Roughly half of the mortgages owned or guaranteed by Fannie Mae
are registered in the Mortgage Electronic Registration Systems
name, according to a filing by the government-sponsored enterprise last week.
Fannie's guaranty book of business totaled $2.9 trillion at the end of the first quarter, meaning about $1.45 trillion of loans are registered in MERS' name. The connection, Fannie said, poses a significant risk.
Privately held MERS, which was built by the GSEs and the nation's major lenders in the 1990s, is an electronic registry that tracks servicing rights and ownership of loans from origination through securitization. MERS serves as a nominee for the owner of a mortgage and therefore becomes the mortgagee of record for the loan in local land records.
Along with other organizations in the mortgage finance industry, Fannie Mae is a shareholder in Reston, Va.-based Merscorp Inc.
, the parent company.
Several legal challenges emerged during the foreclosure crisis, finding holes in the system that includes mishandled securitization transfers and foreclosure affidavits. Fannie, Freddie Mac
and a few other lenders prohibited its servicers from initiating foreclosures in MERS' name, guidance MERS also issued to its members
"These challenges could negatively affect MERS' ability to serve as the mortgagee of record in some jurisdictions," Fannie said in its quarterly filing with the Securities and Exchange Commission
. "Failures by MERS to apply prudent and effective process controls and to comply with legal and other requirements could pose counterparty, operational, reputational and legal risks for us."
Federal regulators found several problems in the MERS system during their investigation last year. The company did not invest enough resources, staff or training to properly handle rising caseloads and failed to implement the needed oversight, according to a study. MERS signed consent orders with regulators in April pledging to make corrections.
But the real risks to Fannie come from potential new rules regulators or lawmakers may enact. Foreclosure costs increased dramatically
in the first quarter as home values continued to fall, pushing loss severities at the already struggling mortgage giant up higher.
"If investigations or new regulation or legislation restricts servicers’ use of MERS, our counterparties may be required to record all mortgage transfers in land records, incurring additional costs and time in the recordation process," Fannie said in its filing.
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