Who's MERS and What Do They Have To Do With Me?

I received a notice yesterday from my county recorder's office. It has something to do with my recent mortgage refinance. Here's what it says:

"KNOW ALL MEN BY THESE PRESENTS, that certain Deed of Trust described below provides that the holder of the Note secured by said Deed of Trust may appoint a successor Trustee to any Trustee thereunder appointed; and,

"WHEREAS, the indebtedness secured by the Deed of Trust, described below, has been paid and satisfied;

"NOW, THEREFORE, Mortgage Electronic Registration Systems, Inc., it's address being, [MERS address], being the present legal owner and holder of the indebtedness secured by said Deed of Trust, does hereby substitute and appoint [Loan Serving Bank], it's address being [Bank address], as successor Trustee, and the Trustee(s) under said Deed of Trust, having received from the Beneficiary under said Deed of Trust sufficient directive to reconvey, detailing that the obligation secured by said Deed of Trust has been fully paid and performed, does hereby reconvey unto the parties entitled thereto, but without any covenant or warranty, express or implied, all rights, title and interest which was heretofore acquired by said Trustee(s) under said Deed of Trust."

Oh boy. Basically it's saying because the loan has been paid off (refinanced), they have released the security interest in my house. You think they can just say that in plain English?

The notice says Mortgage Electronic Registration System, Inc. (MERS) was the legal owner of my loan. I don't think I have ever dealt with them. I wonder what they have to do with my mortgage. So I did a little bit of research. I dug up my original Deed of Trust, which was the security document by which I gave my house as the collateral for my home loan. Lo and behold, they are right there! The Deed of Trust says

"MERS is a separate corporation that is acting solely as a nominee for Lender and Lender's successors and assigns. MERS is the beneficiary under this Security Instrument."

So instead of listing itself in the country records, the lender puts down MERS as its puppet. When they sell the loan, MERS keeps track of who the new owner is. They can sell and resell the loan many times. As far as the county real estate records are concerned, MERS still remains as the nominal owner.

Related posts:

• Mortgage Refinance Documents: OMG What Did I Sign?
• Mortgage Refinance Closing Process Explained

Mortgage Refinance Documents: OMG What Did I Sign?

I closed my mortgage refinance last month. I often hear the media saying that people who signed up for an adjustable rate mortgage (ARM) didn't know their interest rate can adjust. Well, make no more excuses. I'm going to list all the documents I signed at closing and explain what they mean. This way anybody can look up in Google and be prepared before they go into closing.

Before I continue, let me say these documents are what I signed for my loan. The required documents may vary depending on the lender and the laws and customs of the state where you live.

1. Promissory Note. This is your promise to pay. The note clearly spells out  your loan terms, including

• the principal borrowed
• the interest rate
• the date of the first and last payment
• the monthly payment amount
• how late charges are assessed
• whether there is any prepayment penalty

If you only read one document at closing, this is it. Read it carefully before you sign. Double check and verify the terms are what you think you were offered.

2. Security Instrument. Depending on where you live, this document is called a Mortgage, a Deed of Trust, or some other name. There are some legal differences between a mortgage and a deed of trust, but you really don't have a choice because it's purely a function of where you live. This document basically says you are using your property as the collateral for your loan. It spells out in details your rights and obligations, which include:

• make payment on time
• occupy the property as primary residence
• keep insurance
• pay taxes
• keep the property in good shape
• do not store explosives
• etc. etc.

This document gives the lender the right to take your home away if you don't comply.

3. HUD-1 Settlement Statement. This is a standard form by U.S. Department of Housing and Urban Development. It shows you the closing costs and various other charges related to finalizing the mortgage.

4. Truth In Lending Disclosure Statement. This form shows an APR and the total finance charge through the life of the loan. If you are getting an Adjustable Rate Mortgage (ARM), you will see the "Variable Rate Feature" box checked here. There are also two checkboxes for whether or not the loan has a prepayment penalty. Pay attention to those checkboxes.

The four documents above are the most important ones. These other documents below are mostly formality.

5. Escrow Instructions. This document contains authorizations from you to the closing agent on how they should distribute the funds. The closing agent will then act on your behalf to pay off your old loan and record your new loan.

6. Notice of Rights to Cancel. This is telling you that you have 3 days after signing the loan documents to change your mind and back out of the loan.

7. Signature/Name Affidavit. Here you confirm your name and signature.

8. Errors and Omissions Compliance Agreement. Here you agree to cooperate with the lender if they have to correct clerical errors.

9. Escrow Waiver. If your lender lets you pay your homeowner's insurance and property tax on your own, as opposed to include it with your mortgage payment, you sign this document and promise to pay insurance and tax before the bills are due.

10. Acknowledgement of Disclosures. They want you to acknowledge that you received a bunch of notices and disclosures.

11. Form 4506-T. You give the lender permission to request your tax return information from the IRS so they can verify your income.

12. Loan Servicing Disclosure. This document tells you whether the lender typically retains the servicing of the loans it makes or transfers the servicing to someone else. Servicing means accepting payments from you and providing you tax form after year-end. If servicing is transferred, you will receive a notice in the mail telling you where to send your payments.

