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MERS: Coming Soon to a Mortgage Near You

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November/December 1998 - Volume 77, Number 6

by Sharon McGann Horstkamp and William Hultman

You may have heard the trade name "MERS" or its full legal name, Mortgage Electronic Registration Systems, Inc., and wondered what MERS is. You even may have run across MERS in the chain of title of a mortgage loan. If you haven’t heard about MERS yet, there is a strong likelihood that you will soon. This article should help to keep you from being caught off guard by explaining how MERS works.

What is MERS?

MERS serves two purposes. First, it is a national electronic registry for tracking servicing rights and beneficial ownership interests in mortgage loans. Second, MERS acts as nominee (a form of agent) for the servicer and beneficial owner of a mortgage loan in the public land records. MERS is designed to operate within the existing legal framework in all U.S. jurisdictions and did not require any changes to existing laws.

How is this made possible? Its members appoint MERS as the mortgagee of record on all loans that they register on the MERS System. This appointment eliminates the need for any future assignments when servicing rights are sold from one MERS Member to another. Instead of preparing a paper assignment to track the change in the county land records, all subsequent transfers are tracked electronically on the MERS System.

MERS does not create or transfer beneficial interests in mortgage loans or create electronic assignments of the mortgage. What MERS does do is eliminate the need for subsequent recorded assignments altogether. The transfer process of the beneficial ownership of mortgage loans does not change with the arrival of MERS. Promissory notes still require an endorsement and delivery from the current owner to the next owner in order to change the beneficial ownership of a mortgage loan.

MERS is a Delaware corporation with a broad base of ownership from the mortgage industry. American Land Title Association® is among our owners and has a seat on the MERS Board of Directors. Other owners with substantial investments in MERS include the Mortgage Bankers Association of America (MBA), Fannie Mae, and Freddie Mac. These parties, along with Ginnie Mae, decided several years ago that MERS would be a major benefit to the mortgage industry and worked together to create the MERS of today.

The MERS System operates on a membership basis and came on line in April of 1997 with Norwest Mortgage, Inc. and Allied Group Mortgage Company being the first companies to register loans on the system. Over 118,000 loans have been registered on the System to date with the number rapidly growing as many more members are gearing up. Our membership includes mortgage lenders and servicers, title companies, mortgage insurers, investors, conduits, document custodians, and county recorders.

What Do I Need to Know About MERS?

With every new loan that is registered on the MERS System, it becomes more likely that you will come in contact with a mortgage loan having MERS as the mortgage holder in the chain of title. MERS is put in this position in one of two ways: the first is by an assignment from a lender or servicer to MERS. This method is usually associated with bulk transfers of servicing. The second way is with the lender naming MERS as the mortgagee of record as nominee for itself (and its successors and assigns) in the original security instrument at the time the loan is closed. We call this second option "MOM", which stands for MERS as Original Mortgagee.

"MOM" was a significant milestone for MERS and the mortgage industry. Fannie Mae, Freddie Mac, and Ginnie Mae have each approved the use of MERS as original mortgagee as nominee for a lender on the security instrument for loans sold to them and registered on the MERS System.

In order to make MOM work, changes were made by Fannie Mae and Freddie Mac to their uniform security instruments allowing MERS to be named as the mortgagee in a nominee capacity for the lender. First, to reflect the interrelationship of the promissory note and mortgage and to ensure these two instruments are tied together properly, the recital paragraph names MERS, solely as nominee for Lender, as beneficiary. Second, it is made clear that the originating lender rather than MERS is defined as the "Lender". This change was made so that everyone understands that MERS is not involved in the loan administration process. Third, as mortgagee of record, MERS needs to have the authority to release the lien of security instrument, or if necessary, foreclose on the collateral on behalf of the lender. Such authority is provided by adding a paragraph to the security instrument informing the borrower that MERS holds only legal title to the interests granted by the borrower. It also informs the borrower that, if necessary to comply with law or custom, MERS may exercise the right to foreclose and sell the property and may take any action required of the Lender to release or cancel the security instrument.

Once MERS is named in the original security instrument or by way of an assignment, the document is then recorded in the appropriate public land records. From this point on, no subsequent assignments of the mortgage to a MERS member needs to be recorded. MERS remains in the land records, as mortgagee, throughout the life of the loan so long as servicing is not sold to a non-MERS member. All subsequent transfers of ownership in mortgage loans and servicing rights for that loan are tracked electronically between MERS members through the MERS System. This process eliminates the opportunity for a break in the chain of title.

Moreover, unless a MERS member transfers servicing rights to a loan registered on the MERS System to a non-MERS member, the loan stays on the system until it is paid off. The process to transfer servicing rights between MERS members requires an electronic confirmation from the buyer. It begins with the seller entering loan transfer information into the system, including the Mortgage Identification Number (explained below), the new servicer organizational identification number, the sale date, and the transfer effective date. The buyer then must submit a confirmation acknowledgment to the system. The old servicer and the new servicer are still required to notify the homeowner in writing when loan servicing is traded as required under the Real Estate Settlement Procedures Act (RESPA), 12 U.S.C. ? 2601 et seq. A loan is de-registered from the system only if its servicing rights to a loan are transferred to a non-MERS member.

