The ambitious new book-entry electronic system for tracking ownership of servicing rights is set for an April 1997 rollout. The MERS system, a joint industry venture, offers the potential benefits of higher servicing prices and operating savings.
"Mortgage servicing rights have become a commodity," notes Dick Hebl, senior vice president, loan administration at Knutson Mortgage Corporation in Minneapolis. "But they are traded in a cumbersome, involved manner." Hebl says that time delays - and the problem of adequately serving borrowers while transferring a loan package - increase the difficulty of buying or selling servicing.
Knutson Mortgage is an active subservicer receiving many "sight unseen" loans that often come with existing problems, adds Hebl. Ownership rights often are not correct on county land records, he explains. For instance, a defunct savings and loan might be named as the servicer. Hebl's staff then must track down a government official who is authorized to sign on behalf of the long-gone financial institution.
An automated alternative to these problems is the promise of the new Mortgage Electronic Registration Systems, Inc. (MERS). Knutson Mortgage is one of MERS' charter members, and Hebl recalls thinking "this is a big deal" when he first saw how MERS would work.
Knutson Mortgage is incorporating MERS into its loan origi-nation software. In 1997, the firm will start generating an 18-digit mortgage indentification number (MIN) for every origination. A MIN will stay with a loan throughout its life - even as ownership of the loan and its servicing changes hands.
Knutson will record the mortgage or deed of trust in public land records, just as it does today. But an assignment also will be recorded in the county records, naming MERS as mortgagee-of-record.
MERS then electronically will track ownership and servicing transfers on that loan. When rights are traded, no additional assignments would have to be recorded in the land records. And unrecorded assignments, which currently are prepared for investors or warehouse lenders, also will become unnecessary.
MERS will register each loan according to its MIN and serve as an electronic clearinghouse for recording ownership rights and ongoing transfers. It will seek to cut costs and reduce errors by centralizing certain information now scattered through closing documents, public land records and mortgage assignments.
"MERS addresses a problem that was costing the industry a significant amount of money," says Rick Amatucci, a Fannie Mae vice president and the agency's liaison with MERS. He recalls that the idea grew out of an Interagency Task Force, which brought the secondary marketing agencies and the Mortgage Bankers Association of America (MBA) together "to identify ways to bring efficiencies to the industry,"Amatucci says.
A feasibility study and business plan were then developed before incorporating MERS in 1995, says MBA Executive Vice President Warren Lasko. He cites "a very high level of enthusiasm" within the industry for an initiative that is designed to:
* Lower costs for servicers, which offers benefits to themselves as well as their borrowers.
* Provide immediate access to information on mortgage ownership rights to both consumers and the industry.
* Lessen the potential for fraud by giving lenders the ability to track individual mortgages throughout their life span.
What MERS Costs Fees for lenders include a setup charge, annual membership fee and transaction costs. Different fees are levied on nonlenders - such as title companies and custodians. Firm Size (in billion) Origination or Size of Servicing Membership Annual Volume Portfolio Setup Fee Fee $10+ $50+ $3,000 $7,500 $2.5+ to $10 $25+ to $50 $3,000 $5,500 $1.0+ to $2.5 $10+ to $25 $2,000 $3,500 $0.5+ to $1.0 $5+ to $10 $2,000 $2,000 $0.25 to $0.5 $2 to $5 $1,150 $1,000 under $0.25 under $2 $1,150 $500
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MERS President and Chief Executive Officer Paul Mullings cites a "very, very positive response" to the system. "Some say it was overdue for the industry," he adds. Mullings sees MERS as part of a movement toward the use of electronic rather than paper-based processes in mortgage lending.
The genesis of MERS reveals the industrywide cooperation behind the initiative. Fannie Mae and Freddie Mac each invested $1 million in MERS as startup capital. Lenders, industry vendors and real estate professional associations combined to bring in another $2 million.
MERS is a nonstock corporation owned by its members - similar to the way MasterCard is owned by financial institutions offering the cards. However, MERS has two classes of members. Charter members have a financial interest in the project, in addition to the voting rights that all members enjoy.
A bright idea
In January 1997 MERS plans to hire four additional staff members - to bring the total in its McLean, Virginia, offices to just 10. Yet the senior management team of Mullings, General Counsel Roland Arnold III, and Senior Vice President of Operations and Information Management Dan McLaughlin come into the venture with reputations of previously helping to develop financial services innovations.
Mullings formerly was CEO of the residential mortgage division at Los Angeles-based First Interstate BanCorp. Arnold was part of a team at AT&T Universal Card Services...