Current Russian legislation provides for the possibility of electronic registration of rights to mortgage notes (in case the mortgage note is transferred for depository registration of rights thereto).
Meanwhile, the global trend is not only the electronic trading of mortgage loans but also the existence of mortgage agreements (and in some cases, mortgage loans themselves) as such (documents describing the rights and obligations of the parties) in electronic form. In particular, such a possibility exists in the United States of America, Sweden, and the United Kingdom.
UNITED STATES OF AMERICA
The mortgage market of the United States of America (USA) has been actively transitioning to electronic form for mortgage loan documentation since the 1980s. The most important documentation for a mortgage loan is created, signed, transferred, and stored in electronic form. The increase in the use of electronic documentation is mainly related to the development of standard requirements for mortgage loan documentation used in securitization by the companies Fannie Mae and Freddie Mac.
Electronic documents and transactions (including mortgage lending) are executed based on the provisions of the Uniform Electronic Transactions Act (UETA), the Electronic Signatures in Global and National Commerce Act (ESIGN), and the Uniform Real Property Electronic Recording Act (URPERA).
Currently, a number of non-governmental organizations (Mortgage Industry Standards Maintenance Organization, MISMO; Secure Identity Services Accreditation Corporation, SISAC; Property Records Industry Association, MERSCORP, Inc., MERS) essentially ensure the development of the electronic mortgage market (developing technical software, standards for its application).
In particular, on the initiative of the largest participants in the mortgage market (such as the Mortgage Bankers Association, Fannie Mae, Freddie Mac, Merrill Lynch Credit Corporation, and other companies), a system for electronic registration of mortgage rights was created, ensuring performance under the housing loan (Mortgage Electronic Registration System, MERS).
Electronic Registration of Assignment of Mortgage Loan Rights
The Mortgage Electronic Registration System (MERS) is a system of records of mortgage rights, which is maintained by a private company created by members of the housing mortgage lending industry – Mortgage Electronic Registration System, Inc. (State of Delaware).
In 2010, approximately 62 million mortgage loans were registered in the MERS system (about 60% of all mortgage loans in the USA).
The main goal of creating MERS is to reduce the costs of registering the assignment of mortgage rights, achieved by registering such an assignment in the MERS system (instead of registering the assignment in the local state registry). Thus, according to MERS, savings amount to USD 30 per operation per loan.
Registration of a mortgage assignment in MERS is carried out as follows:
Thus, when a creditor assigns its rights under a mortgage loan to another MERS member, such an assignment is not registered in the official registry and is only recorded in the electronic records of MERS (which reduces the time and cost of formalizing the transfer of the mortgage loan). The debtor is notified of the transfer of the mortgage loan for servicing to a third organization (if applicable), but not of the assignment of such loan.
Initially, MERS functioned purely as a record-keeping system. Thus, MERS can at any time identify the current creditor of the mortgage loan and the servicing agent, but it does not interact with debtors during their repayment of the mortgage loan, cannot issue information about debt repayment, or confirm that the corresponding payment was sufficient to repay the mortgage loan (MERS only points to the entity that possesses such information – the servicing agent).
However, gradually, the actual creditors of the mortgage loan (their servicing agents) began initiating (with MERS's sanction) judicial proceedings for foreclosure on the mortgaged property in the name of MERS, rather than in their own name (since MERS is indicated as the mortgagee in the official state registry). Furthermore, MERS itself began to foreclose on the mortgaged property in its own name, rather than in the name of the actual creditor of the mortgage loan (which is usually a legal structure created in the form of a trust, placing securities in the form of participation certificates among investors on the securities market).
This practice led to problems during foreclosure on the pledged property, as claims in the name of MERS were not allowed by courts in some states on the grounds that MERS lacks the authority to foreclose since it is not the secured creditor. Although in other states, there are opposite cases where the court allows MERS to foreclose on the pledged property. When MERS members foreclose in their own name, some of them also face problems, as the court questions the validity of the assignment of mortgage loan rights to them through the MERS system, rather than through the official registry.
In this regard, MERS has made changes to its operating rules considering negative court practice. These changes mainly concern the following:
At the same time, MERS can carry out judicial and non-judicial foreclosure procedures for a defaulted mortgage loan as an agent of the lender or a lender whose rights are certified by a bearer instrument (mortgage note).
