The lending industry launched the Mortgage Electronic Registration System in 1997 to be a centralized database to streamline the transfer of home loans among investors while making it easier for borrowers to keep track of who owns their loans.
But the system’s critics, including an influential Maryland state senator, say the industry got it only half right: Loans are being transferred electronically between investors at such an alarming pace — and with so little governmental oversight — that homeowners often cannot discover the current loan owner’s identity.
This difficulty results, in large part, from a legal fiction in which MERS registers as the nominal mortgagee in county land records offices. Loan transfers under the mortgage are not similarly recorded and “transparent” but are instead handled through the electronic database.
The true lender comes to light only when foreclosure proceedings begin, when MERS reassigns the mortgage in land records to the lender, critics say.
“They [MERS] hold the paper, but they don’t own the loan,” said state Sen. Brian E. Frosh, who chairs the Senate Judicial Proceedings Committee.
The Montgomery County Democrat said he plans to introduce legislation this session to restore order to the chaos caused by MERS, a “faceless entity” that is neither a mortgagee in fact nor a loan holder.
The bill, which is still being drafted, will essentially restore the recordation requirement to ensure borrowers can readily discover their current lenders. Frosh said. Such knowledge is critically important for homeowners in default and facing potential foreclosure, he added.
“I want to make sure that the borrowers know who they owe the money to,” he said. “It’s important to know who you owe the money to and how you can get back into [loan] compliance.”
Such legislation is under consideration elsewhere, too.
In Virginia, state Del. Robert G. Marshall has introduced the proposed Home Ownership and Title Protection Act to bar the sale of any home unless all loan assignments are recorded in the local land records office.
“It’s incomprehensible … that you can’t trace back who owns the property,” said Marshall, R-Loudoun and Prince William counties. “This is a core responsibility of government: assuring records are properly kept with respect to ownership.”
But MERSCORP Inc. President R.K. Arnold said the MERS database, which his company operates, makes it easier for borrowers to track the current owner of the loan.
He declined to address Frosh’s criticisms directly, referring instead to written testimony he gave in November to the U.S. Senate Banking, Housing and Urban Affairs Committee as part of its examination of the mortgage serving industry.
“MERS helps the mortgage finance process work better,” the written testimony said. “The MERS process of tracking mortgages and holding title provides clarity, transparency and efficiency to the housing finance system. We are committed to continually ensuring that everyone who has responsibilities in the mortgage and foreclosure process follows local and state laws, as well as our own training and rules.”
Titles and transfers
Frosh’s legislation will be introduced amid mounting criticism of the system run by MERSCORP, a Reston, Va.-based company owned by about 3,000 members of the mortgage lending industry who pay annual dues of between $264 and $7,500. About 31 million active loans are registered on MERS, the company said.
Federal legislation introduced in the waning days of the last Congress would have prohibited the nation’s major home-loan insurers — Fannie Mae, Freddie Mac and Ginnie Mae — from underwriting any mortgage listed with MERS.
Attorney Phillip Robinson, who represents homeowners facing foreclosure, said concerns about MERS are justified.
MERS is “a mysterious database controlled by the lending industry” in which loans are transferred without the knowledge of homeowners and without the oversight of state regulators, said Robinson, executive director of Baltimore-based Civil Justice Inc.
“I’d just like to see it outlawed,” he said. “Homeowners need to have access to who is related to their loan. They don’t need to be told to contact mysterious parties.”
Robinson added that foreclosure cases in which MERS is the nominal mortgagee should be stayed based on the uncertainty of whether MERS, a database, can be a mortgagee.
He pointed to a Massachusetts high court ruling this month in which the justices invalidated a foreclosure because the banks, U.S. Bancorp and Wells Fargo & Co., did not prove they actually owned the mortgages at the time of foreclosure. Though the issue did not involve MERS, the legal principle is the same: a break in the chain of title invalidates a foreclosure, he said.
Maryland’s top court, the Court of Appeals, has yet to address the issue of whether MERS qualifies as a mortgagee, enabling clear title. But the three state Supreme Courts that have addressed the issue — Maine, Kansas and Arkansas — have each concluded that MERS does not qualify legally as a mortgagee.
“We might begin to see some of those kind of cases” involving MERS in Maryland, Robinson said.
In response to claims that MERS is not a valid mortgagee, MERSCORP’s president told the Senate panel that the company clearly notes on mortgage documents signed by the borrower at closing that MERS is the mortgagee. The document is then recorded in the public land records, Arnold said in written testimony.
The lenders, under their membership agreement with MERS, state that the system serves as the mortgagee of record with regard to each loan, he added.
“What MERS does is eliminate the expense of repeated assignments, resulting in lower cost for lenders when they sell the loans … to investors,” Arnold added. “When the note is sold, MERS continues to act as the mortgagee for the new note holder because the mortgage interest follows the note when it changes hands.”
Despite this assurance, and even in the absence of a court ruling or legislation, title insurers in Maryland might grow leery of underwriting home sales involving properties in which the MERS database was the mortgagee. Title insurers feel more comfortable with paper documents attesting to the ownership of property and loans, said underwriter Robert J. Brilliant.
“Title companies are obligated … to go back in the case and make sure all the documents that led up to that [sale] are satisfactory,” added Brilliant, president of Brilliant Title Corp. in Annapolis.
“A banker is going to need to show that it is the holder of the note.” Brilliant said, adding that an electronic transfer without accompanying paper will not suffice. “It’s a simplistic view but I think that’s what we’re going to get back to.”
Critics of MERS say the electronic database has also enabled banks to avoid paying county recording fees whenever they assign a loan. MERS accomplishes this by serving as the named mortgagee on the recorded mortgage.
The banks need not record the loan transfers because on paper the same company, MERS, retains the mortgage.
University of Utah law professor Christopher L. Peterson, a critic of MERS, said the practice shortchanges counties and is presumably illegal in many jurisdictions.
Maryland counties have yet to challenge the practice in court, even though they “have historically been concerned about paper-shuffling mechanisms” to evade filing fees, said Michael Sanderson, executive director of the Maryland Association of Counties.
“We’ve generally stood up to say it’s not fair for Mom and Pop to pay the tax but somebody else can hire a lawyer or work with some multistate company and effect the same type of thing and not have to pay taxes,” he said. “We think that’s unfair.”
Frosh, in discussing his pending legislation, said he consulted the writings of Peterson, who testified last month before the House Judiciary Committee as it examined causes and effects of the foreclosure crisis.
Peterson, in an interview, said state lawmakers should consider passing legislation — like the bill pending in Virginia — that would require mortgages and loans to be recorded with land records officials to ensure proper chain of title.
Such legislation would combat the mortgage industry’s “cavalier documentation practices” under which MERS is “pretending to own the mortgage,” Peterson said.
Kathleen Murphy, president of the Maryland Bankers Association, defended MERS as having made it easier for the industry and borrowers to track mortgage and loan assignments. She attributed recent criticism, in part, to the wave of foreclosures in recent years.
“People are stepping back and looking at everything in the foreclosure process,” she said.
Murphy added that that any legislation regarding MERS should come from Congress, rather than individual states.
“It’s important that whatever is done is a national solution because this is a national registry,” she said.
MERSCORP’s Arnold, in response to Peterson’s criticism, referred once more to his written Senate testimony.
“We take our role as a mortgagee very seriously and we see our database as a key to moving toward better access to information and transparency for customers,” the testimony said.