What Is Mortgage Electronic Registration Systems (MERS)?

When a mortgage is sold from one bank to another, an "assignment" is typically prepared and filed in the county land records to show the new bank's interest in the property. Generally, a new assignment is supposed to be recorded each time a mortgage changes hands, which results in significant paperwork and administrative costs.

The mortgage industry established Mortgage Electronic Registration Systems (MERS) to streamline this process. The MERS database tracks changes in mortgage ownership and servicing rights for its members as loans are sold or transferred between banks. ("MERS" refers to the company itself and to the database it manages.) MERS records these transactions electronically, eliminating the need to file a new paper assignment with the county each time a loan is sold. This electronic process significantly reduces paperwork and costs while providing a more efficient way to keep track of mortgage transfers.

In the past, many foreclosures were filed in the name of Mortgage Electronic Registration Systems. However, this practice has become rare and is generally prohibited today. Whether MERS can initiate a foreclosure depends on state law and the specifics of the mortgage documents. Most courts, major investors, and MERS itself now require that a foreclosure be brought in the name of the lender or current loan owner, not Mortgage Electronic Registration Systems. Still, if MERS is involved in your home loan, you should understand how it works and what role it plays in a foreclosure.

Understanding MERS in Mortgage Transactions: Key Terms and Documents

To fully understand Mortgage Electronic Registration Systems (both the company and database) and how it works, you must understand the basic terms and documents involved in a residential mortgage transaction.

• Mortgagee (beneficiary) and mortgagor. A "mortgagee" is the lender in a mortgage contract. In a deed of trust, the lender is called the "beneficiary" or "lender." The mortgagee or beneficiary loans money to the "mortgagor," who is the borrower.
• Loan documents. A loan transaction consists of two main documents: the mortgage (or deed of trust) and a promissory note. The mortgage or deed of trust is the document that pledges the property as security for the debt, whereas the promissory note contains the borrower's promise to repay the loan.
• Loan Transfers. Banks often sell and buy mortgages from each other. An "assignment" is the document that is the legal record of this transfer from one entity to another. In a typical transaction, when the mortgagee sells the debt to another company, an assignment is recorded, and the promissory note is endorsed (signed over) to the new owner.

What Is MERS?

MERS, or Mortgage Electronic Registration Systems, is an electronic registry system that the mortgage banking industry developed in the 1990s. Mortgage Electronic Registration Systems, Inc. is also the name of the company that manages the database. The goal in creating this company and database was to streamline the mortgage assignment process and reduce the costs and delays associated with regular, paper-based recording of mortgage assignments.

To accomplish this goal, MERS serves as a nominee (or placeholder) for the lender and any subsequent loan owner in the land records. It tracks ownership and servicing rights without requiring repeated updates to local land records.

How Does Mortgage Electronic Registration Systems Work?

In a home loan transaction involving MERS, the mortgage designates Mortgage Electronic Registration Systems, Inc. as the mortgagee, solely as a nominee for the lender. These loans are called "MERS as Original Mortgagee" or "MOM" loans. In a deed of trust, Mortgage Electronic Registration Systems, Inc. is designated as the beneficiary to act as the lender's nominee. In other cases, the loan might be assigned to Mortgage Electronic Registration Systems, Inc. (solely as a nominee) sometime later in its life cycle after the loan closes.

MERS then tracks the loan transfers in the Mortgage Electronic Registration System, acting as the nominee for each holder, eliminating the need for separate assignments when the loan is transferred. So, you don't need a separate paper assignment each time a MERS loan is transferred. The Mortgage Electronic Registration System keeps track of this information in its database. Each change in ownership is recorded electronically in the MERS system.

By keeping this information in a single database, the MERS system allows for faster and more cost-effective loan transfers, which contributes to the efficiency of the secondary mortgage market. (Mortgages are bought and sold on the "secondary mortgage market.) This process reduces administrative burdens and allows financial institution, investors, and borrowers to determine who currently owns or services a given loan quickly.

How MERS Tracks Mortgage Loans

MERS assigns a unique Mortgage Identification Number (MIN) to each registered mortgage loan. The MIN follows the loan through its life cycle, regardless of how many times the loan is sold or the servicing rights change hands.

If the lender or a subsequent loan owner sells the loan, MERS updates its information in its database. All updates to ownership and servicing are logged in the MERS system database, eliminating the need to record each transaction with local county clerks.

Why Lenders Use MERS: Cost-Saving and Recording Efficiency in Mortgage Transfers

Having the loan in the name of Mortgage Electronic Registration Systems, Inc., as a nominee, in the land records saves time and recording costs because multiple assignments aren't necessary each time the loan changes hands.

Does MERS Own the Loan? Understanding Its Nominee Status in Mortgage Records

While MERS acts as "mortgagee," it is solely as a nominee for the loan owner. It doesn't actually own the debt or hold the promissory note.

What Are the Benefits of the Mortgage Electronic Registration System?

Using MERS offers a couple of advantages for lenders and servicers. Having the loan in the name of Mortgage Electronic Registration Systems, Inc. (as nominee) in the land records saves time and recording expenses because it's not necessary to prepare an assignment every time the loan transfers to a new owner. So, it reduces recording costs and minimizes paperwork, which lowers administrative costs. It also simplifies loan ownership tracking.

What Criticisms and Legal Issues Are Associated with Mortgage Electronic Registration Systems?

