Moving from paper to blips.

MERS, a proposed mortgage industry database, promises to streamline today's paper-intensive mortgage-assignment process

In modern housing finance, new mortgages are like newborn lambs. Singly, they are easy to keep track of. But neither mortgages nor lambs move around one-by-one. The essence

The sheep farmers have it easier than the mortgage industry. Before long, the wooly ones wind up as chops and legs in the supermarket.

Not so with mortgages. "Herds" of mortgages move all kinds of places on their way from originators to secondary market investors. And packages of mortgages, securitized or not, may be under the administration of numerous servicers over the course of their long lives. Mortgages, themselves a representation of a security interest, may in turn serve as security for an originator's warehousing loan.

Every time owners or servicers change, the recording of such details as servicing rights, ownership rights, and security interests must be adjusted accordingly in the public land records maintained in counties across the country. Every change must be prepared, tracked, shipped, and recorded. And when a loan is paid off-- as a result of normal amortization, refinancing, or because the mortgage holder is moving, liens must be released and other details processed promptly and properly. Yet under current, substantially manual methods, lien release can take from a couple of months to a year.

This all adds up to a massive paperwork challenge that can be costly--at a typical $30 per loan--and still more expensive if and when mistakes are made. By one industry estimate, it can cost as much as $250,000 to clean up assignment problems relating to a single block of 2,500 loans.

Coming up for air

Paper, paper, and more paper--with the risk of delays and that records will be wrong and borrowers, at the least, alienated. All in a time when many other aspects of the mortgage business are being nudged into the world of electronics to improve speed, accuracy, and cost control.

As mortgage industry leaders are fond of pointing out, this was the state of things in the securities brokerage business two decades ago, when brokers and investors found themselves so inundated with paper stock certificates and other securities instruments that Wall Street was drowning. The brokerage industry developed the now-routine book-entry system as a solution. Nowadays, it's a rare thing for active investors to ever see the instruments they own.

Now, a similar solution to the challenges of the mortgage-assignment process appears to be in the offing. The culmination of an initial three-year development effort, the proposed Mortgage Electronic Registration System-- MERS, for short--was announced in late October.

As envisioned, MERS would eliminate virtually all paper-based aspects of the assignment process with the exception of the initial recording at the local level, which would be executed in the name of MERS. After that, subsequent changes would be recorded in the MERS database electronically, with E-mail providing ancillary notification requirements. Even members of the public would be players in the new system.

Backers estimate that the proposed system will save the mortgage industry $80 million annually.

The MERS system, which planners hope to have up and running in early 1997, will operate under the auspices of a new corporation, Mortgage Electronic Registration Systems, Inc., and will be available for all types of residential mortgages, including conventional and federally guaranteed or insured loans. This Delaware non-stock corporation is intended to become an industry utility and will seek to operate in a manner to minimize profits. Users will pay fees according to a tiered schedule based on volume of use and other factors, such as whether they merely need to look up data or make changes to the electronic record.

Multiple sponsors

The MERS project owes its birth to cooperative efforts of numerous lenders as well as the Federal National Mortgage Association, the Federal Home Loan Mortgage Corp., the Department of Housing and Urban Development, the Government National Mortgage Association, the Department of Veterans Affairs, and the Mortgage Bankers Association. During the formative stages, many other trade groups with interests in the mortgage process, including the American Bankers Association, participated in developmental meetings.

Fannie and Freddie each committed $1 million in funding to the effort, and a group of mortgage companies contributed more than $1 million, in total, as well. Among these are several mortgage banks owned by banking companies, including BancBoston Mortgage Corp., Jacksonville, Fla.; Crestar Mortgage Corp., Richmond, Va.; and Norwest Mortgage, Inc., Des Moines, Iowa. Stephen Morrison, senior vice-president and general counsel at Norwest, has been appointed to serve as MERS' first chairman of the board. Fannie and Freddie will both have permanent seats on the board.

Currently a dozen vendors have been asked to respond to a request for proposals to develop and provide the technical guts of the database system, which will most likely be available through existing mortgage-related computer networks. Leilani E. Allen of Tenex Consulting, Burlington, Mass., an advisor to MERS, expects that the final selection of a vendor or vendors will be announced at the end of the first quarter of 1996. The party or parties selected will share in the MERS revenues for a fixed period in exchange for absorbing the costs of development.

How MERS would work

"The MERS project is an obvious way to eliminate costly assignments and recertifications when servicing is transferred," says Norwest's Stephen Morrison. He notes that his company has been re-engineering its mortgage operation to make it more efficient and cost-effective and that MERS is one more step in that direction.

At its heart, MERS is intended to serve as an electronic clearinghouse. Each new loan entered into the system-- generally this is expected to be processed on a batch basis from the participants' end--will receive a permanent "MIN"-- mortgage identification number. Participants can adopt this universal number as their own or retain their own numbering scheme internally. When the loan closes-or sooner, at the participant's option--a paper mortgage and assignment of mortgage in MERS' name will be recorded locally. MERS will remain the mortgagee of record on the local books for the lirc of each loan.

Participants will record all subsequent changes with the electronic registry, eliminating any need to send word to local recording offices. "That information will be readily available through MERS to those with a need to know," through electronic data interchange, according to a MERS backgrounder.

Borrowers will be able to verify who is servicing their loan by dialing into a voice-response system that MERS intends to maintain.

When the time comes to release a lien, it is intended that servicers will notify MERS, which will generate the necessary documents. It is expected that lenders and settlement agents will communicate this event between themselves via E-mail.

Overall, the MERS effort will take care of all new mortgages put through by participating members of the mortgage community. What of the huge number of mortgages already outstanding?

Consultant Leilani Allen says she expects there will be some backfilling of outstanding mortgages--likely once participants observe the expected benefits of the system. However, she adds, such backfilling will be up to individual participants. --BJ

By Steve Cocheo, executive editor