Ensuring the Issuance of Electronic "Mortgage Notes" (eNotes)
The US Uniform Electronic Transactions Act (UETA) of 1999 allows for the issuance in electronic form of a number of debt securities meeting the requirements of "negotiable instruments and documents," in which form mortgage loans are formalized in American practice (a mortgage note under Russian law also possesses the features of a "negotiable instrument").
MERS® eRegistry maintains a system of records that record: a) the entity controlling (holding) electronic mortgage notes; b) the company responsible for storing such securities in an electronic repository. Electronic debt securities are identified by a Mortgage Identification Number (MIN).
Assessment of MERS Activity
The main advantages of MERS are: a) the quality of operational technologies (electronic system for receiving, transmitting, and storing information, interaction between MERS system participants); b) low service cost. The MERS system allows for the simple transfer of mortgage loan rights and contributes to the development of an efficient secondary mortgage market (since there is no need to carry out more costly and time-consuming registration of assignment of rights in the official registry).
SWEDEN
In Sweden, the granting of real estate as collateral is formalized by the issuance of a mortgage certificate (Pantbrev), including (after the entry into force of the Mortgage Certificate Registry Law in 1994) in the form of an electronic mortgage certificate (Datapantbrev).
The nominal value of the mortgage certificate and encumbrances thereon are registered with the authorized state body – the Land Registration Department (Inskrivningsmyndigheten) (a structural subdivision of the Swedish state authority for mapping, cadastre, and land registration (The Swedish Land Authority (Lantmäteriet))). The electronic form of the mortgage certificate is only permitted if its holder is a bank or credit institution – a member of the electronic mortgage certificate system.
The owner of an electronic mortgage certificate can transfer rights thereto to another bank (credit institution) – a member of the electronic mortgage certificate system by making electronic entries in this system. Such a transfer requires the consent of the mortgagor.
Ensuring the issuance and circulation of electronic mortgage certificates is a separate part of the overall Swedish land registration system, which operates partly on a paper basis and partly electronically. For example, an application for registration of a pledge and issuance of a certificate thereof can only be submitted in paper form, but the mortgage certificate can be issued either in paper or electronic form. However, applications from banks and credit institutions can be submitted electronically (currently, the Swedish Government is discussing measures for a complete transition to an electronic registration process).
Losses arising due to technical inaccuracy or errors made by the Swedish Land Authority must be compensated by the Swedish Government.
Overall, this system for formalizing and providing mortgage certificates favors mortgage lending, as it represents a procedure with simple rules, the possibility of very fast information retrieval, exchange, and transaction formalization.
UNITED KINGDOM
In the United Kingdom, the main act regulating the registration of land rights is The Land Registration Act 2002. This law provided for initial measures for the transition to an electronic land registry (in particular, provisions on electronic documents signed electronically, provisions on the Land Registry electronic network).
To implement these provisions, The Land Registration (Electronic Conveyancing) Rules 2008 were adopted in 2008. These rules are dedicated to the creation and registration of mortgages in electronic form (types of mortgages that can be formalized electronically, mandatory provisions that must be contained in a mortgage agreement). Under the electronic procedure, the mortgage agreement is formed directly in the Land Registry system and signed with an electronic signature. The form of the mortgage agreement is preliminarily approved by the Land Registry upon the applicant's request.
Overall, the electronic method of formalizing and registering transactions is intended to make this process faster, simpler, and safer compared to its paper counterpart.
However, the electronic method is not used frequently, as simultaneously with the application for electronic registration of a charge, any documents not related to the mortgage cannot be submitted (since only a mortgage can be formalized electronically).
It is necessary to note that when issuing mortgage-backed securities, the assignment of mortgage rights is traditionally not registered in the Land Registry. The assignment of rights under mortgage loans acting as security for mortgage-backed securities is usually formalized as an equitable assignment, which does not require: a) notifying each borrower of the assignment; b) re-registering the mortgage in the Land Registry. The trustee of the mortgage pool (mortgage trustee) has the right at any time to formalize the assignment of mortgage loans into a legal assignment and re-register the mortgage in the Land Registry.
Meanwhile, the global trend is not only the electronic trading of mortgage loans but also the existence of mortgage agreements (and in some cases, mortgage loans themselves) as such (documents describing the rights and obligations of the parties) in electronic form. In particular, such a possibility exists in the United States of America, Sweden, and the United Kingdom.
