Really interesting article in @NYT today about a company nobody knew about until this recession:
Created by lenders seeking to save millions of dollars on paperwork and public recording fees every time a loan changes hands, MERS is a confidential computer registry for trading mortgage loans. From an office in the Washington suburbs, it played an integral, if unsung, role in the proliferation of mortgage-backed securities that fueled the housing boom. But with the collapse of the housing market, the name of MERS has been popping up on foreclosure notices and on court dockets across the country, raising many questions about the way this controversial but legal process obscures the tortuous paths of mortgage ownership.
If MERS began as a convenience, it has, in effect, become a corporate cloak: no matter how many times a mortgage is bundled, sliced up or resold, the public record often begins and ends with MERS. In the last few years, banks have initiated tens of thousands of foreclosures in the name of MERS — about 13,000 in the New York region alone since 2005 — confounding homeowners seeking relief directly from lenders and judges trying to help borrowers untangle loan ownership.
In an interview, the president of MERS, R. K. Arnold, said that his company had benefited not only banks, but also millions of borrowers who could not have obtained loans without the money-saving efficiencies it brought to the mortgage trade. He said that far from posing a hurdle for homeowners, MERS had helped reduce mortgage fraud and imposed order on a sprawling industry where, in the past, lenders might have gone out of business and left no contact information for borrowers seeking assistance.
Here is a chart from the article that explaints MERS role in mortgage packaging:
I kinda get the sense that the NYT is making a big stink based on the reporter's lack of understanding of how the securitization process works. If my understanding is correct, MERS' role in loan origination is that whereas the promissory note (the actual document that says you owe money to the mortage lender) is in the name of the loan originator, the lien on the house is held by MERS. This makes complete sense if the intent of the mortgage originator is to sell the mortgage on to be packaged into mortgage backed securities.
Everyone who has an interest in the house (and when you enter a mortage, you give a security interest to the mortgage holder in your house) has to register their interest through the local registry (and this is important, because proper registration ensures that your interest doesn't get kicked back, or subordinated, by some later interest). So you, as the homeowner, has official title to the house, but subject to other interests.
If a mortgage was always intended to enter into the MBS market and the registration was in the name of the mortgage originator, it would create an unbelievable amount of excess paper work. Each time that the mortgage is passed from bank to bank (and I'm guessing this could happen a few times, first to a bank that would package a bunch of local mortgages to sell to a national bank, then by the national bank, who would package a bunch of local pools and chop them up to sell to other banks/investors/funds as MBS, and then maybe even further pooling and chopping to create CDOs), the new owners would have to re-register their interest. And how would you register the interest that an MBS holder would have in the home? Would you have to register each purchaser of the MBS (which could be thousands of investors) and their 1/2000th share in the home?
This is no different than the problem that has been talked about in the media over the last few months, about how slowly the foreclosure process has been because mortgages have been stuck in asset backed securities. Looking at #6 in the chart, it is the "trustees" and more importantly, the "servicers" that have the obligation to manage the pools of assets that provide the income streams for the asset backed securities. And these trustees and servicers get fairly nominal fees to do what they do. They are loathed to have to take the role of being debt chasers, especially since no matter what path they choose (negotiation or pursue foreclosure), there will likely be some tranche of security holders displeased with their decision.
MERS makes the step after the decision to pursue foreclosure simpler. It looks once the decision to foreclose is made, MERS files suit, but the deed is ultimately transferred to the bank that will ultimately pursue resolution and recovery (see chart #8 and #9). Of course, that bank (or financial institution) is really just another fiduciary intermediary, acting on behalf of the hundreds/thousands of securities holders.
And there is the problem with transparency. Yes, we can't see the ultimate security holders, but really, even if we could, what benefit does that offer? How is it helpful to get a 30 page list of all the investors that own a partial interest in a mortgage? How exactly do you even deal with hundreds of security holders?
I've been looking at securitization documents recently, and I've come to think that the vehicles aren't inherently evil. The worst problem is that the boom-time securities were ridiculously optimistic in their projections and still got extraordinary ratings from the ratings agencies. Yes, there are still securitization deals happening, but the amount of overcollaterailzation and equity cushion being provided is pretty significant. I'm guestimating, but some of these new deals would probably require default rates at nearly 25% (in other words, 1/4 of all the underlying loans) before the overcollateralization/equity cushion is wiped out.
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