13. Loan Application. For some strange reason, they want you to sign your loan application again.

That's it. Although there are a lot of documents, if you pay attention to the important ones, it's pretty clear what kind of deal you are getting into. If you don't understand what a particular document means, ask the closing agent.

Related Posts:

• "No Cost" Mortgage Refinance: Stepping Down the Ladder
• Mortgage Refinance Closing Process Explained

TFB's Stumbles: Week Ending April 11, 2008

Here are some food for thought for this week:

My Very Own Risk-Based Repricing Experience (Credit Slips) - A law professor wrote about his experience with disputing a billing error on his credit card.

And It All Comes Down to This ... (Wall Street Journal) - After writing more than 1,000 columns, Jonathan Clements is leaving WSJ. He distilled his advice down to eight simple suggestions. No surprises.

Lenders Swamped By Foreclosures Let Homeowners Stay (Bloomberg) - Borrowers who don't pay their mortgage get to live rent-free for six months. That's a sweet deal.

The real reason borrowers default (Business Week) - And why do those borrowers not pay their mortgage? A recent study from Boston Fed says it's because they are upside down. They stop paying even if they can keep making payments if they really have to. It would be a different story if home prices are going up, not down. "Heads I win, tails you lose ..."

Better never than late (Enough Wealth) - See how homeowners in the U.S. are spoiled. Mortgage rates in Australia are 9%. And it looks like you can fix your rate for maximum 5 years. Perhaps they don't have Fannie Mae there.

And tell me why the U.S. government is contemplating giving billions of dollars to delinquent mortgage borrowers? What a strange world.

TFB's Stumbles: Week Ending April 4, 2008

Here are some interesting articles for this week.

IRS making sure your rebate gets spent (Marketplace, audio) - This April Fool's story fooled me. It gave me a good laugh.

Iceland's Biggest Banks Targeted by 'Unscrupulous' Speculators (Bloomberg) - Iceland banks under attack. You can't blame the attackers if your banks  borrowed four times of your country's GNP.

How Many Points Should I Pay On My Mortgage? Do You Like To Gamble? (My Money Blog) - Another great article by Jonathan. Should you pay points when you get a mortgage? It comes down to a guessing game on whether and when the interest rate will go down after you get your mortgage. If you think it may go down within a few years, don't pay points. If you think it won't go down in the next few years, pay points. Also see my previous post "No Cost" Mortgage Refinance: Stepping Down the Ladder.

Accident Victims Face Grab for Legal Winnings (Wall Street Journal) - This article brought out an outcry from many bloggers. Wal-Mart haters, chill. Whoever injured the woman should pay her medical bills and her future income, not Wal-Mart. Wal-Mart already advanced her medical bills. Getting paid back is fair. It's called subrogation.

McCain Rejects Broad U.S. Aid on Mortgages (New York Times) - Also don't miss the included pop-up for Candidates' Proposals on Housing. Although I side with Democrats on many issues, I have to say McCain "gets it" on this one. The mortgage crisis is a result of the burst housing bubble. Mortgage backed securities investors, lenders, and borrowers were all counting on the housing bubble continuing. They bet and they lost. It's that simple. Losing their home? It's not their home to begin with.

TFB's Stumbles: Week Ending March 28, 2008

Here are some interesting articles. Some are from last week which I didn't have room to include.

What Moves Mortgage Rates? (HSH Associates) - Excellent article from HSH Associates on what determines the mortgage rates. If you are in the market for a mortgage, their free weekly e-mail newsletter Market Trends is very helpful.

Things Can Always Get Worse (MFI Diary) - Magic Formula Investing is doing very badly since last year, but this blogger is still hanging on with discipline. In his own words,

"Not much to say, it has been a bloodbath in the markets and my portfolio continues to do worse than the benchmarks. I can't even bear to look or print the graphs. If it was possible to drop straight down, that is what you'd see."

Will it pay off in the end? I sure hope so. Here is his graph as of Feb. 1, 2008. Click on it for a larger picture.

Wells Fargo To Offer Retail Banking Customers a Personal Online Safe (Payments News) - Will an online safe deposit box gain consumers' trust even if it's offered by a bank?

Why Don't More Employers Provide Independent 401k Advice for Free? (FiLife) - Why don't more employers provide breakfast to all employees for free? Survey shows 70% of them don't have breakfast before they come to work. :-)

Should I Contribute To A Non-Deductible IRA? Part 1, Part 2 (My Money Blog) - Excellent write-up on contributing to a non-deductible IRA. If you are not eligible for a Roth IRA, contributing to a non-deductible IRA is still worthwhile after maxing out the 401k.

TFB's Stumbles: Week Ending March 7, 2008

Here are some of the interesting articles I came across this week.

Gore Invests $35 Million for Hedge Funds With EBay Billionaire (Bloomberg) - Entrepreneur Al Gore increased his networth by at least 30 fold in 8 years (from $3 million to over $100 million). What about you?

Carlyle Fund Misses Margin Calls (New York Times) - A $21 billion hedge fund with 99 percent of AAA-rated US agency mortgage securities could not meet $37 million margin calls. That's what happens when you invest with borrowed money.

