Securitization of home loans — MERS — confounds borrowers at foreclosure
Ryan and Jaclyn Graft just got a mortgage the old-fashioned way: They closed on it at a community bank, which will hold the loan until the Greensburg couple pays it off.
"Standard Bank wasn't like a big bank, where you're just a number," said Ryan Grant, 29, who obtained a 2 1⁄2-year second mortgage from Standard Bank on March 14.
The majority of home mortgages, however, get done a newer way: They're originated, sold to other lenders and split into mortgage-backed securities, where homeowners' payments are divided between the investors who bought them.
That securitization process leaves some borrowers wondering who owns their mortgages. The issue is important to people selling or refinancing a home. But it's especially vexing to those trying to modify a troubled mortgage or stave off foreclosure because the mortgage owner or its agent will determine whether the borrower loses his house.
"It used to be you got a mortgage from your local savings and loan, and they kept that loan on its books," said Steve Emery, Pittsburgh office manager for Chicago Title & Trust.
In the mid-1980s, more mortgages started getting written by brokers and sold to lenders. They, in turn, sold them to other lenders. Emery said each time that happened, the lender would file documents at the county courthouse stating the mortgage had been reassigned.
Under mortgage securitization, which took hold in the mid-1990s, a bank might sell 1,000 loans to Fannie Mae, for instance. But making 1,000 courthouse filings and paying a recording fee each time "got to be very burdensome," said Emery. The fee in Allegheny County, for instance, is $63.50.
That's how and why MERS was born. Short for: Mortgage Electronic Registration Systems Inc., the company was created by the banking industry to centralize and economize the filing work.
"If you didn't have MERS, you'd have to invent it because the volume and velocity (of transactions) exceeded the human ability to do these recordings," said Kurt Pfotenhauer, CEO of the American Land Title Association in Washington, D.C., one of the 23 mortgage giants that co-founded the electronic system.
In Allegheny County, for instance, more than one in four mortgages recorded at the real estate department in 2010 was done electronically by MERS, based in Reston, Va.
"MERS only benefits businesses, not the general public," said Valerie McDonald Roberts, manager of the county's real estate department.
"It makes it easier for lenders to buy and sell (mortgage loan) portfolios," but makes it less evident who owns the mortgage, said McDonald Roberts, whose office sometimes hears from residents seeking help in determining who holds their mortgages.
"MERS was created so lending institutions didn't have to pay all the filing fees," said Dan Sullivan, mortgage foreclosure specialist for ACTION-Housing Inc., Downtown, which helps people fight foreclosures.
"It's part of the larger problem where servicers and investors are trying to do everything as quickly as possible without a lot of costs," he said.
When mortgages get securitized, they are assigned to a trust, which becomes the owner of the mortgages pooled into that trust, said Ken Yarsky, a real estate attorney Downtown.
The trust describes the mortgage securities and terms, such as the interest, or "coupon," rate the many investors will be paid from homeowners' payments. They bear long and unfamiliar names such as Homestar Mortgage Acceptance Corp., Asset-backed Pass-through Certificates Series 2004-6, said another local attorney.
"These trusts represent tens of millions of dollars (in mortgages), and they are held by thousands of investors," said Michael Malakoff, a Downtown attorney who represents homeowners fighting foreclosures.
Big banks usually serve as the trustees, which -- like home lenders themselves -- can initiate foreclosures, said Malakoff. But the owners of these trust securities are "just passive investors," he said. "The loan servicers are the ones who usually run the show."
Loan servicers, the companies that receive mortgage payments and distribute the money to investors and tax authorities, often initiate foreclosures. Banks that originate a mortgage sometimes sell the loan but keep the servicing business and draw a fee for doing so.
"Being a small community bank, we see our customers every day and don't want to see them get into a situation where they couldn't keep their house," said Tim Zimmerman, president of Standard Bank, Murrysville. It usually sells its 30-year mortgages to be securitized but keeps the servicing.
"So customers continue to deal with us," said Zimmerman. "They send their payments to us, and anything that comes up with taxes or delinquencies, they deal with us."
In 2010, the Allegheny County Department of Real Estate recorded about 47,000 home mortgages, both primary and secondary, said Deputy Manager Jim Uziel. Of those mortgages, 12,351 listed MERS as the nominee, or agent, for the lender.
That means when any of those 12,351 mortgages are sold, the lender does not have to file documents with the county indicating mortgages were assigned to another bank or investors in a trust. Allegheny County charges lenders $63.50 per such filing. So the MERS system potentially cost the county $784,288 or more, assuming all 12,351 mortgages changed hands at least once.
MERS employs 55 people in six offices in five states, including more than 40 workers at its Reston headquarters, according to the company's website. Thirteen people work in the legal department.
More than 3,000 lenders have registered more than 65 million home mortgage loans with MERS since it began operations in 1997, the company states. It was founded by 23 mortgage giants, including Bank of America, Fannie Mae, Freddie Mac and Wells Fargo.
When a lender/member of MERS originates a mortgage, the MERS name goes on the mortgage filed at a courthouse because it is acting as the nominee, or agent, for the lender. So if the mortgage gets sold, one would contact MERS for the name of the new owner.
MERS became a lightning rod in the recent foreclosure crisis because lenders and trusts sometimes file foreclosure complaints in its name, said Malakoff, even though MERS technically did not own the mortgage.
Whether a nominee for a lender may legally bring a foreclosure complaint has been tested many times in the courts in the past couple of years, although not in Pennsylvania, say local attorneys.
Different state and federal courts from Massachusetts to California have ruled both for and against MERS. The controversy was apparently enough to push the corporation to stop initiating foreclosures on Feb. 16.
"We have divested ourselves of the foreclosure proceeding," said Karmela LeJarde, spokeswoman for MERS.
That means lenders/members must assign the mortgage back in their own names to bring a foreclosure complaint.
LeJarde could not say how many foreclosures in Pennsylvania have been brought in MERS' name.Additional Information:
If you're uncertain who holds your home mortgage, there are several ways to find out.
• Check the documents you received when you closed on the home purchase.
• Contact or visit the county courthouse or real estate department.
• Contact the loan servicer where you send your mortgage payments.
• If the mortgage document lists MERS as nominee for the lender, see the mortgage identification number (MIN) at the top of the page and call MERS at 888-679-6377.