On Friday, New York State Attorney General Eric Schneiderman filed a lawsuit against the nation’s largest banks, alleging that their use of a private national mortgage database run by a company called Mortgage Electronic Recording Systems (MERS) has facilitated systematic fraud in foreclosure filings. The suit alleges that financial institutions that rely on MERS have moved to foreclose on homeowners without the legal standing to do so, and further charges that MERS has effectively circumvented the public record, greatly reducing the public’s ability to make sure those banks comply with lending and foreclosure procedures.
A consortium of financial institutions founded MERS in 1995 to expedite the packaging and resale of home loans by circumventing the paperwork and fees local governments typically require when a mortgage note changes hands. In the attorney general’s words, “The mortgage industry created MERS to allow financial institutions to evade county recording fees, avoid the need to publicly record mortgage transfers, and facilitate the rapid sale and securitization of mortgages en masse.”
If lenders used MERS to avoid paying recording fees with county clerks, then we want to know: Roughly how much money could have local governments in New York lost as a result?
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What we found
The black box of MERS proved slow to reveal its secrets. Nationally, former MERSCORP President and CEO R.K. Arnold said in 2009 that MERS had saved its members more than $2 billion and that MERS facilitates approximately 60 percent of all loans in the United States.
Some back-of-the-napkin math can give us a very rough estimate for how this translates to New York City – and it could be $100 million or more.
According to the Federal Reserve Bank of New York, as of March 2011 1.6 million mortgages were outstanding across the five boroughs. In New York City, the recording fee for a mortgage is $45 plus $5 per page, and mortgages can run to 20 pages or more.
So if we take as an example a mortgage at 25 pages thats 25 x 5 = $125 plus the $45 base fee is $170. If MERS handles the same proportion of loans in New York as it does nationally then we take 60 percent of 1,622,187 NYC loans equals 973,312 loans handled by MERS.
973,312 loans times $170 average recording fee is $165.5 million of lost revenue.
If the typical mortgage is 10 pages, that figure would be $92,464,659.
And that’s just on outstanding mortgages. MERS started all the way back in 1995.
This number is most likely higher, though, since the beauty of MERS for the banks is that mortgages can be transferred between parties, as part of the securitization process, any number of times for free. Financial blogger Yves Smith reported that the recorder for Salem County, Mass., determined that MERS mortgages had each been transferred at least twice, each time avoiding recording fees. So double or triple the numbers above.
Whether these swaps should be included as lost revenue is a tricky question, however, since mortgage securitization as we know it might have developed differently if a bank incurred this marginal fee for each mortgage transfer. Banks, after all, have an eye for the bottom line.