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MERS Misery Looms

A recent article in the New York Times details the legal questions and wider real estate implications currently surrounding The MERS Corporation (MERS).

 MERS (Mortgage Electronic Registration Systems) was created in the 1990s and is owned by several major banks, as well as by Fannie Mae and Freddie Mac. MERS is essentially a private mortgage registry that has replaced the more customary practice of recording mortgages in county records offices around the country.

Land ownership records are usually logged in longhand at county records offices. Every time a financial instrument containing mortgages is sold, every mortgage and note needs to be recorded in U.S. county courts and a recordation fee has to be paid. The mortgage industry, eager to trade and maximize profits in mortgage-based securities (i.e., bundled mortgages), wished to circumvent county clerks and the recordation requirements, and thus established MERS as a private alternative to the public recordation system. MERS then made it legally possible to re-assign underlying mortgages without the cumbersome recordation process in county courts as historically required.

MERS claims to hold title to 60 million loans, nearly half of all home mortgages in the United States. Now, however, in the wake of the mortgage foreclosure crisis, MERS’s legal standing is being widely challenged. Some state and federal courts have questioned MERS’s role as an agent for institutions that own mortgages. And records of transactions for mortgage in the MERS system have often been flawed or missing.

The New York Times article raises several compelling questions. How can MERS claim title to mortgages, and foreclose on homeowners, if it never invested a dollar in a single loan? Is MERS more than just a legal fiction? Can it get involved in foreclosure proceedings when it never actually made or serviced any loans? Furthermore, given growing evidence of document fabrication in foreclosures, does anyone know who owns what or owes what to whom anymore?

While the legal and political realm will strive to adjudicate these questions in the coming months, the impact of these disputes involving MERS on the financial system could be profound.