With foreclosures at an elevated level since the mortgage crisis broke out, the Mortgage Electronic Registry System (MERS) has come under scrutiny.
The role the registry plays in the foreclosure process is being questioned in some quarters.
At a November House hearing on mortgage-servicing related issues, the Office of the Comptroller of the Currency (OCC) reported that it is conducting an onsite examination of Reston, Va.- based MERS, as well as some mortgage servicers.
The OCC examination will focus on MERS' corporate governance, control systems and the accuracy of the information on the MERS system.
In response to such concerns, according to a Washington Post report, the financial services industry is seeking legislation to block any bill that would call into account what MERS does.
At the heart of the issue is the question of whether MERS has the right to foreclose on loans when it is merely a recordkeeping system.
MERS is a database that tracks changes in the ownership interests of mortgage loans, as well as changes in servicing rights. There are about 31 million active loans on the system.
The electronic registry also serves as the mortgagee of record for a loan. This means that there is no need to record changes in country records each time a mortgage note changes hands.
MERS also acts as an agent of the lender in foreclosure matters.
There has also been some concern about whether assignment of loans backing securitized mortgages have been following proper procedures, and whether MERS has the right to foreclose on loans if it is merely an agent of the lender and not the actual mortgagee.
According to Laurence Platt, a partner with K&L Gates in Washington, some class action suits that are pending against MERS in states such as California, Arizona and Nevada are "backdoor ways to prevent foreclosure" and are not likely to prevail.
There have been rulings against MERS in some states, including Maine, Arkansas, and Kansas.
Platt noted that each of these rulings has a different basis and essentially none of them has invalidated a mortgage. "They may delay the process of foreclosure, but they don't prevent foreclosure," he noted.
While there may be an impact on the old securitized loan as such issues come up, he doesn't see any systematic impact on the RMBS sector as a result of such issues.
He pointed out that the Department of Treasury now indirectly owns 30% of MERS, through its stake in Fannie Mae and Freddie Mac.
"The use of MERS has been sanctioned by Ginnie Mae, Fannie Mae and Freddie Mac for several years now. So if the allegations are true, it's the federal government that probably has the most to worry about," Platt said.
To avoid such issues, banks can choose to foreclose in their own name by opting out of the MERS system prior to initiating foreclosure proceedings.
At least one bank, JPMorgan Chase, has chosen this option.
R.K. Arnold, president and CEO of MERS, noted, "Banks have always had the option between foreclosing in their own name or MERS foreclosing for them. This is an internal business process decided by the banks independent of MERS."
At the House hearing, Arnold said that MERS initiated foreclosures only after getting possession of the mortgage note from the lender.
The American Securitization Forum (ASF) has come out with a white paper to support the standing of MERS relating to securitized mortgages.
A negotiable mortgage note and a mortgage are documents essential to the mortgage process.
When a mortgage note is transferred in the course of securitization, the ownership of the mortgage also follows.
Tom Deutsch, executive director of the ASF, noted, "The longstanding and consistently applied rule in the United States is that 'the mortgage follows the note.'"
What this means is that when a mortgage note is transferred due to a securitization, ownership of the mortgage is automatically transferred to the transferee of the mortgage note.
