In the years gone by, I had always thought that this obscure acronym was an entity owned by Countrywide, as the term was always used in their Deeds of Trust. However, as I started to work with a more diverse set of financial institutions, the more I found myself running across this four-letter word. I never really paid it much attention until one day out of curiosity I stopped and peeled back the layers on this entity. Later, I learned that MERS is in the middle of the current malaise, which permeates our dysfunctional mortgage market in a big way. Let me explain.
MERS stands for Mortgage Electronic Registry System. It sounds big and official, and by volume it is very big. It is perceived as a government-managed repository of every mortgage ever brought into existence. Well, it is and it isn’t. MERS is a repository of mortgages; however, the government has nothing to do with it, or in the past had nothing legally to do with it–until now. It is privately owned and managed by its parent holding company, MERSCORP, and was originally created to track the assignment and transfer of ownership and servicing rights of real estate loans originated throughout the United States. The reason for this is two-fold. As with the practice of law, licensing for real estate is handled at the state level. Conversely, the recordation of the ownership of real estate is handled at the county level. Every time a property or its underlying mortgage “changes hands,” most counties want a record of the transaction and its corresponding fees. Therefore, MERS seeks to circumvent this requirement by vowing to keep track of every transaction involving a mortgage or mortgage-backed securities registered in its system. By and large, the mortgage industry has bought in. As it stands, over 70% of all home loans are registered with MERS.
Technically, MERS is the “owner of record” for the interest stake that comes from mortgages originated by banks, private lenders, master servicers and pooled investors. Since the start of MERS in 1995, mortgage liens and securities were assigned, traded and sold freely with information on the ultimate owners readily available for those who subscribed to the system. With a Servicer ID, a borrower could easily track down their servicer, which would then be able to identify the ultimate holder of the note to simplify negotiations in event of a imminent default, thereby staving off foreclosure. Fannie and Freddie have bought into MERS as they require registration of eNotes on the MERS e-registry prior to either entity purchasing the loans. For years, MERS worked well, and then with the advent of the subprime crisis–things changed. The mortgage implosion has created a new operating paradigm for the organization, along with lawsuits and lots of finger pointing.
From Kansas to California, New York to Nevada, Florida to Washington, and all of the states of the Union in between, MERS has become a controversial entity as the question arose as to whether MERS had ownership and/or decision making authority over the underlying loans in its registry. In some cases, MERS couldn’t prove its interest and foreclosures were suspended. In other cases, litigants argued that MERS lacked the authority to commence foreclosure proceedings and that their deeds of trust or mortgages were unlawful (some states utilize the mortgage instrument, other states, such as California, use a deed of trust).
By and large, when most plaintiffs take this entity to court, they lose as the basis for their suit is founded on MERS’ legal status as the owner of record. Most courts affirm the company’s ownership status based on the simple fact that the borrower’s signature is on the deed of trust, which outlines and affirms MERS’ ownership position from day one. However, as stated above, recent examples of case law have invalidated MERS’ position and many courts have rejected MERS’ ability to foreclose. Other courts have disavowed their ability to transfer ownership rights, while some have chose to split the difference by stating that while MERS is the owner of an interest in the mortgage, it does not equate to an interest in the underlying note (which in itself is confusing). Courts at all levels have chimed in on this decision (e.g. Federal District Courts, Federal Courts of Appeals, US Bankruptcy Courts, State Superior Courts, State Courts of Appeals, and State Supreme Courts). Ultimately, I believe that given the severity of the issue, the various decisions for and against the registry system, and the extensiveness of MERS’ reach, the U.S. Supreme Court will weigh in with a final decision on its true authority. Once that is done, a formal road map will be drawn for all to follow concerning ownership, transfer rights and assignments for mortgages registered in the MERS system and the confusion should stop.
In summary, MERS is a non-governmental mortgage behemoth. With nearly three out of every four mortgages registered and tracked within its system, when problems and controversy arise, the discourse is grand. With borrowers using every tactic to keep their properties, holes in MERS’ business incorporation and legal status as “owner of record” will be challenged vigorously in a court of law. Some will win while others may lose. Ultimately, the Supreme Court will decide and then we will deal with the consequences of the fallout and the efficiencies (or lack thereof) of the mortgage registration system that will follow. Have you read page one of your deed of trust or mortgage? Does MERS “own” your loan? Are you registered in their system? Are you in default? IS there a possibility that you may need to modify, renegotiate or restructure your loan? Given our recent foreclosure and “robo-signing” controversies, it would be foolhardy not to find out.
Preston Howard is a mortgage broker and Principal of Rose City Realty, Inc. in Pasadena, CA. Specializing in various facets of real estate finance, he can be reached at firstname.lastname@example.org.