First, the electronic mortgage superhighway. Then, the pileup.
Sunday, January 2, 2011
In the early 1990s, the biggest names in the mortgage industry hatched a plan for a new electronic clearinghouse that would transform the home loan business - and unlock billions of dollars of new investments and profits.
At the time, mortgage documents were moved almost exclusively by hand and mail, a throwback to an era in which people kept stock certificates, too. That made it hard for banks to bundle home loans and sell them to investors. By contrast, a central electronic clearinghouse would allow the companies to transfer thousands of mortgages instantaneously, greasing the wheels of a system in which loans could be bought and sold repeatedly and quickly.
"Assignments are creatures of 17th-century real property law; they do not coexist easily with high-volume, late 20th-century secondary mortgage market transactions," Phyllis K. Slesinger, then senior director of investor relations for the Mortgage Bankers Association, wrote in paper explaining the system.
On March 4, 1994, the MBA unveiled its plan to county recorders who were charged with keeping track of titles signifying the ownership of land. Not everyone was sold on the idea.
"There needs to be some outside control or oversight," one recorder said, according to a transcript of the meeting.
Another said that if errors were put into the electronic system, "they're really hard to track further down the road."
Sixteen years down the road, the mortgage business is a mess. The electronic clearinghouse has become a reality; Virginia-based Mortgage Electronic Registration Systems, a registry with 67 million mortgages on file, has become part of the industry's standard operating procedure.
Critics say promises to increase transparency and iron out wrinkles in recordkeeping haven't panned out. The firm, which tracks more than 60 percent of the country's residential mortgages but whose parent company employs just 45 people in a Reston office building, is now on the firing line.
MERS is facing lawsuits from across the country seeking unpaid county recording fees. Several state courts have rejected attempts by MERS to act on behalf of banks seeking to foreclose on delinquent mortgages. And Congress is weighing legislation that would bar home loan giant Fannie Mae from buying any mortgage listed in MERS, potentially a death knell for the registry.
Merscorp, the registry's parent company, argues that it helps borrowers. Spokeswoman Karmela Lejarde said MERS has kept costs low, reduced the risk of recordkeeping errors and made it easier to keep track of loans.
"MERS plays an important role in building and sustaining confidence in the mortgage process," Lejarde said.
But in the recent uproar over improperly prepared foreclosure paperwork, MERS has become the central villain.