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MERS: Readying for the Surge

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May/June 1998 - Volume 77, Number 3

Now that MERS has becom original mortgagee of record, the registry’s value to lenders has increased through its delivery of up front cost savings in the origination process. It is anticipated that the registry will help title companies as a source of information after MERS registers and tracks large numbers of loans.

Editor’s note: Carson Mullen took the reins last year as MERS executive vice president and customer division manager, at a time when the electronic mortgage registry moved into a dramatic new position as lender nominee for Fannie Mae and Freddie Mac--and potential original mortgagee of record for all loans purchased by those agencies. In this interview, the mortgage industry veteran and former vice president of MGIC and president of Wasatch Document Systems looks to the future of MERS on the threshold of what promises to be an historic surge in volume, and offers a viewpoint on what it can mean to the title industry.

Since last year’s article by MERS President R.K. Arnold appeared in Title News, ALTA® members have been hearing about Mortgage Electronic Registration Systems, Inc., or MERS. As was pointed out in the May-June, 1997, article, MERS represents the mortgage industry’s cooperative efforts to streamline the tracking of beneficial ownership rights to mortgage loans and their underlying servicing rights. It tracks these rights through a paperless, electronic registry system that was developed by Electronic Data Systems (EDS) under contract to MERS. The company has been developing the software and related systems to enable efficient and fast registration of mortgage loans on MERS since April, 1996.

In the early days, as MERS Executive Vice President and Customer Division Manager Carson Mullen points out, lenders questioned the MERS value proposition, since originated loans had to first be assigned to MERS in order to be registered. Only after this original assignment to MERS were subsequent assignments and their related costs eliminated. MERS was slow to attract registrations because lenders did not realize up-front cost savings with initial registration of loans on MERS.

The MERS value proposition changed dramatically this past October, Mullen continues, when Fannie Mae and Freddie Mac announced support for using MERS as nominee for the lender, clearing the way for MERS to become the Original Mortgagee of Record for all loans purchased by the agencies. FHA and Ginnie Mae have added their assent as well. The full process of developing final language for the security instruments in all 50 states and territories consumed a few months and the first publication of Seller-Servicer guide changes by Freddie Mac occurred at the end of March, 1998. Fannie Mae’s announcement has also been released.

The use of MERS as Original Mortgagee (called "MOM" by MERS staffers) increases the value of MERS to the mortgage industry by delivering cost savings up front in the origination process. MOM simply means that MERS will be named as the original mortgagee on the security instrument as nominee for the lender upon the closing of a loan that will be registered on the MERS system. Members benefit because MOM eliminates even the first assignment that was required previously to name MERS as mortgagee of record. MERS estimates that, on average, eliminating the cost of preparing, recording and tracking an assignment will save about $22 per loan immediately.

The mortgage or deed of trust is recorded in the land records with MERS named as the mortgagee of record in a nominee capacity for the originating lender, its successors and assigns. The originating lender continues to be the payee on the note. The physical note continues to be held by the originating lender or a subsequent holder. This process of using MERS as Original Mortgagee (MOM) delivers immediate savings to the loan originator by eliminating the necessity for any subsequent assignments at all. Ownership is tracked and reflected electronically on MERS’ computer systems.

In an interview for Title News, Mullen provided the following responses to questions about MERS.

As an industry veteran, but a newcomer to MERS, what do you see as your principal challenges this year?

CM: I’ve called 1998 the launching year for MERS. With all of the agency approvals behind us, Original Mortgagee means that every loan in America can be recorded using this special security instrument language right now. And, of course, we think every one should be!

Is this original mortgagee language that important to MERS?

CM: MOM changes the value equation tremendously. We’ve had dozens of companies look at using MERS registrations strategically. Prior to being able to use MERS as original mortgagee and being able to book savings right up front, only a few of our potential users got excited. Now, with immediate and significant up front savings, the ball game has completely changed.

Do you mean that MERs had difficulty persuading people of the value of registration before MOM was approved?

CM: No. The value of registration for subsequent transactions was always there for the MERS system. But remember, mortgage bankers and brokers originate most of the loans done in this country and they take a no nonsense approach. With record mortgage refinancing and originations now going on, you’ve got to deliver immediate real value just to appear on a busy lender’s radar. To get their attention, MERS had to demonstrate immediate, significant value for registering loans. We’ve done that now. We need to repeat this beneficial news often across the industry to make all our potential users aware of the money they’re leaving on the table.

Just how does MERS intend to get the word out?

CM: We are using every means available to us. This interview with Title News is one method. The Mortgage Bankers Association of America has provided support to us through conference panels and forums. Fannie Mae, Freddie Mac and Ginnie Mae have encouraged use of MERS and acted very quickly to approve MERS as Original Mortgagee. We are regularly invited to speak at vendor’s user group meetings. These support sources are all critically important to us. The most important approach has been to meet individually with potential users across the country to deliver the facts about MERS usage. Face-to-face meetings have been the most effective means to do that.

That support is very good, but don’t you need the leading companies to endorse and use MERS to make the progress you intend?

CM: Absolutely. Let me illustrate. Mark Oman and Norwest Mortgage have been strong and vocal in their support of MERS and will launch a joint campaign with us this summer to begin signing up Norwest’s correspondent lenders to deliver loans to Norwest using MERS as Original Mortgagee. Norwest has been a major supporter of MERS since the beginning and intends to use MERS for all of its production eventually. Crestar Mortgage should begin registrations this summer. Crestar’s CEO, Mark Smith, is the current president of MBA and has promoted MERS use among MBA members widely. Both Norwest and Crestar have prepaid large numbers of loan registrations this year. Terry Klein’s First Nationwide mortgage is registering loans now and should accept MERS loans from correspondents this summer.

