MERS is hardly a household name to many homeowners but the company now finds itself tossed right in the middle of the latest and rapidly-heating home loan challenge. It stands for Mortgage Electronic Registration System and the name pretty much says what it does. It records electronically, in proprietary software, mortgages that have been originated throughout the country, having currently over 65 million of them in its books, or better said in its servers.
The standard practice still is that local clerks record all mortgages and when ownership changes a new paper-based entry is created and notarized. Of course, all this is time-consuming, and this is how MERS came into being. Over ten years ago mortgage securitization took its first baby steps and quickly grew into a vibrant business model on the international securities arena. Large mortgage lenders, big banks and servicers were bothered, though, by the slow turnaround time of the local clerks, so they helped form MERS that could transfer information electronically. And really fast. And highly profitably. Bank of America, AIG's United Guaranty Corp., GMAC, Wells Fargo, Freddie Mac and Fannie Mae are a few of its prominent shareholders.
However, MERS has also blurred the real ownership of the mortgages it has in its system. Mortgage-backed securities with MERS ties were traded globally and supposedly the ownership of them was properly transferred with each trade. Or was it? There is no paper trail now to back anything up. As homeowners began struggling with payments in the collapsing real estate scene, lenders and servicers were promptly foreclosing on them using seemingly unreliable ownership chain.
And this is now the hot topic.
Increasingly, homeowners are challenging foreclosure action based on lack of clear ownership of the mortgages in MERS. And courts are starting to find that there indeed is a problem and have ruled several times already that MERS cannot foreclose because it does not own the mortgages. Class action lawsuits are underway in Nevada, California and Arizona - some of the hardest-hit states - against MERS over its lack of a legal standing to foreclose. JPMorgan Chase just announced that it will no longer use MERS due to the uncertainty over loan ownership, clear proof of something being wrong with it.
Hedge funds, pension systems and other wealthy investors bought mortgage-backed securities by the billions during the housing's go-go years and are now angrily licking their still-bleeding wounds. They are looking to make mortgage lenders to compensate them for their losses, or even cancel the securities trades altogether. Should they be successful in this, it could put the entire U.S. financial regimen in jeopardy once again. The predictable consequence is that the housing market's recovery would be pushed back further. Not only that, but the mortgage industry really needs to clean up the house to be able to attract the understandably skeptical investors back, because without them there isn't much to write home about.