Craig D. Robins Quoted in Long Island Business News Article About ME...

Critics Question a Digital Financial System Web

by LIBN Staff
Published:  January 26, 2011

The lending industry launched the Mortgage Electronic Registration System in 1997 to be a centralized database to streamline the transfer of home loans among investors while making it easier for borrowers to keep track of who owns their loans.

But the system’s critics say the industry got it only half right: Loans are being transferred electronically between investors at such an alarming pace - and with so little governmental oversight - that homeowners often cannot discover the current loan owner’s identity.

This difficulty results, in large part, from a legal fiction in which MERS registers as the nominal mortgagee in county land records offices. Loan transfers under the mortgage are not similarly recorded and “transparent” but are instead handled through the electronic database.

The true lender comes to light only when foreclosure proceedings begin, when MERS reassigns the mortgage in land records to the lender, critics say. “Mortgages seem to be bought and sold at such a dizzying pace on the secondary mortgage market that frequently a plaintiff  mortgagee is no longer the proper party by the time the foreclosure is served,” said Craig Robins, a Woodbury-based attorney and writer who specializes in bankruptcy law.

But MERSCORP President R.K. Arnold said the MERS database, which his company operates, makes it easier for borrowers to track the current owner of the loan.

He referred to written testimony he gave in November to the U.S. Senate Banking, Housing and Urban Affairs Committee as part of its examination of the mortgage serving industry.

“MERS helps the mortgage finance process work better,” the written testimony said. “The MERS process of tracking mortgages and holding title provides clarity, transparency and efficiency to the housing finance system. We are committed to continually ensuring that everyone who has responsibilities in the mortgage and foreclosure process follows local and state laws, as well as our own training and rules.”

Robins noted that MERS, of course spins toward the positive for his company. “Although MERS claims its process is efficient, we can see that’s not the case because of all the sloppiness that’s been exposed in the way they maintain their records,” he added.

In response to claims that MERS is not a valid mortgagee, MERSCORP’s president told the Senate panel that the company clearly notes on mortgage documents signed by the borrower at closing that MERS is the mortgagee. The document is then recorded in the public land records, Arnold said in written testimony.

The lenders, under their membership agreement with MERS, state that the system serves as the mortgagee of record with regard to each loan, he added.

“What MERS does is eliminate the expense of repeated assignments, resulting in lower cost for lenders when they sell the loans … to investors,” Arnold added. “When the note is sold, MERS continues to act as the mortgagee for the new note holder because the mortgage interest follows the note when it changes hands.”

Despite this assurance, and even in the absence of a court ruling or legislation, title insurers might grow leery of underwriting home sales involving properties in which the MERS database was the mortgagee. Title insurers feel more comfortable with paper documents attesting to the ownership of property and loans. One reason for title insurers comfort level with paper is it’s easier to document a complete chain of title, assuming the mortgage instruments are properly prepared, Robins noted.

Critics of MERS say the electronic database has also enabled banks to avoid paying county recording fees whenever they assign a loan.

The banks need not record the loan transfers because on paper the same company, MERS, retains the mortgage.

University of Utah law professor Christopher L. Peterson, a critic of MERS, said the practice shortchanges counties and is presumably illegal in many jurisdictions, testifying last month before the House Judiciary Committee as it examined causes and effects of the foreclosure crisis.

Peterson, in an interview, said state lawmakers should consider passing legislation that would require mortgages and loans to be recorded with land records officials to ensure proper chain of title.

Such legislation would combat the mortgage industry’s “cavalier documentation practices” under which MERS is “pretending to own the mortgage,” Peterson said.

MERSCORP’s Arnold, in response to Peterson’s criticism, referred once more to his written Senate testimony.

“We take our role as a mortgagee very seriously and we see our database as a key to moving toward better access to information and transparency for customers,” the testimony said.

Robins sees big trouble ahead unless fundamental questions are resolved. “Until there’s some kind of resolution of the problems MERS has created, we’ll certainly see an increasing number of attorneys who are raising MERS defenses to foreclosure proceedings,” he said. “However if this is left unabated, the MERS problem will spiral out of control.”

This story originally appeared in LIBN’s sister paper, The Daily Record.