You mentioned prepayments. Just what is the total number of active registrations on the system now, as well as prepayments?

CM: We’ve got just over 60,000 active loans on MERS as of this interview, plus another 300,000 more in prepaid registrations for a 360,000 loans total so far. We’ve also experienced a large number of de-registrations due to payoffs as loans are being refinanced in the major refinancing boom that is currently under way. Although we’re pleased with our progress since January, we expect a dramatic upturn in registrations as major companies and their correspondents begin use of MERS this summer and fall. That’s when we expect to see the beginnings of real MERS usage.

That’s surprising. We might have expected to see larger numbers of loans before now. Can you explain that?

CM: Surely. It’s as simple as naming two major lender priorities: 1) year 2000 systems compliance; and, 2) consumers rush to refinance a major portion of the existing mortgage loans in the country to take advantage of lower interest rates. Both of these trends are historic in their impact on the mortgage industry and MERS is competing for very scarce computer system programming resources to make the changes necessary to implement MERS.

Do you mean that MERS is that intrusive, so that you haven’t been able to get people to make these changes?

CM: MERS itself is not intrusive at all in the operations of mortgage lenders. However, the OCC (Office of the Comptroller of the Currency) has required our nation’s banks to assure that all of their critical systems are year 2000 compliant by the end of this year. Mortgage refinancing is at historic highs. These two items alone have absorbed most of the computer system resources of the industry, plus some. The combination has made it very difficult for even our most supportive lenders to make MERS a top priority. Top priorities are reserved for immediate business needs, and MERS is farther down the list with many of them.

What has MERS been able to do to increase visibility under these circumstances?

CM: Original Mortgagee status has helped. Without it, we’d be making slower progress. Working personally with the management and staff of several major lenders has brought MERS back on the plate as a priority in many shops. For example, NationsBanc Mortgage, Countrywide Home Loans, Chase and Merrill Lynch are making substantial progress. I have been impressed with the commitment of these firms to MERS implementation, even in the face of huge demands in these other areas. NationsBanc has taken a leadership position and CEO Andy Woodward has been strong and vocal in his support. Likewise now, the folks at Countrywide and Chase are preparing their implementation plans. Merrill Lynch continues to register loans. It is this type of commitment to MERS that will get us really moving this summer and fall. These organizations will also involve their correspondents in delivering loans with MERS named as Original Mortgagee because they want to deliver MERS benefits to their correspondents as well. By involving their correspondents, MERS will benefit by acquiring several hundred new members from each of these major wholesale lenders. In addition, we’re working with literally dozens of middle market wholesalers and companies that deliver directly to Fannie and Freddie.

It sounds like MERS has things moving. Do you have any other concerns?

CM: We have the same concerns that other businesses have in wishing to serve our customers well. We’ve established very high internal standards for customer service and we’re taking the actions we believe to be necessary to achieve and maintain those standards, such as proper levels of staffing. As it has been said many times, we are looking forward to the problems of heavy volumes. Those are nice problems to have.

We have heard that MERS needs additional capital. What can you say about your future needs?

CM: The recapitalization plan of MERS is well under way. The Mortgage Bankers Association of America has agreed to provide MERS with additional capital on behalf of its members and Fannie Mae and Freddie Mac have been asked to participate in that effort. Negotiations are proceeding positively. Don Lange, president-elect of MBA, and Paul Reid, its executive vice president, are leading the effort for MBA. Fannie Mae and Freddie Mac have already invested over a million dollars each, and have been asked to participate in the new recapitalization round. Essentially, I’d rather call this effort the "capital completion effort" rather than recapitalization. The original study done by Ernst and Young showed very clearly the capital required to implement MERS nationally, and all we’re trying to do now is to acquire the last piece of that capital that was not provided earlier. We expect the effort to be completed in June.

ALTA® members have expressed interest in using MERS as a source of information. Can you give us your best estimate on when meaningful data will be available?

CM: For MERS to deliver for ALTA® members, we need to register and track large numbers of loans. I think members of the Association should begin to see that happen with the introduction of correspondent loan delivery programs by major national lenders this summer and fall. It should certainly be well under way by the end of the year. As title firms begin to use MERS as a source of updating information, we’ll work with them to make MERS access simple and efficient for them. We expect a number of title firms to help out in the effort by becoming MERS registrars as well.

Can you explain what a registrar is and why a title company would want to be one?

CM: A registrar is a third party that registers loans on MERS on behalf of a lender. A registrar would generate Mortgage Identification Numbers (MINs) for each loan, gather and enter the data to register the loan on MERS, usually for a small fee. It’s a natural for firms that are involved in the process already, such as title companies, since the MIN and Original Mortgagee language must be placed on the security instruments prior to closing. If the title firm is handling the closing, its seems an ideal way to offer better service to lenders.

If ALTA® members are interested in this registrar process, who should they contact?

CM: Call me directly, or ask for Connie Davies at 800-646-MERS(6377). All that’s required is that they become MERS members and agree to follow the rules and procedures of our member agreement as they perform services for other MERS members.

Is MERS planning any new products or services this year?

CM: Our emphasis has been to make it easy for firms to do business with MERS. So, we’ve developed a new approach called a MERS Lite User membership category. This category of membership costs only $250 per year and is designed primarily for originators who sell loans servicing released. We’ve also issued an updated version of MERS Destktop Software, which has been repriced to lower its cost. Software is now available for only $125 for those people who wish to enter data for their own loans. We also intend to introduce a World Wide Web browser-based software application so that loans may be registered with us over the Internet.

It sounds like a very busy year.

CM: I’d like to thank ALTA® for its continued support and for the opportunity to communicate with its members. We appreciate the help.

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