Banks' MERS Database Stirs Concern, But What Is It Exactly?
If you have a mortgage, there's a good chance it's connected to something called MERS. MERS stands for Mortgage Electronic Registration Systems. It's a database run by a company several banks created about 15 years ago. Today, it's linked to more than half of all U.S. home mortgages. Banks created MERS to save money as they passed loans on to investors, often several times. University of Utah law professor Christopher Peterson explains. "Each time they transferred ownership of that loan under the old-fashioned way of doing things, they needed to record a copy of an assignment of that mortgage. Well, they don't want to do that anymore because it was expensive - you know, it cost $200, $300 in order to keep all of the records straight - so instead they created this company," he said. Peterson has written extensively about banks' use of MERS, and its potential ramifications. It's attracted the attention of regulators and lawmakers, and is sure to get more attention in the courts. This month, Bank of America, PNC and Citigroup warned investors they may have to pay fines or other costs associated with MERS if its use is determined to be invalid. WFAE's Scott Graf spoke to Professor Peterson to learn a little more about the MERS database and the company that runs it. Here's a transcript: Peterson: It's really, I think, fair to call it (MERS) a shell company. It doesn't own any other assets and it doesn't have employees, per se, and this company MERS pretends to own all the mortgages that are registered in its system. So, instead of recording the mortgage or the assignment in the name of the real company that actually owns it, they just say "MERS" owns it, and they pretend that MERS owns the loan for the life of the mortgage and that way they don't have to pay recording fees. But no state legislature says that you can do this. And there were no appellate decision by the state supreme court that said that that was all right either. They just got the credit rating agencies to sign off on it, and they just did it. Graf: So this system was left to its own device for, basicallya decade and a half. Why are we hearing about it now? Peterson: Well, it takes time to work these issues out in the courts, and when everybody's going along with it and there aren't a lot of lawsuits, then, nobody's complaining so things move ahead. But now, there are millions and millions of families all across the country that are losing their homes in foreclosure, and some of them are fighting these foreclosures and challenging the basic assumption that the industry made about what the law says. And it turns out that, oftentimes, that those assumptions were wrong. For example, there are now three state supreme courts that say that the basic sentence included in the contracts that borrowers sign - (they) typically say that MERS is the mortgagee or the Mortgage Electronic Registration System is the mortgagee, the person that owns the mortgage. But now three state supreme courts have said that that's not true. So what are the long-term implications for that? Well we're going to do with these millions and millions of mortgage loans that are recorded in the name of this shell company through a proxy system. Graf: So for the mortgage holders, those who bought the securitized mortgages, what are the implications? Peterson: We don't know because the state Supreme Court hasn't answered those questions yet. My own personal view is that we ought not to recognize MERS as an appropriate party to record these documents, and that that's going to create some headaches in the short-term but we need to make sure that we have a sound system of records that tracks who owns the land - not just for the next year, not just for the next five years, but for the next 100 or 200 or 300 years, just like we always have. And if we don't have that, people will be more reluctant to invest in land, businesses will be harder to start up, families will be less likely to put their life saving into neighborhoods and communities, and that we need that in order to have a healthy, vibrant middle class. Graf: Those who bought the securitized mortgages it sounds like, have the most to lose. Would that be accurate? Peterson: Well, that's right. So the investors in these mortgage loans do have a lot to lose, and this has the potential to become another big dispute between institutional investors and a lot of the big banks that packaged these securities together. When Lehman Brothers, Merrill Lynch, Goldman Sachs, Bank of America, and others were packaging these investment vehicles, they made representations and promises - what sort of underwriting was done with these loans, and also whether or not all of the laws were followed, etc. If it turns out that MERS doesn't really own the mortgage loans or that recording the ownership of loans in the name of MERS doesn't actually do what it's required to do under the law, investors are going to be very upset, and that has more potential fallout for disappointed expectations all around. Graf: Should someone who has MERS on their mortgage, but is in good standing with their mortgage, have anything to be concerned about? Peterson: Well I think that there is something for all of us to be concerned about in that it's harder to know now who it is that owns your mortgage loan. It's harder to negotiate a settlement with them in the event that you do fall behind, and it's harder to know whether or not when you pay off your mortgage loan that the person who is releasing the mortgage or releasing the lean, that the person that does that is the appropriate person to do so because that person has not appeared on the public records, which are recognized as the authoritative source of information about who it is that the borrower has to pay. But assuming there are no mistakes in the financier's records, you're probably going to be okay. So this is not the sort of thing that I think you should worry about in the short term, but I do think that for the long-term well-being of the country, this is a potential problem.