How do you make one of the most paper-intensive industries paperless-or at least much less paper-intensive?
Not very easily. At least that has been the experience to date of Mortgage Electronic Registration Systems Inc., better known as Mers. The McLean, Va.-based company was launched in 1995 by the mortgage industry to create an electronic system for tracing ownership of mortgage loans and servicing rights.
So far, though, only about 5% of the industry's loan originations are registered with Mers, and it probably will be at least another year before anything well into the double digits is approached.
"I would think that we'll probably be close to 30% by the end of 2000, and that represents very strong, significant, good growth," says R.K. Arnold, president. "I seldom if ever find a company that doesn't want to come into the system. I think that the vast majority of those in the industry have concluded now that Mers is a good idea and eventually they will come into the system."
Mers was 70,000 registrations ahead of schedule at the start of 1999; another million originations should be added this year.
"The system's still in its infancy but is growing at a rapid pace," says Mr. Arnold. "This is really the year you'll see the ramp-up in registrations. We've already added 242,000 registrations this year, we're on schedule to reaching our yearend goal. For instance, we've landed bulk acquisition contracts that in the second quarter will more than double in volume the contracts that we have in hand. Volume will exceed 500,000 by the end of June."
Mers is the brainchild of the technology committee of the Mortgage Bankers Association of America. "The idea germinated in that committee somewhere around 1992 and 1993," says Mr. Arnold. "The committee was looking for a way to, among other things, eliminate paper, reduce costs and improve efficiency.
The association, along with initial supporters such as Fannie Mae, Freddie Mac, and Ginnie Mae, saw enormous potential benefits to creating an electronic registry-the same sort of benefits that Wall Street has realized through its book entry system for tracking securities ownership that came about with the creation of the Depository Trust Co., our securities counterpart. We've all been working toward that, and it has been an evolutionary process."
Indeed. On the face of it the benefits of being a Mers member appear all too obvious. Potential economic gains speak for themselves: originators, for instance, save anywhere from $22 to $50 per loan transaction primarily because correspondents no longer must assign loans to wholesale lenders who buy them. Per-loan costs without Mers are $47; with it, $3.50, the company says. Without Mers, a typical correspondent/broker transaction costs $25; with it, $3.50. A typical direct mail transaction costs $3; it is eliminated altogether with the new system. Annual savings for the industry overall will total roughly $200 million when most of the industry is using Mers for registration.
Soft-dollar efficiencies are numerous as well. For instance, the old and nagging problem of lost or missing documentation promises to evaporate as loans are registered; and as a loan is sold or servicing rights moved, new assignments, both recorded and unrecorded-what Mr. Arnold calls the "elongated logistical tail of an assignment"-will no longer have to be made.
"Currently, the recorded assignment takes six to 12 months to get back from the county recorder," says Mr. Arnold. "With Mers, the physical paper itself will be eliminated. And we'll no longer have to worry about multiple assignments being recorded in the wrong order-the second assignment has been recorded before the first, for instance-which has been a nightmare in the past because of the chain of title has been thrown off."
One of the greatest long-term advantages will be in the value of Mers- registered portfolios, which should increase relative to their nonregistered counterparts. "What we offer in terms of enhanced due diligence and recertification, as well as the increasing amount of data held on the Mers data base, will all be reflected in pricing," says Mr. Arnold.
Consider recertification: "When company A sells a mortgage to company B, you need to do a due diligence on the portfolio," says Mr. Arnold. "Recertification for investors requires that the portfolio be physically reviewed, but that will be streamlined because the paperwork has been eliminated."
Finally, Mr. Arnold predicts that Mers-registered portfolios will become a "real instrument for balance sheet management. When you want to buy or sell servicing rights, you'll be able to execute it much more quickly and at less cost."
Despite the many benefits Mers offers the mortgage industry, it has been somewhat slow to embrace the new system. Part of the problem: preoccupation with Y2K, along with the enormous strains put on the mortgage industry overall by the originations boom.
"Both of these caused some delay in companies jumping in," says Mr. Arnold. "Now, though, the refi boom is largely past, and with Y2K they're to the point where they're testing. More important, many of the larger companies have included funding in their 1999 budgets so they become involved because there are some capital expenditures required in terms of technical resources so they're able to move forward."
While these issues initially kept the industry from focusing on Mers, however, a more subtle problem kept the largest originators from jumping in: A lack of perceived up-front benefits for them. Originally those accrued primarily to servicers, who enjoyed more efficient, simplified, and cheaper transfers. Left out of the up-front benefits equation: The lenders themselves, who had to bear the new cost of assigning loans to Mers once they had been originated and recorded with county offices.
"When we began the corporation, there was only one way to get loans into the system, and that was by assignment," says Mr. Arnold. "In July 1997 at a member meeting we realized that was a concern-that the system would not be utilized to the degree initially expected. So we started looking for a way to eliminate the need for the initial assignment to Mers."
The answer: "Mom," or "Mers as original mortgagee." This program enables companies to register loans with Mers recorded as the nominee for the mortgage lender in public land records. The inception of Mom means that those who need to know who owns the beneficial interest in loans or who is servicing them must go to Mers.
"Mom was a significant milestone for Mers and the mortgage industry," says Mr. Arnold. "It only became available in 1988 but it really jump- started our rapid growth." Among those who have already taken advantage of Mom are Merrill Lynch Credit Corp. and Alliance Mortgage Corp. in Jacksonville, Fla.
Before Mom could become available, Fannie Mae, Freddie Mac, and Ginnie Mae had to give the nod to document changes that would enable Mers to be recorded as the original mortgagee-a lengthy process. The company was able to put the time to good use.
"Back in 1997, a light bulb went off," says Mr. Arnold. "We realized that we needed to remake ourself into an entrepreneurial corporation."
Among its moves: recapitalizing Mers and turning it into a stock company in the summer of 1998 and creating new, easier ways for industry participants to join.
The recapitalization was a de facto industry vote of confidence in Mers and its mission. "As a nonstock corporation, we borrowed all of our capital; with the recapitalization, we wiped out $6 million in debt, raised new funds and obtained $8 million in loan guarantees," says Mr. Arnold. "The MBA put in $1 million in equity stock to equal the financial commitment already made by Fannie and Freddie and members prepaid about $1.7 million of registrations."
To boost membership, Mers went after smaller companies who did not want to register loans themselves. "We call this Mers Lite because wholesalers take care of the registrations for them. All smaller companies have to do is create the necessary Mom documents. Now our pipeline is full of small companies moving forward."
Ultimately, what will drive Mers' growth? "Competition," says Mr. Arnold. "In 2000 and 2001, those not in the system will see that they're at a serious competitive disadvantage from a cost standpoint. And when our portfolios begin to reflect their enhanced value, that should seal our success."