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MERS: Myths, Misconceptions, and Realities
The housing crisis has revealed many things about our finance system. It lacked proper oversight, auditability, transparency, and incentives to do the right thing by borrowers and investors. My partners and I often refer to these calamitous times simply as the battle between – “victims and villains” - those who took advantage of the system and those who were taken advantage of by it.
MERS is emerging as a convenient and misunderstood target for pundits and politicos that appear to view this organization as fitting the profile of a “villain”.
First, let me answer the question: What is MERS?
The mortgage industry (the MBA, GSEs, and largest originators and loan servicers) created MERSCORP, Inc. to more easily identify and track individual mortgage loans and the information related to those loans, including the servicer and investor.
The MERS® System is a national electronic registry that tracks the changes in servicing rights and beneficial ownership interests in mortgage loans. The MERS® System tracks mortgage loan information by use of a unique
18-digit Mortgage Identification Number—or “MIN” as it is called—which
is registered on the MERS® System. MERSCORP, Inc. is the parent company of Mortgage Electronic Registration Systems, Inc., a corporation whose sole purpose is to be the mortgagee of record and nominee for the beneficial owner of the mortgage loan.
Because the MERS® System was developed using open, non-propriety
standards and technology, it has been incorporated into virtually all of
the mortgage industry’s loan origination, servicing, and loan delivery
software. Nearly every major originator, servicer and investor in residential mortgage finance is a member of MERS and is electronically connected to this unique system. Since 1997, more than 63 million home loans
have been assigned a MIN and have been registered on MERS®.
Today, more than 60 percent of all newly originated mortgage loans,
including those from Fannie Mae, Freddie Mac, Ginnie Mae, all major
conduits and state housing authorities, have a MIN.
In summary, MERS is a nearly universally adopted industry utility that keeps track of who owns and services your mortgage. By making MERS the “mortgagee of record” loans can be bought and sold more easily which creates a more liquid and tradeable market for mortgage assets, which should reduce costs to borrowers. Lenders pay a one time “registration fee” to MERS for this service...
Why does “MERS” appear on many mortgages?
mortgage loans typically consist of two elements: 1) a note between the
lender and the borrower that sets forth the terms of the loan and
establishes the obligation to repay the loan to purchase a property; and
2) a security instrument which depending on the state may be called a
“mortgage” or “deed of trust.”
The security instrument is
recorded in the county land records telling the world that there is a
lien on the borrower’s property. This lien allows the property to be
foreclosed upon and sold if the borrower defaults on their obligation to
repay the promissory note.
The homebuyer at the closing table
signs the security instrument (“mortgage” or “deed of trust”). By
signing this document, the lender and the borrower agree to appoint
Mortgage Electronic Registration Systems, Inc. (MERS) as nominee for the lender and the lender’s successors. By
doing so, the borrower grants the mortgage lien on the property to MERS,
and the security instrument is recorded in the county land records. As
long as the sale of Note involves a member of MERS, MERS remains the
mortgagee of record, and continues to act as a nominee for the new
Myth#1: MERS is paid by servicers to foreclose on homeowners that can’t make their payments.
Reality: Anything that MERS does beyond its core business of registering and tracking mortgage loans is a net cost to them. As the mortgagee of record, they have traditionally been responsible (though not financially incented) to carry out foreclosure actions on behalf of the lender when the music stopped playing or paying.
Myth#2: MERS is defrauding and virtually bankrupting municipalities by enabling servicers and investors to avoid paying county filing fees. Because MERS is the mortgagee of record, loans can be bought and sold without the traditional paperwork and fees required before MERS was created.
Reality: Borrowers generally pay recording and transfer fees, and, yes, when those services no longer need to be performed, a fee is no longer required.
MERS reduces the filing and transfer fees paid by the borrower (at closing) to the government when a loan is recorded and/or assigned from one lender to another, and many lenders pass on this savings to the borrower. As for “defrauding” and “virtually bankrupting” municipalities by reducing the fees they collect, avoiding these fees in no way constitutes any type of tax avoidance or fraud. Fees are paid in exchange for a service. If the service is not needed—i.e., registering subsequent assignments are not necessary and therefore paying a fee is unneeded—then there is no “lost” revenue. So while banks are avoiding the county recording fee through the use of the MERS System, it is not tax avoidance.
Misconception: If I stop making my payments MERS doesn’t have any right to foreclose since they don’t actually own my mortgages.
Reality: When a borrower signs the mortgage security instrument at closing, they grant and convey the legal title to the mortgage to Mortgage Electronic Registration Systems, Inc. (MERS) and MERS is the mortgagee. As the agent for the promissory note owner, upon instructions from the owner, MERS will commence a foreclosure. The mortgage instrument states that MERS has the right to foreclose and sell the property. Courts around the country have repeatedly upheld and recognized this right.
Remember, MERS is the mortgagee of record and acts as the note holder's agent. If the noteholder wants to foreclose, MERS needs to carry out their responsibilities to their client. MERS, like any mortgagee, needs to produce documentation (often signed original note/deed) as indisputable evidence of ownership in a mortgage. In some cases where MERS did not or cannot produce the documentation, the foreclosure actions have been cancelled. However, the right for a lender or a lender’s agent to foreclose because of a lost Deed or assignment does not, generally speaking, expunge a borrower’s obligation to pay a debt – it just might not be a collateralized loan anymore.
How does MERS fit into today’s market?
The housing crisis revealed the need for greater transparency in the mortgage loan process. Policymakers are demanding new regulations that require tracking and analysis of loan level data throughout the life of every mortgage loan – the type of data already captured or accessible through the MERS® System and the MIN. The MERS process creates accountability and transparency, helps keep
costs low, reduces the risk of errors in recordkeeping and makes it
easier to keep track of the lien if a loan is sold to other banks and
The Mortgage Identification number, or “MIN”, and the MERS® System are existing loan level data systems that are fully integrated into the mortgage industry. Together they are the single most important existing tools for tracking loan level data in the home loan process. MERSCORP, Inc. (MERS) provides a central registry of mortgage information. It identifies and tracks individual mortgage loans and the information related to those loans, as well as facilitates more efficient transfer of loans from originators to investors.
At a time of crisis in the nation’s financial system, the MIN provides greater accountability and transparency for consumers, lenders, investors and regulators. Through the MIN, MERS helps:
- Identify for homeowners the servicer of their mortgage loans
- Investors and credit rating agencies analyze the credit quality of mortgage back assets
- Regulators in monitoring compliance with the law
- Public agencies track housing and economic trends
- Track and confirm great volumes of loan-level data for professionals who originate, service and securitize mortgages
- Identify the parties responsible for maintaining vacant properties, thereby helping local governments succeed in their neighborhood preservation efforts
- Keep distressed borrowers in their homes by speeding up the loan modification process
- Law enforcement officials fight fraud by tracking down criminals who attempt to obtain multiple loans on the same property
So I would concur that there may be some confusion related to the MERS business model and value-add to the mortgage process. However, accusing them of malfeasance, fraud, or putting municipal employees out of a job is as far-fetched as saying Tiger Woods will receive the husband of the year award.
Let’s face it, the only thing MERS has done wrong is be at the wrong place at the wrong time during a crisis. And as we all know every crisis needs a victim and a villain. It just so happens that MERS was convenient to fill that role.
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