UNITED STATES OF AMERICA
The mortgage market of the United States of America (USA) has been actively transitioning to electronic form for mortgage loan documentation since the 1980s. The most important documentation for a mortgage loan is created, signed, transferred, and stored in electronic form. The increase in the use of electronic documentation is mainly related to the development of standard requirements for mortgage loan documentation used in securitization by the companies Fannie Mae and Freddie Mac.
Electronic documents and transactions (including mortgage lending) are executed based on the provisions of the Uniform Electronic Transactions Act (UETA), the Electronic Signatures in Global and National Commerce Act (ESIGN), and the Uniform Real Property Electronic Recording Act (URPERA).
Currently, a number of non-governmental organizations (Mortgage Industry Standards Maintenance Organization, MISMO; Secure Identity Services Accreditation Corporation, SISAC; Property Records Industry Association, MERSCORP, Inc., MERS) essentially ensure the development of the electronic mortgage market (developing technical software, standards for its application).
In particular, on the initiative of the largest participants in the mortgage market (such as the Mortgage Bankers Association, Fannie Mae, Freddie Mac, Merrill Lynch Credit Corporation, and other companies), a system for electronic registration of mortgage rights was created, ensuring performance under the housing loan (Mortgage Electronic Registration System, MERS).
Electronic Registration of Assignment of Mortgage Loan Rights
The Mortgage Electronic Registration System (MERS) is a system of records of mortgage rights, which is maintained by a private company created by members of the housing mortgage lending industry – Mortgage Electronic Registration System, Inc. (State of Delaware).
In 2010, approximately 62 million mortgage loans were registered in the MERS system (about 60% of all mortgage loans in the USA).
The main goal of creating MERS is to reduce the costs of registering the assignment of mortgage rights, achieved by registering such an assignment in the MERS system (instead of registering the assignment in the local state registry). Thus, according to MERS, savings amount to USD 30 per operation per loan.
Registration of a mortgage assignment in MERS is carried out as follows:
- Members of MERS (companies issuing mortgage loans, banks, insurance companies) appoint MERS as their agent (nominee for Lender) and mortgagee for all mortgage loans that are entered into the MERS system registry;
- Entries indicating Mortgage Electronic Registration System, Inc. as either the original mortgagee or the new mortgage lender (to whom the mortgage rights were assigned) are made in the official mortgage records of the local state registry;
- All transactions for the assignment of mortgage loan rights and changes concerning the replacement of the entity providing mortgage payment collection services to the mortgage lender are recorded in the electronic record system of MERS.
Thus, when a creditor assigns its rights under a mortgage loan to another MERS member, such an assignment is not registered in the official registry and is only recorded in the electronic records of MERS (which reduces the time and cost of formalizing the transfer of the mortgage loan). The debtor is notified of the transfer of the mortgage loan for servicing to a third organization (if applicable), but not of the assignment of such loan.
Initially, MERS functioned purely as a record-keeping system. Thus, MERS can at any time identify the current creditor of the mortgage loan and the servicing agent, but it does not interact with debtors during their repayment of the mortgage loan, cannot issue information about debt repayment, or confirm that the corresponding payment was sufficient to repay the mortgage loan (MERS only points to the entity that possesses such information – the servicing agent).
However, gradually, the actual creditors of the mortgage loan (their servicing agents) began initiating (with MERS's sanction) judicial proceedings for foreclosure on the mortgaged property in the name of MERS, rather than in their own name (since MERS is indicated as the mortgagee in the official state registry). Furthermore, MERS itself began to foreclose on the mortgaged property in its own name, rather than in the name of the actual creditor of the mortgage loan (which is usually a legal structure created in the form of a trust, placing securities in the form of participation certificates among investors on the securities market).
This practice led to problems during foreclosure on the pledged property, as claims in the name of MERS were not allowed by courts in some states on the grounds that MERS lacks the authority to foreclose since it is not the secured creditor. Although in other states, there are opposite cases where the court allows MERS to foreclose on the pledged property. When MERS members foreclose in their own name, some of them also face problems, as the court questions the validity of the assignment of mortgage loan rights to them through the MERS system, rather than through the official registry.
In this regard, MERS has made changes to its operating rules considering negative court practice. These changes mainly concern the following:
- MERS members are prohibited from initiating judicial and non-judicial foreclosure procedures for a defaulted mortgage loan in the name of MERS;
- If MERS acts as the mortgagee (or beneficiary) "of record" for a mortgage loan, the MERS member and MERS must formalize the assignment of rights thereto according to the law of the respective state, if the MERS member wishes to conduct proceedings against the debtor independently.