How is a Loan Registered on the MERS System?

First, a Mortgage Identification Number (MIN) must be assigned to each loan being registered on the MERS database. The MIN is a unique, 18-digit number that will not change during the life of the loan. The first 7 digits are the member’s organizational identification number, the next 10 digits are a sequential number (which can be the lender/servicer’s existing loan number), and the last digit is a check digit.

The constant MIN is an improvement over the current process. Usually, when loan servicing is sold, the loan receives a new loan number. Multiple loan numbers can be confusing and may lead to additional record keeping over the life of a 30-year loan. A loan registered on the MERS System will receive only one identifying number for as long as it remains on the system. It is not hard to imagine that many lenders may ultimately abandon their own loan number system in favor of the MIN.

The second step is to register the loan on the MERS System. The MERS member registers a mortgage loan on the MERS System by entering specific data into the system. The MERS System is a secured network. Access level depends on the member’s relationship to the mortgage loan. Servicers and investors can update only their own loans. There are three levels of identity validation that must be entered in order for a member to access the System: organizational number, operator identification, and the operator’s password. Attempt to access the system will be denied unless all three tiers of security have been met.

Finally, as noted above, at some point before or after the loan is registered, MERS needs to be established in the county land records by the MERS member as the mortgagee of record or the beneficiary to the deed of trust.

MERS also tracks changes in the beneficial ownership interest of the loan (generally, the promissory note holder), or as often referred to in the mortgage industry, the investor. If the beneficial ownership of the mortgage loan is transferred to a non-member, such non-member beneficial owner may choose to have the loan either de-registered from the MERS System or continue to be registered on the MERS System provided that the servicer of the loan is a MERS member.

If the beneficial owner is not a member but chooses to have the loan registered on the MERS System by the loan servicer/member, MERS is required to comply with instructions given by the loan servicer/member on behalf of the non-member beneficial owner (investor).

What Interest does MERS Hold in Loans Registered on the MERS System?

MERS does not have a beneficial ownership interest in the loans and does not service the loans. The holder of the promissory note remains the beneficial owner of the mortgage loan and is the party entitled to repayment of the loan. Just like the current practice today, the servicer contracting with the beneficial owner will continue to collect the payments from the borrower, send the payments to the beneficial owner, make certain that the insurance and taxes on the mortgaged property have been paid, and take corrective action when a borrower is delinquent in their payments. A servicing contract is not an interest in real property, but rather it is defined as personal property under the Uniform Commercial Code (UCC) Article 9-106. Prior to the inception of MERS, the servicer typically appeared in the county land records in order to service the loan. This practice allowed the servicer to be recognized as the mortgagee of record and receive legal process. As a result, the promissory note and the mortgage often became bifurcated, with the beneficial interest (evidenced by the note) being held for the beneficial owner and the legal interest (represented by the mortgage) held by the servicing company as mortgagee.

Under the MERS System, MERS now becomes the mortgagee of record in place of the servicer and receives service of all legal process related to the property. To facilitate this process, MERS operates a state-of-the-art electronic mailroom. The mailroom is responsible for the receipt, scanning, and handling of physical mail documents into electronic images. All mail is indexed to the appropriate MIN and routed electronically to the corresponding servicer. The servicer then responds as required under its servicing contract with the investor.

How Does MERS Benefit the Title Industry?

The biggest impact that MERS System generates for the title industry lies in the area of payoffs and lien releases.

It has become very common for servicing transfers to occur multiple times over the life of a loan. To properly preserve the chain of title to a mortgage, the best practice would be to record an assignment between the transferring and receiving servicer. As we all know, assignments are often not recorded, or the recording can significantly lag the transfer, and as a result, the public land records in the county recorders’ office does not identify the current servicer of the loan. The failure to record assignments typically causes a significant delay in obtaining payoff figures and processing lien releases. Before MERS, there was no industry-wide standard for the processing of assignments and lien releases. With MERS becoming the mortgagee of record, the current process and cost of preparing and recording assignments when servicing is transferred are eliminated. No longer will you need to track down missing assignments because of a break in the chain of title.

When a payoff figure is needed on a loan registered on MERS, calling the MERS Voice Response Unit (VRU) by using a toll free number easily identifies the current servicer. Information available from the VRU includes the servicer name, address, and telephone number. The servicer can then be contacted for the proper payoff figure. This service is a huge benefit for consumers because it allows title insurer offices and agents to get accurate pay-off information more easily, making loan closings more efficient. You can access this information by calling our toll free telephone number: 1-888-679-6377.

