So Much for the Vaunted Private Sector

There is an interesting battle going on regarding the foreclosure mess in the U.S. and the role of the Reston, Virginia based company Mortgage Electronic Registration Systems (MERS).

It is a wonderful example of efficiency in the private sector.

Traditionally the mortgage business in the U.S. was predicated on a clear understanding of who held title to a specific property. If a lender on a mortgage wanted to sell the lien they were required to fill in new forms and pay filing fees each time a loan changed hands.

This was a cumbersome process which had a benefit that the documentation to title would be scrutinized by the purchaser in their normal due-diligence procedures. It took time, and time is money in the world of high-finance. So the giants of the Mortgage industry including Fannie Mae, Freddie Mac, GMAC and the Mortgage Bankers Association got together and created MERS in 1995 to facilitate the trading of mortgages at speed, bypassing local property laws.

Efficiency. The use of electronic systems to track mortgages as they were traded between firms in the creation of Mortgage Backed Securities (MBS) at lightning speed. As long as everything was going up there were no problems.

Now prices are declining, and the cracks begin to appear. MERS was created to smooth the securitisation process, and to allow lenders to avoid paying registration fees. Cost savings. What is not clear in this cost-saving efficency machine is if MERS is an agent or a principal.

This is a very important distinction. Apparently you can't be both, and yet being only one could be a real problem. An agent can't list itself as a principal. MERS states cleary that it is an agent-it was created as such. And yet it lists itself as a mortgagee. An agent doesn't hold title so in it's role as an agent it doesn't actually own the loan. Acting as an agent and as a principal could be contravening a precedent which states that you cannot separate the loan from the mortgage, and to do so makes the mortgage null and void. Null and void.

And in this case, although the borrower still owes the money, the mortgage can no longer be enforced-the house cannot be foreclosed on, and, my favorite, the house could be sold without paying off the mortgage as the borrow retains title!

Of course the lender can sue the borrower, and will. But most of the homeowners in question are financially distressed, and as the old saying goes, you can't reach into a naked man's pocket...

And the efficiency goes further. As MERS began submitting affidavits in foreclosures signed by "vice presidents" of the firm it turned out that the vice presidents had never seen the files as the affidavits stated they had. Even better, MERS allowed financial institutions that are its members to name anyone a vice president so none of these people actually worked for MERS.

And you wonder why our financial system needed to be bailed out by TARP.