Backgrounder: A Closer Look at MERS, the Industry’s
Controversial Mortgage Clearinghouse
by Marian Wang
As we’ve noted in several posts, one player that has been featured in the foreclosure scandal and is currently under federal investigation is the Mortgage Electronic Registration System, or MERS.
Despite the fact that MERS keeps electronic records on about half of all home mortgages in the country, the system is hardly a household name. The New York Times published a lengthy piece about MERS over the weekend, the Washington Post has also written about it, as have ProPublica and other outlets. But given the many questions surrounding this creation of the mortgage banking industry, it’s worth reviewing what we know about what MERS was intended to do, how it works and why the controversy surrounding it has grown in the wake of the foreclosure scandal.
Origins of MERS
MERS is a confidential electronic registry that banks helped create in 1997 in order to keep track of mortgage paperwork. As we noted in our primer on the foreclosure scandal players, MERS saved the banks time and money by providing a private, electronic alternative to the public system used by local government recorders. By using the MERS registry, they largely avoided the recording fees.
Local government offices play important roles in recording changes in land ownership, the same way they record births, marriages, and other essential records. Having a public entity holding onto original documents is handy, after all—for instance, if you can’t find your marriage license, you can request a copy from the county you were married in. Or if you need those documents authenticated, the government can help do that too.
But for Fannie Mae, Freddie Mac and the banks, the local government recorders weren’t speedy enough—especially as the mortgage industry moved into the business of securitization, or bundling and selling mortgages. To facilitate securitization, they created MERS, a private database that relied on its members to enter data about mortgage transfers on their own.
How MERS works as recordkeeper
The creation of this system allowed mortgage companies to list MERS as the proxy for the true mortgage holder in local government records and to record subsequent changes of ownership in the MERS system only. Here’s what one expert told us about how it works:
“It’s like a Microsoft Excel spreadsheet, only bigger. It doesn’t have images of documents, it doesn’t have signatures in it. It doesn’t have copies of original documents,” explained Christopher Peterson, a law professor at the University of Utah who has written several research papers on MERS.
A member of the MERS system can put information in the database “if it feels like it,” Peterson said. “MERS uses the word ‘track,’ they say they track servicing rights or ownership rights, but that’s not really what they do. They’re more of a passive information receptacle.”
MERS faces questions about accuracy of records
A spokeswoman for Fannie Mae told the Times that the company would “never rely on [MERS] to find ownership” of a loan. More on the accuracy of MERS records, from the Times:
Alan M. White, a law professor at the Valparaiso University School of Law in Indiana, last year matched MERS’s ownership records against those in the public domain.
The results were not encouraging. “Fewer than 30 percent of the mortgages had an accurate record in MERS,” Mr. White says. “I kind of assumed that MERS at least kept an accurate list of current ownership. They don’t. MERS is going to make solving the foreclosure problem vastly more expensive.”
Despite its reliance on members to accurately input its content, MERS maintains that its system is accurate, accountable and transparent.
“With the MERS System, mortgage data is more accurate and title information more reliable,” the company has said.
MERS’ muddled role in foreclosures
Aside from the debate over MERS’ role as a recordkeeper, another controversy has long plagued the company: In some cases, banks have tried to foreclose under MERS’ name.
Given that MERS doesn’t actually own the mortgages (or hold the note), judges and attorneys have frequently questioned whether it has the legal standing to enforce these foreclosures. Critics have also argued that MERS makes it harder for homeowners to fight foreclosures because it shields the true owner of the mortgage in public records.
While MERS maintains on its website that it has the right to foreclose on behalf of the true owner of the mortgage, last month it seemed to back off from that position when it announced a proposed rule change that would “require Members not to foreclose in MERS’ name.” What this means, practically speaking, is that banks will have to go through an extra step of using a “certifying officer” to sign the mortgage over from MERS to the true owner in order to foreclose.
The additional step doesn’t necessarily mean that the information undergoes an additional layer of review, however. Those “certifying officers,” as depositions have revealed, are in many cases the same bank employees accused of “robo-signing” foreclosure documents en masse without due diligence or verification of the documents they were assigning.
One Chase employee testified that she was certified to sign as both a MERS vice president and assistant secretary, but she did not attend any MERS board meetings, did not report to anyone at MERS, had never spoken to anyone at MERS and did not know where the MERS headquarters were. As part of the changes announced last month, MERS also announced an “enhanced” process for certifying these officers.
With courts split, MERS’ future uncertain
Court cases across the country have both upheld and rejected the legitimacy of MERS’ business practices, depending on each state’s recording laws and foreclosure laws.
According to the Times, the Ohio Secretary of State has asked federal prosecutors to investigate MERS’ signing officers. In Massachusetts and North Carolina, local registers of deeds called on the states’ attorneys general to investigate the allegation that MERS deprived local governments of millions in revenue by allowing major mortgage companies to sidestep the fees paid to government recorders.
Last month in New York, a federal bankruptcy judge concluded that MERS lacked the legal standing to transfer the ownership of mortgages on behalf of the banks. (The Missouri Court of Appeals ruled similarly in 2009.) The judge, recognizing that his decision would have a “significant impact,” criticized MERS’ business model, saying it “was designed in large part to avoid the requirements of the traditional mortgage-recording process.”
The Oregonian reported today that in Oregon, where state law requires that mortgage assignments be recorded with county recorders, federal judges have halted some foreclosures and questioned whether the use of MERS caused lenders to break the law. One attorney for the lenders told the Oregonian, “A lot of us are questioning whether there is a solution.”
In California, a state appeals court last month validated the role of MERS in foreclosure proceedings: “Under California law,” wrote the judge, “MERS may initiate a foreclosure as the nominee, or agent, of the noteholder.” The company has also won favorable rulings in recent cases in New Hampshire, Georgia, Massachusetts and Kansas.
Banks have warned in their regulatory filings that, given the legal questions concerning MERS, they could face fines for using the MERS database to foreclose in lieu of original documents, Bloomberg has noted.
MERS has for months been the subject of a joint investigation by federal bank regulatorsat the Office of the Comptroller of the Currency, the Federal Reserve, the Federal Deposit Insurance Corporation and the Federal Housing Finance Agency.
MERS and the industry are well connected in Washington
A quick look at its lobbying activity shows that MERS has spent more than a million dollars on lobbying since 2009, and OpenSecrets points out that it has retained several big-name lobbyists. The Post has noted, however, that while MERS has kept a relatively low profile, the financial services industry has been lobbying aggressively to defend it and to push legislation that would affirm MERS’ legality.