One of the lessons from the near-collapse of the credit market is the need for more accountability in both the primary mortgage origination market and the secondary market for mortgage-backed securities.
Mortgages and the securities created with them should be tracked over time and linked with the people and companies who create them to make our financial system more transparent.
There would be a relatively easy way to do this if two resources, which are already in place, were connected.
My company, Mortgage Electronic Registration Systems, maintains a national loan registry used by virtually all mortgage originators and servicers. In the Mers database, each mortgage has a 18-digit mortgage identification number.
The database tracks information regarding the originator, the borrower, the property, the loan servicer, the investors, and any changes of ownership for the life of the loan.
It currently tracks more than 60 million loans and is embedded in every major loan origination, servicing, and delivery system in the United States.
On the securitization side, the American Bankers Association has a program called Cusip that generates a nine-digit identification number for most types of financial instruments, including mortgage-backed securities. The number uniquely identifies the company or issuer and the type of instrument.
Together, these two identifiers solve the need for greater transparency and accountability — Mers tracks millions of individual loans, and the Cusip system tracks thousands of unique financial instruments produced each year.
With loan-level information for every mortgage and mortgage-backed security available at the touch of a button, the credit rating agencies would have access to all the information they need to assess the risk of a given security and track its performance over time, in case it warranted downgrading.
As the Congress looks to reform the capital markets, they should require these two complementary identification systems to be linked and expanded in scope to track the decisions of all the participants — both the originators and securitizers. In this way, participants throughout the value chain who contributed to making bad mortgages and selling bad securities could be identified and held accountable.
Just as the vehicle identification number has evolved from a simple serial number into a valuable tool for consumers, enabling a potential purchaser to research the history of any car or truck, a comprehensive Mers/Cusip numbering system would be the key to tracking the history and performance of mortgage-backed securities.
With a system like this in place, Congress, regulators, and the market as a whole would have a means of distinguishing the quality of financial products, enforcing the discipline the market has failed to deliver, and restoring accountability to mortgage finance.