It’s difficult to keep track of all the things that all the people are suing all the banks for regarding mortgages. A place to start is by remembering that banks stood in the middle of originating loans to people who didn’t pay them and selling them to people who are now sad that they didn’t get paid. So the flow of money was kind of Investor -> Bank -> Homeowner -> Incinerator. If you think of that flow of money, it makes sense that the people are are doing the most suing are the investors and GSEs who bought mortgages, and regulators who sort of kind of represent the investors, and so in fact there are a lot of big numbers sloshing around in pretty normal securities-fraud-y lawsuits of exactly that sort.
But there are also lawsuits, with quite large dollar numbers attached to them, that go the other way. In these, homeowners, and regulators who sort of kind of purport to speak on behalf of the homeowners, are suing the banks for really quite stonking amounts of money.
It’s analytically helpful for me to separate those suits into two further buckets:
(1) Suing banks for doing a variety of substantive things that put homeowners in a worse position, ranging from refusing to follow their own policies on mortgage modification to not giving proper notice of foreclosure to foreclosing on people who were not in default on their mortgages and stealing their parrots. But also:
(2) Suing banks over things with names like “robosigning” and “MERS.”
The first category is easy enough to understand; if you kick me out of my house and steal my parrot, even if I ultimately get back both the house and the bird, I am at the very least inconvenienced and so you should pay me. That seems obvious and right.
A lot of smart people think the second category of bank actions is just as objectionable. And Massachusetts’s big lawsuit yesterday seems to fall into that category. But I find it really hard to understand. So let’s chat about it.
MERS is an interesting creature. Here’s how the Massachusetts complaint describes it:
146. MERSCORP and Mortgage Electronic Registration System, Inc. are owned by some of the nation’s biggest banks and mortgage companies, including several of the Bank Defendants and/or their subsidiaries.
147. MERS has created a private electronic database (the “MERS System”). The MERS System is designed to be a national electronic registry that tracks changes in beneficial ownership interests and servicing rights associated with mortgage loans. Full access to the MERS System is limited to members and/or owners of MERS.
148. Since 1997, more than 63 million home loans have been registered on the MERS System. Indeed, more than 60% of all newly-originated mortgage loans are registered on the MERS System.
149. Through the MERS System, MERS is named the mortgagee of record for participating members either at the origination of the mortgage — by being named the mortgagee as nominee for the originating lender and its successors and assigns in the mortgage documents or by subsequent assignment of the mortgage to MERS. MERS is listed as the mortgagee in the official records maintained by the register of deeds for the county in which the property rests. The lenders retain the promissory notes, which they often sell to investors without recording the transaction in the public record. Lenders likewise are granted the servicing rights to the mot/gage, which they either retain or transfer to other entities. As with the transfer of the promissory notes, a transfer of servicing rights is not recorded in the public record.
150. To facilitate the transfer of beneficial interests in mortgages, MERS and its members typically structure mortgage transactions as follows: …
b. When the promissory note is sold, and potentially re-sold, in the secondary mortgage market, the transaction is, or is supposed to be, tracked – in the MERS database as a transfer of beneficial rights from one investor to another. MERS members are responsible for entering accurate information into the MERS System reporting the transfer of the beneficial interests and servicing rights associated with each mortgage. Members of the general public, however, are unable to access this information.
Okay. Does this sound nefarious to you? It doesn’t especially to me. MERS is to mortgages what DTC is to stocks (and, um, bonds and other things). Time was, I would sell you a share of stock under a tree on the New York Stock Exchange, then I’d go back to my office and tell my clerk to walk the certificates over to you, and you’d tell your clerk to walk your money over to me, and when my clerk got to your office it would be empty and vice versa, and so our clerks would embark on a slapsticky series of near-misses until they finally exchanged money and certificates three days later, which is why we have T+3 settlement. (This is very approximately true.)
But then someone realized that if we just put all the stock certificates in one place, nobody’s clerk would have to go around looking for stock certificates, and someone in that one place could just mark transfers of stock on its books. And, lo, DTC was born, and it was good, and it’s what we have now and it makes a great goddamn deal of sense.
Now, mortgages. A thing about mortgages is that, like everything else related to land, they have to be registered. You register land instruments under the law of the state where the land is. This law, it is safe to say, is old. In most states, you record land documents by actually going to an office – often one per county – and, like, stapling a piece of paper to a file in a musty room. (I’ve been to one in Connecticut. It was fun. But musty.) If Bank A wants to transfer a Las Vegas mortgage to Bank B, someone has to go staple the transfer notice to the file in the musty room in Las Vegas.
If you want mortgages to be tradeable, this is a much, much less efficient system even than my clerk and your clerk tracking each other down on the streets of lower Manhattan and handing each other stock certificates. If we’re selling each other mortgages in a bunch of states, it requires us to send our clerks to each one of those states – maybe each county in each of those states – to do the equivalent of handing over those stock certificates.
So of course MERS was created. For the same reasons and in the same ways as DTC. And it was good, right? Well. Here’s the Massachusetts complaint again:
157. The creation and use of the MERS System — including the assignment of mortgages to MERS “as nominee” for others, and the naming of MERS as the original mortgagee in the mortgage — was adopted by defendants principally to avoid registration and recording requirements. By cutting these corners, MERS and its industry owners, among other purposes, have sought to avoid the payment of millions of dollars of filing fees.
158. In creating and using the MERS System, defendants ignored long-standing and well-established statutory requirements intended to protect property titles and their owners through the land title registration system. Their failure to follow these procedures solely to avoid paying registration fees — and without regard to the impact on the integrity of either the land title registration system or Massachusetts consumers — is unfair and deceptive.
