MERS Must be Saved

The fallout from the recent ruling by the US Bankruptcy Court that the MERS “system” does not comply with current law is fast making its way through the bank and mortgage markets, potentially threatening the business models of lenders and servicers, as well as the overall operating efficiency of the market.

Judge Robert Grossman recent ruled that system by which the automated MERS program for assignments and the related positioning of MERS as a “principal” in the chain of ownership is not consistent with current law.  Judge Grossman did acknowledge the significantly negative impact that his ruling will have on the markets, as banks and servicers will now be faced with a major “redo” in the execution and recordation of mortgage documents.  To his credit, the judge seems to grasp the weight of this decision but was reluctant to attempt to legislate from the bench and has instead suggested that the appropriate legislative bodies take up the cause for fixing the system.

Apparently, MERS has already started to notify its clients to reconsider their reliance on the 15-year-old process for automating the arcane “physical” recording processes that have been on the books since the invention of the wheel!

Not only does this ruling affect the hotly debated foreclosure process that so many banks and servicers are currently trying to navigate, it could negate the validity of billions and billions of dollars in mortgage-backed securities which are collateralized by MERS mortgages.  MERS estimates that it maintains more than 50 million mortgages in its system.

Before anyone jumps out the window, clearly these mortgages have substantial value so, even if some, many or all are “thrown-out” as a result of a related litigation, we think that you have to assume that the issuer of an MBS security will eventually sort out the chain of ownership, thereby exchanging the value of those mortgages for any restitution it may be obligated to pay to its bondholders.

The “real cost” of this ruling is the loss in efficiency that the MERS system has provided to the residential mortgage market in the US for more than 15 years.  Critics argue that the MERS system was a scam from the very beginning, providing Wall Street with a slick way to get around local law and speed the path to getting MBS deals into the market.   We think such a view is totally ridiculous.

Anyone who has been through the local UCC and county filing processes can tell you how arcane and outdated these rules and regulations are.  This is about as clear a case as you will find of a situation where logic should ultimately prevail.  The MERS program is logical, safe and efficient and, despite Judge Grossman’s ruling, there remain many good legal minds that believe the MERS system is legal and does meet the law.

Nevertheless, as the Judge seems to have suggested, it is time for the legislative end of government to step in and fix the law.  The US Congress seems to be the most appropriate place to start.  We hope they are listening.

About markferraris
Managing Principal Orchard Street Partners LLC

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