MERS? What’s MERS? It’s what’s behind the headline that made the very top of the front page of the Oregonian a couple of Sundays ago: “Hundreds of foreclosed sales halted.”
MERS is a company set up about 15 years ago by a bunch of the biggest players in the mortgage finance business to reduce their expenses and increase their profits. MERS did so by making it cheaper and easier to sell the rights to mortgages from one lender to another. It allowed the mortgage lenders to get very fancy, packaging and “slicing and dicing” pools of mortgages into “mortgage-backed securities,” “collateralized debt obligations,” and other exotic financial instruments that could be very profitably sold to investors. When billions and billions of dollars worth of these instruments turned nearly worthless virtually overnight, they became the infamous “toxic assets” that threw the economy into its tailspin of the last few years.
So how does MERS fit in here? And how could this all help today’s distressed homeowner?
It’s an abbreviation for Mortgage Electronic Registration Systems, Inc. It operates a computer database designed to track mortgage loans in the United States. MERS lowered the costs of processing loans for mortgage lenders, in part by reducing what the lenders pay for recording fees, by avoiding recording fees for the assignments of trust deeds. When one lender sells a loan and its trust deed to another lender—often in big batches of loans—it assigns the trust deed, and the rights contained in it, including the right to foreclose, to that new lender.
MERS saved these mortgage lenders these recording fees through some fancy footwork which is now the source of the lenders multi-billion dollar—maybe multi-trillion dollar—problem: the homeowner’s original lender prepares the loan documents with itself as the lender to be paid on the loan, as expected, but instead of putting its name on the trust deed (giving itself the right to foreclose if the homeowner doesn’t make the payments), it writes in MERS as the original trust deed holder. MERS then records the documents at the county recorder’s office, but then all subsequent assignments are kept track of through MERS but are NOT recorded in the official county records. According to MERS these assignments don’t need to be recorded. This more “efficient” system became essential starting in the early 2000s when mortgage lenders figured out that they could make much greater profits by repackaging loans in a particularly creative way called securitization and selling shares of these packages to investors.
But MERS created a whole bunch of problems. One is that many state’s laws—including Oregon’s—plainly require a lender to have received its assignment of the trust deed through an officially recorded assignment. Unbelievably, for years this requirement was overlooked mostly because homeowners very seldom challenge foreclosures. But just last month an Oregon bankruptcy judge ruled that a mortgage lender could not foreclose on a home because that lender had received its right to foreclose from the homeowner’s original lender through an “assignment” that had NOT been recorded in the county real estate records. Other judges have made similar rulings. As a result, one of the nation’s largest title insurers has announced that it would not insure real estate titles in these circumstances. In the last few weeks, hundreds of foreclosures have been cancelled all over Oregon. Where this is all leading is very unclear because we’re in uncharted territory. We’ll update you in our next blog.