159. Beyond violating the statutes applicable to registered land, this practice conceals from borrowers the true identity of the holder of the debt as memorialized in the promissory note. A borrower whose mortgage is held by MERS cannot readily identify the investor who owns their promissory note, impairing the borrower’s ability to deal directly with the holder of the note.
Well, okay. There seem to be two theories here. First, you could be mad because most states charge a tax or filing fee when you record a transfer of a mortgage. If you transfer a mortgage in MERS’s database, you don’t pay the fee. But the fees aren’t that much – maybe a total of $100 per mortgage – and suing over the fees seems a little childish.
Second, you could be mad that this “impair[s] the borrower’s ability to deal directly with the holder of the note.” This one is … hard to even understand. You deal with the servicer, not the noteholder. The noteholder is in many cases a securitization trust. It’s unclear why “impairing the borrower’s ability to deal directly with the holder of the note” is a thing that we should care about.
That leaves a third theory, which is sort of implicit in the Massachusetts complaint. Here, it’s important to keep in mind that no one is suing just because they don’t like MERS. Massachusetts’s complaint alleges a lot of bad things, some related to shenanigans in the mortgage modification process, others related to actual foreclosure mistakes. And you could – and the states and consumer advocates seem to – have a theory that says that MERS transfers are “cutting corners,” like Massachusetts says, and that when you cut corners houses get foreclosed on incorrectly, and you end up with traumatized parrots.
But – and tell me where I’m wrong here – isn’t that just sort of crazy on its face? Again, I like the MERS:DTC analogy. And DTC works like a charm. One failure of T+3 settlement in 200 is viewed as unacceptable, and it seems unlikely that anyone, ever, has been unable to sell stocks held at DTC because DTC lost them. Stocks going missing on their way from buyer to seller is just not a thing that we worry about any more in the modern world, not in spite of the fact that stocks have gone from being physical slips of paper that we pass around to being computer bits in a centralized database, but because of that fact.
Which system is more likely to be screwed up: The one in which when banks trade mortgage loans by IM or phone, they also make a notation in the electronic database they all have access to changing the beneficial owner of the note? Or the one in which, when banks trade mortgages by IM or phone, they also send someone to hundreds of county clerks’ offices to record those transfers?
My somewhat uninformed guess is that the foreclosure mistakes largely stem from banks having to have a system where in every county they have some schlub responsible for keeping the paperwork together according to local rules, and from those schlubs being, well, schlubs. If all there was was MERS, it strikes me that foreclosure mistakes would be far less likely. Most (not all) of the inaccuracies listed in the Massachusetts complaint are not “they foreclosed on the wrong house” but rather “the MERS owner and the record owner didn’t match up.” You can speculate on which was more likely to be “accurate” (in the sense of “reflecting the desire and understanding and cash flows of the people who bought and sold the mortgage”), but I don’t know why you’d presume it to be the county clerk records.
So what is going on with the animus against MERS? Yves Smith, the leading expert on the mortgage lawsuits: “Consumers are very upset about MERS (I find it resonates with readers more than many of the other securitization abuses).” Why? MERS is just a way of moving mortgages from, literally, the Dark Ages into the 20th century. It’s an electronic central registry of stuff that used to be done on paper in diffuse places, like DTC or, um, Facebook.
There’s one obvious answer: it seems like banks pretty uniformly lied about stuff in their foreclosure complaints, and people hate liars. Emphasis on “seems,” though; your “Bank X lied because it said it was the mortgagee when actually MERS was” or vice versa or whatever could be my “Bank X used language somewhat loosely when it said it was the mortgagee but was in fact only the beneficial interest holder in a mortgage technically registered to MERS.” Those nuns probably aren’t going to hell for saying that they’re “shareholders” of Goldman Sachs when in fact they’re just holders of a beneficial interest in shares owned of record by DTC.
But I think the real answer has to be that MERS is the one place where populists and technocrats, smart people and dumb people, can all come together and say “here is a great place to clamp down on efficient financial intermediation.” And that desire, in some form, is actually pretty widespread. That breakneck increase in speed and efficiency and transferability of claims is maybe contributing to financial system instability, or at least market volatility. It’s why people keep getting really psyched about quasi-Tobin taxes. It’s a plausible explanation for why there’s so much debt knocking around.
If you generally have a vague sense that unrelenting increases in the speed and efficiency of markets for financial claims is responsible for creating and magnifying crises, then you probably want to do something about it. Maybe you go occupy Wall Street. But if you’re a regulator and you say things like “let’s tax all trading to reduce volatility” or “let’s make lending more difficult and time-consuming so that fewer people get loans who maybe shouldn’t have them” or “let’s ban money market funds from serving banking-like functions” then you open yourself to (often accurate) criticism that you’re going to kill jobs ore destroy the economy or whatever.
But if you instead say “let’s kill an effort to modernize the financial intermediation of mortgages and return to a system where paper certificates need to be filed and reviewed by hand in the clerk’s office of every county in the country,” that can work. Because it’s accompanied by dozens of examples of banks misrepresenting who owned the mortgages that they foreclosed on, which sounds kind of bad. Even if the causal connection between the two things is sort of tenuous and directionally unclear.
Commonwealth of Massachusetts v. Bank of America et al. [pdf]
Massachusetts Announces First Comprehensive Lawsuit Against Major Banks [Naked Capitalism]
Massachusetts sues banks over foreclosures [WSJ]