R.K. ARNOLD – Runs the gamut

After the refinancing boom in 1994, when many assignments went missing and unrecorded, many homeowners faced title problems when later trying to refinance or sell their homes.

Shortly after, mortgage industry leaders created a solution to the problem. Although not quite sweeping the industry yet, the Mortgage Electronic Registration System has achieved a solid 15 percent of the market share of new originations so far.

The system, based in McLean, Va., enables members to record MERS as the nominee for the lender in county land records. The loans are registered on MERS, which electronically tracks changes in ownership and beneficial and servicing rights over the life of the loan.

According to R.K. Arnold, president and chief executive officer of MERS since its official start in 1996, it has picked up enough momentum for him to predict 30 percent market share by the end of the year.

“It was born out of the technology committee of the Mortgage Bankers Association of America. It was a widely drawn consensus of industry players that [felt] through electronic commerce, there were ways to create efficiencies within the mortgage industry,” said Arnold.

MERS has been approved for use by big mortgage players like Fannie Mae, Freddie Mac and Ginnie Mae – as well as the Federal Home Loan Banks – to act as original mortgagee and nominee for the lender in county records.

“This can be done via the Internet,” said Arnold. “Our members go from the very small one- and two-person mortgage brokers to the Fleets. It runs the gamut.”

The biggest benefit to signing up with the system is when one company registered with MERS sells a loan to another company that is also registered.

“The benefit to the mortgage company that registers the loans is that they can then subsequently sell that loan to another mortgage company or to Fannie Mae or Freddie Mac, for instance, without requiring the recordation of a paper assignment at the county land records. That’s the benefit to the seller,” said Dan McLaughlin, executive vice president and product division manager at MERS.

“The benefit to the buyer of that mortgage is that they don’t have to follow up as they typically do today, to make sure that assignment got recorded, it got back from the recorder’s office, it got forwarded from the seller to the buyer in a timely way. And particularly, when a loan is securitized that the buyer certifies that that documentation came in in the proper order,” said McLaughlin. “So if you eliminate that assignment, you eliminate all that follow-up and paperwork cost.”

Additionally, MERS can save the originator of the mortgage loan about $22 per loan on the direct costs of preparing and recording the assignment, according to Carson Mullen, executive vice president and customer division manager at MERS.

“Today, with secondary market agencies and lots of trading of mortgage rights going on – in many cases, more than one assignment involved – there can be two and three assignments involved before the transaction is finally placed for servicing with a company that collects payments. So that paper trail, if done improperly, can cause real headaches [especially] in refinance periods like we’re in right now. And MERS really provides a great benefit in refinance periods in terms of cleaning up that paper mess and allowing the refinance to proceed normally and quickly,” said Mullen.

A Tracking System
But while Arnold said he wants another 85 percent of the market, MERS has been a little slow to take off.

Sushil K. Tuli, chairman and chief executive officer of Leader Mortgage Co. in Arlington, said his company doesn’t use MERS for a variety of reasons, including its novelty.

“It will take some time for people to understand and start using it. It is like Desktop Underwriting in 1996 – only a few lenders in Massachusetts were using it. Now, everyone uses it. Also, MERS comes with additional costs associated with each transaction. To stay competitive, we need to keep our origination cost as low as possible,” he said.

“It’s really a proposition that every company evaluates. They see what they intend to do with [the mortgage] in the future. Frankly, for the very, very tiny fees [$3.50] that MERS charges for this, it’s a great way to ensure you won’t have [title] problems in the future,” said Mullen.

McLaughlin uses the word “cooperative” in describing the idea of MERS. “The reason why MERS works is because it provides value to two trading partners. So the buyer and the seller both benefit from the fact that they’re using MERS. That buyer could be Fleet, or that buyer could be a very small mortgage company. The seller could be Countrywide, or the seller could be a very small mortgage broker,” he said.

Currently, about 3.8 million loans have been registered with MERS. Of that, 71,413 loans were originated in Massachusetts.

Webster Bank, based in Waterbury, Conn., has plans to go live with registration of a portion of its loans on MERS by May 1.

Richard Brynildsen, senior vice president of the $11.2 billion-asset bank, is a former director at MERS. Through that association, he became familiar with how the system operates.

“Webster’s been looking at MERS for a considerable period of time. We have a wholesale initiative here that’s going to generate some decent volume, so it makes just that much more sense … that much more of a cost savings,” said Brynildsen.

Only Webster loans to be sold on the secondary market will be registered with MERS, he said.

But even if the company plans to keep the loan in its portfolio, the registration with MERS may be a good idea, said Mullen, especially if selling a portion of the portfolio to raise capital may be an option in the future.

“Keep in mind, MERS is a tracking system,” said Arnold. “It reflects the current servicer and the current owner of the loan … It is not the actual legal representation of those interests. It streamlines, the industry has pointed out, but it doesn’t replace the need to record the mortgage with county land records; it doesn’t replace the need to buy and sell and custodialize the promissory note,” said Arnold.

As a comparison, Arnold cites the Depository Trust Co. in New York City that enabled transactions to be executed electronically, thereby eliminating paper and contributing to substantial growth in volume.

Like DTC, Arnold hopes MERS will enjoy great success.

“The biggest hurdles in our minds have been passed at this point. We’ve honed our value offering to the point where we’re successful in getting companies to see that MERS is enough value so that they can transition and make the systems changes necessary to integrate with our very simple system … Really, our challenge is: How deep can we take that into the mortgage industry? Is it only half? Some have speculated that we’d top off at 50 percent,” said Arnold.

“Our challenge is to continually find ways to make it better, simpler, faster, cheaper, for both our members and anyone involved with MERS,” said McLaughlin.

Carol Bulman, president of Conway Financial Services in Norwell and chairman of the Massachusetts Mortgage Association, said her company does not currently participate in MERS because CFS mostly uses its mortgage broker’s license. She said the decision to use MERS would be left up to the company’s lenders, but she did speak on the subject from an industry standpoint.

“The more lenders utilizing the system, the more efficient our system of tracking changes in mortgage ownership would be. The better this procedure works, the less expensive and time-consuming the process becomes, which will ultimately benefit the consumer,” she said.