Mortgage Electronic Registration: Who Really Holds Mortgages?

The Mortgage Electronic Registration Systems (MERS) is the privately run electronic database that is used by lending institutions and investment companies to track the transfer of the ownership of mortgages as they are packaged into securities and traded around the globe. But MERS does more than just track the trading of loans. In the vast majority of mortgage documents at local courts and offices across the country, it is listed as the holder of the loans. That allows the financial industry to trade mortgages as much as it wishes without spending the time and money to refile the paperwork.

The financial services industry is seeking legislation that would effectively affirm MERS's legality and block any bill that would call into question what MERS does. MERS has spent more than $1 million in lobbying since fall 2008, when lower courts around the country began to rule against it. But MERS had kept its name under the radar until the recent uproar over foreclosures revealed broad problems in mortgage paperwork.

If successful, the industry could make all lawsuits related to MERS across the country moot and remove one of the key uncertainties dangling over the mortgage industry. But lawmakers could create a new federal registry, effectively killing MERS's business and forcing the industry to submit to greater oversight. Reston-based Merscorp, which runs MERS, have been floating the idea of legislation that would establish the firm as the national registry to track the transfer of mortgages.

In recent years, MERS has become the target of numerous legal challenges from homeowners in foreclosure who allege that mortgage transfers made through the system are invalid because they bypass local recording laws. MERS, the lawsuits contend, does not have standing to foreclose because it is only a database and not the actual holder of the mortgage.

The liabilities could be astronomical for MERS. One lawsuit in California alone is seeking recording fees that could cost the company from $60 billion to $120 billion. But the consequences for the financial industry are even greater, as challenges to the validity of transfers done by MERS call into question the entire process of how loans were securitized and could render the 66 million mortgages in its system foreclosure-proof.

MERS is also under scrutiny by the Office of the Comptroller of the Currency (OCC), which oversees national banks. The OCC is taking the lead in an interagency examination of MERS and the accuracy of the information in its database. The agency is also sending personnel to look at the foreclosure process at large mortgage servicers and how they use MERS. (Wash Post, 11/18/2010)