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How MERS helped the housing downfall

Chris Ketcham's latest article explores the problems that led to the mortgage finance bubble.

Jeremy Hobson: We'll get the latest figures on pending home sales this morning -- that's a measure of signed contracts for housing sales, even if the sales haven't been finalized yet. It's supposed to give us an early look at the housing market, and economists are expecting to see a slight drop for the month of December.

But Chris Ketchum of Harper's Magazine says none of that really matters because there's a big cloud hanging over the housing market, called MERS -- the Mortgage Electronic Registration Systems. And he says until MERS goes away, the market cannot recover. Chris Ketchum, good morning.

Chris Ketcham: Good morning.

Hobson: Well first of all, explain MERS for the 95 percent of people out there for whom that is not an everyday word.

Ketcham: MERS was effectively a system for banks to transfer the ownership of mortgages electronically without having to register the ownership of those mortgages with local county recorder's offices.

Hobson: Which they've had to do for all of time, right?

Ketcham: Centuries and centuries.

Hobson: And MERS wasn't created until the late '90s, right before the housing bubble. And you write in your story that without the efficiencies of MERS, there probably would never have been a mortgage finance bubble.

Ketcham: That's right. What happened with MERS is that because there was a centralized electronic database, you could effectively take a mortgage loan and one lender could sell it to another lender, and then that lender could sell it to an investment bank, and the investment bank could then package it as a security -- the mortgage-backed securities. And it could all be done very efficiently and easily. So yeah, MERS streamlined the whole process of what became the mortgage finance bubble.

Hobson: And now there are big questions about the legality of all of this, and the courts are really not in agreement yet about that.

Ketcham: No. It is a mess.

Hobson: Can the foreclosures that need to happen in order to clear the housing market of all of the tangled-up webs that exist in it right now, can those happen in this sort of cloudy state of MERS?

Ketcham: No, and until there's some sort of certainty in the court system about the legality of these loans, and about the legality of the foreclosed entities -- no, there will not be a resolution to the foreclosure crisis anytime soon.

Hobson: Chris Ketcham is a reporter with Harper's Magazine. He's just written a big story (PDF) for the latest issue about MERS. Chris Ketcham, thanks.

Ketcham: Thanks a lot.

About the author

Jeremy Hobson is host of Marketplace Morning Report, where he looks at business news from a global perspective to prepare listeners for the day ahead.

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