The United States has nearly 2.3 billion acres of land. The records of who owns it and who holds mortgages against it often are stored in musty hardbound volumes in county and town recorders’ offices.
It is a cumbersome system. Those records, stretching all the way back to colonial or territorial times, create a “chain of title” that is supposed to lead to present-day owners and others with legal rights to the property.
Title companies have created vast private databases to index these records and make them easier to search. Attorneys and title insurers typically review printouts when property is sold and when mortgages are issued or refinanced. But these private databases are unofficial; if disputes arise, courts rely on those fragile paper-and-ink records.
The system is not well-suited to modern financial life. In the agrarian society of past centuries, a tract of dozens or hundreds of acres often stayed in a family for generations. Today, most Americans own their own homes, which typically sit on much smaller lots. A couple might occupy half a dozen homes, or more, over the course of a marriage.
Mortgages have been around forever, but lenders in bygone days, usually individuals or partnerships, did not merge or otherwise disappear from the legal landscape (other than by death) as often as today. Sales of mortgages from one holder to another were rare, and mortgage securitization — bundling hundreds or thousands of mortgages into a single financial instrument — was unknown.
It adds up to a vastly greater number of real estate transactions today, even without accounting for population growth. But the act of flipping pages in those old volumes has not gotten any faster.
The lending industry sought to streamline the process by creating the Mortgage Electronic Registration System (MERS) in 1997. If Anytown National Bank made a mortgage loan, it could record the loan in the name of MERS at the town hall. When Anytown subsequently sold the mortgage to Moneycenter Bank, there would be no need to go back to the town records. MERS would simply update its own index to show that the loan now belonged to Moneycenter. And if Moneycenter created the Superduper Mortgage Security and put that loan in the security’s portfolio, MERS would once again simply update its index.
In legalese, MERS was a “nominee” for the various owners of the loan. You and I might call it a front or a straw man, without meaning anything negative by those terms. MERS simply was a stand-in for the true owners.
A Kansas Supreme Court decision which, some believe, undermines the MERS system is getting a lot of attention this week after it was discussed by columnist Gretchen Morgenson in Sunday’s New York Times.
Boyd Kesler took out two mortgages on a property in that state. The first mortgage was held by Landmark National Bank, while the second was issued by Millennia Mortgage Corp. Landmark foreclosed after Kesler defaulted. It sent notices during the foreclosure proceeding to Kesler and to Millennia, but neither responded. Apparently, the loan was supposed to have been recorded in MERS’ name, and Millennia had transferred the loan to Sovereign National Bank by the time Landmark brought its foreclosure action. Millennia had no reason to be concerned about the case.
Since neither MERS nor Sovereign appeared in the official government records of the property, neither was notified of the foreclosure until after it occurred. The property was sold, Landmark’s loan was repaid, and whatever money remained was disbursed to Kesler. MERS and Sovereign then went to the Kansas courts to have the sale set aside in order to restore Sovereign’s interest in the property. But they were rejected.
This seems to be the correct and logical result, for the simple reason that the land records were not prepared correctly. MERS should have been recorded as the nominee mortgage holder, but it was not. Courts are loath to set aside completed transactions, and they almost never do so if the party requesting the do-over could have prevented one from being necessary. Had MERS been in the records, it presumably would have known about the foreclosure action in time to act, or at least to alert Sovereign to do something to protect the bank’s financial interest.
The spin in the Times column is different. Courts must examine “the dubious practices that guided the [mortgage] mania,” Morgenson wrote. “Dotting i’s and crossing t’s can be a costly bore, of course.” She notes that 60 million mortgages are registered in MERS’ name, and that the organization estimated that it saved $1 billion in processing costs during its first decade of existence. Quoting an industry expert, she describes MERS as “an artifice constructed to save time, money and paperwork.”
Exactly. Is there something wrong with saving time, money and needless work, especially when dealing with such an antiquated system of records? Who, other than the people who push this paper for a living, would gain by making mortgage holders run back to the local land office every time a loan is sold, a lending bank fails or is merged into another, or a mortgage is securitized? Who, other than buyers and sellers of property (meaning all of us), would bear these needless costs?
Careless lending was one reason, though hardly the only one, for the recent mortgage crisis. The ease of selling off poorly made loans certainly contributed to that sloppiness, and MERS undoubtedly makes it easier and less expensive to transfer mortgages. This should not lead us to conclude, however, that somehow it is a good thing for deadbeat borrowers to escape their obligations and receive a windfall, or that we should create paperwork hurdles to get to the courthouse. Bureaucracy is not a good substitute for thoughtful regulation.
Morgenson called the Kesler decision “poetic justice in this long-running mortgage mess.” I agree that it is justice, given the faulty paperwork in this case, but I don’t see anything poetic about it. If the MERS system goes away, we are going to need something to replace it.