MERS has faced some criticisms. In the past, if you had a Mortgage Electronic Registration Systems loan, it was sometimes difficult and confusing to figure out which entity actually owned your mortgage.

During the foreclosure crisis, loans were bought, sold, and securitized, and, in some cases, it was difficult to determine what company actually owned mortgages. This confusion created challenges for homeowners facing foreclosure and seeking foreclosure alternatives because they needed to know who held their mortgages to work out a loss mitigation option. In some cases, homeowners facing foreclosure were able to successfully raise an argument based on "standing" (the right to foreclose) when they couldn't determine the loan owner and the foreclosing party couldn't prove loan ownership.

Now, however, it's easy to figure out the loan owner using MERS® ServicerID.

How Homeowners Can Use MERS to Find Out Who Owns Their Mortgage

Mortgage Electronic Registration Systems provides an online tool known as the MERS® ServicerID, which allows homeowners to find their loan's current servicer and investor (loan owner) by entering basic information such as the MIN, the property address, or the borrower's name and Social Security number. (To find the MIN, look at the mortgage or deed of trust you signed when the loan closed.)

Other Issues With MERS

MERS' role in foreclosure proceedings has been legally challenged in several states, raising questions about its legitimacy when the loan owner tries to enforce its mortgage rights.

MERS and Foreclosure: How Its Role Affects Judicial and Nonjudicial Foreclosures

MERS has faced significant legal scrutiny over the years about its authority to initiate a foreclosure because of its lack of ownership over the underlying debt. In some judicial foreclosure cases in the past, Mortgage Electronic Registration Systems, Inc., solely as a nominee for the loan's owner, was named as the plaintiff in the lawsuit. And MERS was previously sometimes listed as the beneficiary, solely as a nominee for the loan owner, in nonjudicial foreclosure notices.

In several states, courts have issued rulings about whether Mortgage Electronic Registration Systems as a nominee has the legal standing to foreclose or whether MERS as a nominee may be listed as the plaintiff or beneficiary in foreclosure proceedings.

States Where MERS Can't Foreclose: Legal Limitations by Jurisdiction

Some state courts have determined that Mortgage Electronic Registration Systems doesn't have standing to foreclose.

MERS in judicial foreclosures: State court rulings on legal standing. To file a lawsuit, a plaintiff must have legal "standing," meaning it must have a direct interest in the lawsuit's outcome. Some states have decided that only the lender (or current loan owner) has such an interest in a foreclosure. In those states, because MERS acts solely as a nominee for the lender, it can't be a plaintiff in a judicial foreclosure. Only the true note holder can initiate foreclosure proceedings.

For instance, in 2010, the Maine Supreme Court held that because MERS doesn't own the promissory note, it lacks standing to begin foreclosure proceedings in that state. So, MERS can't be the plaintiff in a foreclosure case in Maine.

MERS in nonjudicial foreclosures: State laws limiting beneficiary rights. Some nonjudicial states, like Washington, have determined that MERS has no right to foreclose in those states. The Washington Supreme Court ruled that Mortgage Electronic Registration Systems as a nominee isn't considered a beneficiary under state law. So, MERS can't nonjudicially foreclose a deed of trust in that state because it doesn't own the debt.

Court Cases Supporting MERS: States Where Foreclosures Are Allowed in Its Name

Other states have determined that foreclosure cases may proceed in the name of Mortgage Electronic Registration Systems. For example, the Supreme Court of Minnesota decided that MERS has standing to foreclose in that state.

MERS Policy Change in 2011: Why Foreclosures Are No Longer Filed in Its Name

In 2011, Mortgage Electronic Registration Systems changed its rules so that, in most cases, foreclosures may no longer be started in the name of MERS. So, MERS usually assigns the loan back to the lender (or the current loan owner) before a foreclosure starts.

In a judicial foreclosure, the lawsuit is then typically filed in the name of the lender or current loan owner. In a nonjudicial foreclosure, the lender or current owner of the loan is named as the beneficiary in the foreclosure notices.

Because MERS changed its rules in 2011, subject to a few exceptions, you generally won't see any more new foreclosures in the name of Mortgage Electronic Registration Systems, even in states that previously allowed them.

Summary Table: MERS in Foreclosures

What Is the Current Status of Mortgage Electronic Registration Systems?

Over the years, MERS has undergone changes that impact its role in the mortgage industry. For example, in 2018, Intercontinental Exchange, Inc. (ICE), the owner of the New York Stock Exchange, acquired MERSCORP Holdings, Inc. (the parent company of Mortgage Electronic Registration Systems, Inc.). This acquisition led to further integration of MERS into broader financial data and trading platforms.

And, again, in response to legal pressure, MERS has updated its rules to prevent foreclosures from being initiated in its name in most states, instead requiring the lender or loan owner to be named in such proceedings. So, it's unlikely that you'll see many MERS foreclosures because MERS typically assigns the loan to the lender or current loan owner before a foreclosure begins.

Facing Foreclosure Involving MERS? Why You Should Consult a Foreclosure Attorney

If you're facing a foreclosure and Mortgage Electronic Registration Systems is involved in your case, consider talking to a foreclosure attorney, especially if MERS is the named plaintiff or you think the servicer is using an improper, incorrect, or robosigned assignment in the process.

To learn about your options if you're facing foreclosure, get Nolo's The Foreclosure Survival Guide.