When a mortgage loan is paid-off, the servicer records a lien release and enters the paid-off status on the MERS System. With MERS as the mortgagee in the public land records, the lien release is executed in the name of MERS. The servicer will prepare the appropriate lien release instrument and have it executed by one of its employees acting as a certifying officer of MERS. A certifying officer of MERS is an employee of the MERS member who is nominated by such member to act on behalf of MERS in performing certain duties expected of a mortgagee of record. Each certifying officer is approved by the MERS Board of Directors and a MERS corporate resolution is provided empowering the certifying officer to execute lien releases as well as initiate foreclosure proceedings in the name of MERS. The appointments and the authorities of certifying officers are all pursuant to a contractual agreement among MERS, the servicer and the owner of the mortgage debt. MERS performs ongoing quality assurance checks to ensure that liens are being properly released and released on a timely basis

How Does MERS Impact Title Policies?

MERS does very little to affect the way title policies are issued. The originating lenders still requests a loan policy from its title company at the time the mortgage loan is originated. The ALTA® Loan Policies insure the named insured (usually the originating lender), the owner of the indebtedness secured by the insured mortgage, and each successor in ownership of such indebtedness.

No change to the title policy is necessary when MERS is assigned a mortgage loan since MERS is considered a successor or assignee of the mortgage loan. Only when MERS is named as the nominee for the lender on the original security instrument, we recommend to the lender that MERS be named as an additional insured on the owner’s policy. The lender instructing its title company to name MERS on the policy accomplishes this step.

What Happens when a Mortgage Loan is Foreclosed in the Name of MERS?

There is another time you will come into contact with MERS: in a foreclosure proceeding. Many times, a title company will insure the trustee’s or sheriff’s sale of the real estate following a foreclosure proceeding. The assured in the guarantee will be the trustee or sheriff and MERS. This situation results because foreclosure can be conducted in the name of MERS when MERS is the mortgage holder.

The mortgage establishes the remedy to foreclose and sell the property if the borrower does not pay back the amount loaned to the borrower according to schedule. Typically, the loan servicer, as the mortgagee of record, is the party that initiates the foreclosure proceedings on behalf of the investor. When MERS is the mortgagee of record, the foreclosure can be commenced in the name of MERS in place of the loan servicer.

For another entity to foreclose, an assignment is required from MERS to the other entity.

Establishing MERS as mortgagee of record will not cause any significant changes to current foreclosure practices in any state when the beneficial owner wants to proceed with foreclosures in the name of MERS.

There are two basic methods for foreclosing a residential mortgage loan, either judicially or non-judicially. Each state has its own preferred method of foreclosure, depending upon the type of debt instrument used and the state’s statutory provisions.

If a non-judicial method is used and the debt instrument is a deed of trust, the certifying officer of MERS would appoint any desired substitute trustee and direct the trustee to foreclose under a power of sale provision in the deed of trust or state statute. If a mortgage is used and is foreclosed under the power of sale provision, a certifying officer of MERS would execute the deed upon confirmation of the sale.

In a judicial foreclosure, the certifying officer of MERS would direct the foreclosing attorney and MERS would be the named plaintiff. The certifying officer of MERS is authorized to sign all necessary documents. After judgment has been entered, and the foreclosure proceeds to a foreclosure sale, the certifying officer will perform any functions required of MERS.

Once the foreclosure process has started, this same individual, either as a certifying officer of MERS or as an employee of the servicer, will follow the foreclosure from start to finish.

As of the date of this article, foreclosures have been filed in the name of MERS in approximately 35 states. Foreclosures have successfully been completed in the name of MERS in California, Georgia, Nevada, Tennessee and Texas.

Conclusion

The Title Industry is already experiencing some of the benefits of MERS. Today, title agents are using the VRU to find out the name of the current servicer of a mortgage loan in order to identify the current servicer and to obtain pay-off information. As the volume of loans registered on the MERS System continues to increase, more and more title agents will turn to the MERS VRU. As for the future, enhancements are projected for the MERS System that will enable title companies and agents to retrieve information about the current servicer from a member-only internet website.

MERS has come a long way over the past few years from being a concept to reality. It was developed by and for the mortgage industry. Title companies, as members of this industry, need to be knowledgeable of MERS. If you would like further information on MERS, please contact MERS at 1(800) 646-MERS.


Sharon serves as Corporate Counsel and Assistant Secretary for Mortgage Electronic Registrations Systems, Inc. She has worked with Fannie Mae and Freddie Mac on policies and procedural changes to the uniform security instruments. Sharon played a key role in gaining approval for MERS to serve as the original mortgagee as nominee for the orginator of mortgage loans.

Sharon is a member of the New Jersey State Bar and the Virginia State Bar and received her law degree from University of Richmond in Richmond, VA.

As Vice President and Corporate Group Manager, Bill is responsible for law, finance, and human resources at Mortgage Electronic Registration Systems, Inc. He joined MERS in February, 1998 after serving as Director of Asset Liability Managmenet for Barnett Banks,Inc.; Asset Liability Manager at Marine Midland Bank; and Treasurer of Empire of America FSB.

Bill holds a B.S. in Physics, an M.S. in Statistics, and a J.D.



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