a mortgage is in its strictest sense a contract, it is secured by physical property and the transfer of the mortgage is a transfer of the right to own that same property, the house, in case of debtor default. MERS, one sole private corporation with public sector connections, is claiming to have the right to represent random mortgagees in up to 60 million cases {@ total of all mortgages that are under the jurisdiction of Fannie Mae} simply because they were paid to track the transfer of ownership electronically and the principle mortgagee, who is not on the legal title at the county office, is contracted to be represented by that same party within documents defining that same holder of records. .
Mortgages are usually transferred by contract. No matter the complications involving the transfer or multiple transfers of the mortgage contract, traditionally this has been legally simplified by the registration of the current mortgagee in the records of the county courthouse.
MERS, spurred on by their connections with the federal government mortgage titans, has attempted to use the law of contract to circumvent this time honored legal registration process. What the courts will decide and most likely it will end up in the Supreme Court, is whether their use of contract is legitimate enough to not only legally track the transfer of title, but also to legally endow MERS with the powers of representation, including the right to foreclose and sell properties they have no beneficial interest in.
It's estimated rather crudely that somewhere in the area of $10 trillion dollars worth of mortgages are under the umbrella of MERS. A Supreme Court decision against the actions and mechanics of MERS would be a landmark decision against an obvious alliance of the state and quasi private corporations and would be highly unlikely, not to mention unprecedented.
Regardless of the outcome, we have another marvelous example of state intervention being used to create a profit machine for privileged corporations that eventually crumbles and requires additional public funding on an even grander scale to preserve the skeletal remains, just in case the bones may be of some use in the future.
MERS was conceptualized by Fannie Mae, a GSE {government sponsored enterprise}, funded and held publicly not only by Fannie and Freddie, but by the major players in the mortgage industry {all who achieved much of their standing through their connection with Fannie and Freddie}, was instituted as a fundamental required step in the formation of any MBS bundled and guaranteed by Fannie, circumvented traditional legal procedure that had been in place for centuries, in the process expediting the tool {the MBS} that was instrumental in creating possible the biggest financial boondoggle in recent {and not so recent} history and at least if we can believe what we were told, threatened our entire financial system.
What will they think of next?
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Posted By: Jahfre Fire Eater
Date: September 12, 2010 03:19:11 PM
If the courts rule that the MERS mortgages cannot be foreclosed due to contractual terms that would be just the homeowner relief the Obama team hoped to create with their failed bailout.
-Jahfre
