[Update: Edited to remove references to Harper's.]

MERS and home ownership is becoming a significant issue for the housing issue — specifically, and how the potential “clouded title” caused by the company is going to continue to hang over the market, and how homeowners are beginning to use that to fight back.

MERS (Mortgage Electronic Registration Systems) manages the database that tracks the sale of mortgages between lenders. That way lenders can buy and sell loans (or pieces of them) without the pesky problem of local paperwork. The loans are placed under MERS’s name. But in that process, the deed for the house gets separated from the mortgage for the house. And that can lead to problems.

Picture it this way

You loan me $25,000 to buy a car. I sign a paper that says “I promise to pay you back this loan or you can take the car” — a promissory note — and I staple the car’s title to it. We put it in a file.

When I pay off the loan, you give me that title so I can hang it on my wall. But if I stop paying, you take the title yourself and repossess the car; if a cop stops you, you can show that title as proof you own it.

But MERS clouds the issue.

Imaging that you take the car’s title and my promissory (“I promise to pay you back…”) note and give it to your friend, Joe Mers. “You are now the owner of this car,” you tell Joe. But you never file any paperwork with DMV.

Joe Mers then unstaples the papers. He keeps the title, but he sells my promissory note to whatever financial institution wants it (or a piece of it). Joe ends up holding a lot of those titles for a lot of people, but he never once tells DMV about the arrangement.

I really liked this movie Then I stop making payments to you. So you tell Joe, “Andrew stopped paying. Go get the car.” Joe puts on his Repo Man outfit and tries to take the car back. A cop stops him as he’s trying to hot wire it, so Joe shows the title as proof of ownership.

But then the cop checks with DMV which says, “Joe Mers? Never heard of him. He’s not the owner.”

“Sure I am,” says Joe, waving the title. “I have the title. I don’t have to tell DMV.”

“In this state,” says the cop, “you do.”

And then we’re headed to court. You gave the title to Joe Mers, sure, but did you do it legally? If you didn’t file with DMV, doesn’t that cloud the title? Shouldn’t you have to repo the car, not Joe?

And so, to MERS

That’s a rough look at the issue with MERS, but instead of car titles and loans, we’re talking about homes and mortgages. Does MERS have the right to foreclose if the local paperwork wasn’t filed? Different courts have ruled differently.

You might think that challenging MERS’s right to foreclose is simply a way of stalling things — after all, if someone didn’t pay his mortgage he really can’t expect to stay in the home, right?

But the Harper’s article brings up a different potential issue. The paperwork shuffle can cloud the title when MERS tries to foreclose, but it can also cloud it when someone pays off his mortgage. Quoth:

If there was no legal record of which bank owned their debt, and the MERS-mortgaged homeowner nonetheless had been making payments, then who exactly was the homeowner paying? The checks, clearly, were going out each month, cashed by a bank that claimed to own the note. But without the legal record to certify the ownership of the note, it followed that the bank could not legally issue the homeowner a clear title to the home.

In effect, a homeowner with MERS on his mortgage could spend thirty years paying
a lender that wasn’t the owner of the note. After those thirty years, said Trotter, when the note was paid off, the homeowner would come to an awful discovery: without a clear title issued to stipulate that the home had no claim of debt against it, the homeowner could assert ownership of exactly nothing.

“Because you’d always be looking over your shoulder,” said Trotter. “Some other lender could come and say, ‘No, we owned that note. You paid the wrong guy.’ ”