What lead to the creation of MERS (Mortgage Electronic Registration System)?

What lead to the creation of MERS (Mortgage Electronic Registration System)?

The Origins of MERS: How Economic Turmoil Shaped Modern Mortgage Systems

The Roaring Twenties: Wealth Disparity Plants the Seeds of Crisis

The 1920s witnessed unprecedented prosperity for America’s wealthiest citizens. Federal income tax cuts coupled with an electricity-powered industrial revolution created a thriving stock market that dramatically increased wealth for the top 1% of Americans. While ordinary workers benefited from Herbert Hoover’s wage-increase initiatives and access to newly affordable consumer goods like automobiles and home appliances, rural America—particularly farmers—faced economic devastation following the post-WWI agricultural collapse.

The Great Depression: When Financial Systems Failed

The devastating stock market crash of 1929 exposed fundamental weaknesses in America’s financial system. The market plummeted nearly 25% in a single day as an unsustainable asset bubble burst. This economic catastrophe stemmed from several factors:

• Corporate focus on profits over sustainable wages
• Widespread stock purchases on margin (credit)
• A parallel real estate bubble with overextended banks and homeowners
• Misguided federal monetary policies benefiting financial institutions over average Americans

By 1933, the economic damage was catastrophic:

• The American economy contracted by nearly one-third
• Unemployment reached 25%
• Wages dropped by approximately 50%
• Global trade collapsed

The New Deal: Rebuilding America’s Housing Finance System

The federal government responded with sweeping reforms. The Glass-Steagall Act of 1932 separated commercial and investment banking, while President Franklin D. Roosevelt’s New Deal created comprehensive economic and social welfare programs. Key developments in mortgage finance included:

1. The Home Owners Loan Act (HOLA) of 1933: Provided emergency relief for homeowners facing foreclosure
2. The Home Owners Loan Corporation (HOLC): Purchased defaulted mortgages from banks and resold them to homeowners on manageable terms
3. The Federal Housing Administration (FHA) in 1934: Introduced mortgage insurance on HOLC loans
4. The Federal National Housing Administration (Fannie Mae): Extended protection to private loans with 20% down payments

These programs revolutionized American mortgage lending by establishing long-term mortgages, interest rate caps, and mortgage insurance. The results were dramatic—by the end of World War II, nearly 70% of Americans owned their homes. The FHA later reduced down payment requirements to just 5%, further expanding homeownership opportunities.

The 1970s: Birth of Modern Mortgage Securities

The 1970s brought another revolution in mortgage finance—the mortgage bond. Government-sponsored entities (GSEs) including:

• The reimagined Fannie Mae (Government National Mortgage Company or Ginnie Mae)
• The Federal Home Loan Mortgage Corporation (Freddie Mac)

These organizations purchased uninsured but conservatively underwritten 30-year fixed-rate mortgages and pooled them into bonds through a process called “securitization.” This system created a perpetual funding mechanism:

• Mortgage payments generated capital for additional loans
• GSEs provided insurance for a small fee
• Insurance attracted more investors
• More investment created more funding for mortgages

By the 1980s, lending standards began to loosen, setting the stage for significant changes in the mortgage industry and eventually the creation of the Mortgage Electronic Registration System (MERS).