How counties lost revenue in the bank foreclosure crisis
In a Senate Banking Committee hearing, newly elected Massachusetts Senator Elizabeth Warren asked why bank regulators protected banks, but would not assist wronged homeowners. Regulators did not have an answer to her question, but there is still another question that needs to be asked: What about the economic damages to county governments from banks using a false mortgage registration system – MERS – to avoid paying mortgage registration fees
What is MERS?
”Mortgage Electronic Registration Systems” (MERS) is a privately held company that operates an electronic registry designed to track servicing rights and ownership of mortgage loans in the United States.
MERS serves as the mortgagee of record for lenders, investors and their loan servicers in the county land records. MERS claims its process eliminates the need to file assignments in the county land records which lowers costs for lenders and consumers by reducing county recording revenues from real estate transfers and provides a central source of information and tracking for mortgage loans.
The Washington Post explains how MERS supplanted the centuries-old property registration systems at the county level and allowed banks to use mortgages like securities:
MERS allowed big financial firms to trade mortgages at lightning speed while largely bypassing local property laws throughout the country that required new forms and filing fees each time a loan changed hands, lawyers say.
The idea behind it was to build a centralized registry to track loans electronically as they were traded by big financial firms. Without this system, the business of creating massive securities made of thousands of mortgages would likely have never taken off. The company’s role caused few objections until millions of homes began to fall into foreclosure.
In recent years, the company has faced numerous court challenges, including separate class-action lawsuits in California and Nevada – the epicenter of the foreclosure crisis. Lawyers in other states have also challenged the company’s legal standing in court.
When local government systems of registering mortgages were bypassed in favor in MERS, revenues were lost. Matt Taibbi laid it out in Rolling Stone:
For those of you wondering why so many localities are broke, here’s one small factor in the revenue drain. Counties typically charge a small fee for mortgage registration, roughly $30. But with MERS … you don’t need to pay the fee every time there’s an ownership transfer. Multiply that by 67 million mortgages and you’re talking about billions in lost fees for local governments (some estimates place the total at about $200 billion).
Outrageously, MERS actually marketed itself to its customers as a way to save money by avoiding the payment of legally-mandated registration fees. Check out this MERS brochure from 2007. It brags on the face page about its fee-avoiding qualities (“MINIMIZE RISK. SAVE MONEY. REDUCE PAPERWORK”) and inside the brochure, in addition to boasting about helping clients “Foreclose More Quickly,” it talks about how clients save money because MERS “eliminates the need to record assignments in the name of the Trustee.”
Counties are beginning to file lawsuits against MERS. One important component of the requests for damages is that a single mortgage could have been traded multiple times and would have required multiple fees to the county registrar that went unpaid. Multnomah County, Oregon has filed a suit against MERS according to The Oregonian:
The lawsuit will claim that MERS has avoided paying anywhere from $3 million to nearly $25 million in local recording fees. The actual amount will be determined by how many mortgages are involved, how many times each of those mortgages was bought and sold without new transaction fees being paid, and by laws that may allow triple damages in certain instances.
This revenue is vital for fiscally stressed communities. It’s likely that we will see more litigation, but MERS continues to roll along. Reuters reports:
Meanwhile, MERS is attempting to remake itself. The company has a new chief executive and a new branding campaign. In Washington D.C. federal lawmakers have recognized the need to create a national mortgage-recording database that would track all U.S. mortgages. MERS is lobbying to build it.