MERS and ICE: Modernization Without Regulation Increases Housing Crash Risk

Remember the Great Recession and resulting cascade of foreclosures that exposed lax mortgage practices highlighted by the poster-child of “robo-signing”? At the center of it all was MERSCORP Holdings, Inc., and their confusingly-named MERS System and Mortgage Electronic Registration Systems, Inc. Earlier this month, Intercontinental Exchange (the other ICE) acquired the remaining minority stake in MERSCORP Holdings it hadn’t already acquired in 2016.

What does this mean for the US Mortgage market?

The US mortgage market is valued at $15 trillion, and coming as no shock to real estate professionals, very analog. Before MERS was setup originally in 1995, the mortgage industry was subject to federal, state, and county regulations and particularly registrations. It was the recording of any changes to mortgages at the county level that added complexity to mortgage transfers – your parent’s mortgage was much more likely to remain at the originating bank for the term of the loan.

So MERS System registry and Mortgage Electronic Registration Systems, Inc. were created by large banks and institutions like Bank of America Corp., Wells Fargo & Co., Citigroup Inc., Fannie Mae, Freddie Mac, and trade groups such as the Mortgage Bankers Association to make mortgage transfers and trading easier by eliminating the need to re-record mortgage changes with individual counties.

Of course, all this speculation in the mortgage market is a main contributor to the sub-prime mortgage debacle and resulting housing bubble and crash. MERSCORP Holdings was punished for their role with sanctions from 2011 until 2018 (needless to say no one went to jail and MERSCORP rarely lost a lawsuit).

MERSCORP Holdings is a member organization containing approximately 5,000 members in the lending, mortgage servicers, sub-servicers, investors, and government institutions. Mortgage Electronic Registration Systems, Inc. is listed on 30 million US mortgages.

While I see the need for older, paper-based systems to modernize, the first salvo of that modernization crippled the housing market. In 2011, over 1.6 million homes were repossessed and home values had dropped by a third.

It shouldn’t be a surprise that post-Recession, the coziness between MERS and its financial institution-owners needed to end. Banks needed a degree of separation in future and selling after the sanctions were lifted was likely a condition of the final payment.

Enter ICE

Intercontinental Exchange was founded in 2000 by Jeffrey Sprecher, a power plant developer who bought Continental Power Exchange. The goal was to create an internet-based exchange for the natural gas market that had been previously a very paper-oriented operation. Since those early days, Sprecher has assembled the world’s second most valuable exchange group by spending billions acquiring other global exchanges and research houses including the New York and Chicago Stock Exchanges and Interactive Data Corp (IDC). In August 2018, they even opened an exchange for digital currencies like Bitcoin called Bakkt. The result is a highly profitable global operation with $78 billion in assets and nearly $6 billion in revenues.

The company’s forte is modernizing operations that center on manual processes which their expertise can be streamline to cut costs and fuel transaction ease (while taking a profit).

ICE and MERS? 

The question is what will ICE do with MERS? Clearly the processes and procedures involved with mortgage underwriting, recording, securitizing and reselling are in need of simplification. But the result will most certainly be the high-speed commoditization of mortgage securities into investor portfolios more aggressively than was seen in the pre-Recession days.

In an October 1 Financial Times feature, Tim Anderson, director of eStrategy at DocMagic (an application connected to MERS) believes ICE’s long-term plan is “is to create the New York Stock Exchange for mortgages.” While MERS board member Christopher McEntree believes home mortgages are too individual for such actions, instead, he sees a more benevolent ICE facilitating speedier and cheaper transactions for everyone.

In the annals of American business, which future rings more true? Avarice or altruism?

Is the US government ever on the frontier of digital change? No

Does the US government have the financial controls in place to stem another housing crisis? No.

Remember:  High-rises, HOAs and renovation are my beat. But I also appreciate modern and historical architecture balanced against the YIMBY movement. In 2016, 2017 and 2018, the National Association of Real Estate Editors recognized my writing with three Bronze (2016, 2017, 2018) and two Silver (2016, 2017) awards.  Have a story to tell or a marriage proposal to make?  Shoot me an email [email protected]. Be sure to look for me on Facebook and Twitter. You won’t find me, but you’re welcome to look.