At the same time, MERS can carry out judicial and non-judicial foreclosure procedures for a defaulted mortgage loan as an agent of the lender or a lender whose rights are certified by a bearer instrument (mortgage note).
Ensuring the Issuance of Electronic "Mortgage Notes" (eNotes)
The US Uniform Electronic Transactions Act (UETA) of 1999 allows for the issuance in electronic form of a number of debt securities meeting the requirements of "negotiable instruments and documents," in which form mortgage loans are formalized in American practice (a mortgage note under Russian law also possesses the features of a "negotiable instrument").
MERS® eRegistry maintains a system of records that record: a) the entity controlling (holding) electronic mortgage notes; b) the company responsible for storing such securities in an electronic repository. Electronic debt securities are identified by a Mortgage Identification Number (MIN).
Assessment of MERS Activity
The main advantages of MERS are: a) the quality of operational technologies (electronic system for receiving, transmitting, and storing information, interaction between MERS system participants); b) low service cost. The MERS system allows for the simple transfer of mortgage loan rights and contributes to the development of an efficient secondary mortgage market (since there is no need to carry out more costly and time-consuming registration of assignment of rights in the official registry).
SWEDEN
In Sweden, the granting of real estate as collateral is formalized by the issuance of a mortgage certificate (Pantbrev), including (after the entry into force of the Mortgage Certificate Registry Law in 1994) in the form of an electronic mortgage certificate (Datapantbrev).
The nominal value of the mortgage certificate and encumbrances thereon are registered with the authorized state body – the Land Registration Department (Inskrivningsmyndigheten) (a structural subdivision of the Swedish state authority for mapping, cadastre, and land registration (The Swedish Land Authority (Lantmäteriet))). The electronic form of the mortgage certificate is only permitted if its holder is a bank or credit institution – a member of the electronic mortgage certificate system.
The owner of an electronic mortgage certificate can transfer rights thereto to another bank (credit institution) – a member of the electronic mortgage certificate system by making electronic entries in this system. Such a transfer requires the consent of the mortgagor.
Ensuring the issuance and circulation of electronic mortgage certificates is a separate part of the overall Swedish land registration system, which operates partly on a paper basis and partly electronically. For example, an application for registration of a pledge and issuance of a certificate thereof can only be submitted in paper form, but the mortgage certificate can be issued either in paper or electronic form. However, applications from banks and credit institutions can be submitted electronically (currently, the Swedish Government is discussing measures for a complete transition to an electronic registration process).
Losses arising due to technical inaccuracy or errors made by the Swedish Land Authority must be compensated by the Swedish Government.
Overall, this system for formalizing and providing mortgage certificates favors mortgage lending, as it represents a procedure with simple rules, the possibility of very fast information retrieval, exchange, and transaction formalization.
UNITED KINGDOM
In the United Kingdom, the main act regulating the registration of land rights is The Land Registration Act 2002. This law provided for initial measures for the transition to an electronic land registry (in particular, provisions on electronic documents signed electronically, provisions on the Land Registry electronic network).
To implement these provisions, The Land Registration (Electronic Conveyancing) Rules 2008 were adopted in 2008. These rules are dedicated to the creation and registration of mortgages in electronic form (types of mortgages that can be formalized electronically, mandatory provisions that must be contained in a mortgage agreement). Under the electronic procedure, the mortgage agreement is formed directly in the Land Registry system and signed with an electronic signature. The form of the mortgage agreement is preliminarily approved by the Land Registry upon the applicant's request.
Overall, the electronic method of formalizing and registering transactions is intended to make this process faster, simpler, and safer compared to its paper counterpart.
However, the electronic method is not used frequently, as simultaneously with the application for electronic registration of a charge, any documents not related to the mortgage cannot be submitted (since only a mortgage can be formalized electronically).
It is necessary to note that when issuing mortgage-backed securities, the assignment of mortgage rights is traditionally not registered in the Land Registry. The assignment of rights under mortgage loans acting as security for mortgage-backed securities is usually formalized as an equitable assignment, which does not require: a) notifying each borrower of the assignment; b) re-registering the mortgage in the Land Registry. The trustee of the mortgage pool (mortgage trustee) has the right at any time to formalize the assignment of mortgage loans into a legal assignment and re-register the mortgage in the Land Registry.