Study: Mortgage Intervention Programs Distribute Costs Unfairly (FreedomWorks.org) - Wharton professor writes about the inequality of the mortgage intervention programs. No good deeds go unpunished.

A Great Bargain or a Big Rip-off? Consumers Perceptions of Price Fairness in the U.S. and China (Knowledge@Wharton) - Are you upset if you find out others paid a lower price than you did for the same purchase? Charging different prices to different customers for the same thing and still keep all of them happy is an art.

Series I Savings Bonds vs the stock market (Savings Bond Advisor) - An equal amount invested monthly into I-Bonds in the last 10 years beats the same investment into S&P 500. Surprised?

Banking Fees Are Rising And Often Undisclosed (Washington Post) - Undercover agents from the Government Accounting Office posing as customers couldn't get all the info on fees from the banks. Nor are the fees on many banks' web sites. The banks said the agents spoke to the wrong people.

Knee Deep in Turbid Tax (The Financial Engineer) - Blogger Kristin raised doubts over Obama's proposal to have the IRS fill out the tax forms for you. Who fills out the tax form isn't the problem. The problem is with the complex rules. Politicians either don't think or don't bother thinking about the details.

 

Have a great weekend!

Mortgage Refinance: Closing Process Explained

My mortgage refinance has been approved by the lender. Now it's time to pick a date for signing the papers. Is any day of the week better or worse than others? Yes, if you want to avoid paying extra interest on a large sum of money.

The federal law (15 USC 1635) says if you refinance the loan on your primary residence from a different lender, you have 3 days to rescind. That means if you change your mind after you signed the documents, you can still get out of it within 3 days. It also means that the lender won't fund your loan until the 3-day rescission period is over. There is no right of rescission on a purchase loan, or if you are refinancing from the same lender, or if the loan is not for your primary residence. The 3-day clock starts on the day *after* the loan documents are signed and all the necessary disclosures and notices are given. Saturday counts as a day but Sunday and bank holidays don't count.

Here's the usual chain of events when you close a mortgage refinance as practiced in my area:

Day 1: You sign the documents and receive all the disclosures and notices.

Days 2-4: Rescission period. Remember Saturday counts but Sunday and bank holidays don't.

Day 5: The escrow agent requests funding from your new lender. The new lender wires the money to the escrow account. You start paying interest on your new loan on this day. You are still paying interest on your old loan.

Day 6: The escrow agent pays off your old loan by wire transfer if your old lender accepts payoffs by wire. If they don't, the escrow agent sends them a check by FedEx. The escrow agent also records the new mortgage with the county recorder's office. You are still paying interest on your old loan until it's paid off.

Day 7: If the payoff is sent by FedEx, the old lender receives the payoff check. The old loan is paid off. You stop paying interest on your old loan.

You start paying interest on the new loan from the day the loan is funded. You stop paying interest on the old loan on the day it's paid off. There's going to be at least two days of overlap for which you are paying interest on both loans. You want to make sure you minimize that overlap to only two days.

Here's a little calendar for the loan refinancing events taking into consideration the 3-day rescission period but assuming there is no bank holiday involved. Each number represents a day on which the loan documents are signed. Just follow the number. For example, if you sign the docs on a Tuesday, the rescission period ends on Friday; the new loan will be funded on the following Monday; and the old loan will be paid off on the following Tuesday (by wire) or Wednesday (by check).

	Mon	Tue	Wed	Thu	Fri	Sat	Sun
Docs signed	1	2	3	4	5
Rescission period ends	4	5		1	2	3
New loan funded	2, 3	4	5		1
Payoff wire sent OR check FedEx'd	1	2, 3	4	5
Old loan paid off (by wire)	1	2, 3	4	5
Old loan paid off (by check)		1	2, 3	4	5

 

The calendar shows that Monday is a bad day for closing because your new loan is funded on Friday, and you start paying interest on it but your old loan isn't paid off until the following Monday or Tuesday. You pay interest on both the old loan and the new loan over the weekend. If payoff is done by a FedEx'd check, signing the docs on Friday is also pushing it. If all goes well, the old loan is paid off on the next Friday. If there's a delay by one day, you will also pay interest on both loans over a weekend. Signing the docs on Tuesday or Wednesday is the best for closing a mortgage refinance because the new loan is funded on Monday and you have the entire week to work with. Thursday is also a good day.

If you have to sign the docs on a Monday, make sure to specifically ask the escrow agent not to request funding on Friday.

Next week, after I sign the loan documents, I will explain what those documents really mean.

[Update on March 4, 2008]: I asked the escrow agent and she said they would pay off my old loan using a wire transfer. That way it cuts down the interest overlap by one day. She also said that not all lenders accept payoffs by wire. I revised the calendar accordingly.

"No Cost" Mortgage Refinance: Stepping Down the Ladder

I posted last week that I'm refinancing my mortgage. Now I can add more details. I lowered the interest rate on my 15-year fixed rate mortgage by 0.25% from 5.125% to 4.875% using a "no cost" refi. All closing cost will be covered by the lender. In exchange, my rate is higher than what it could've been. If I chose to pay the closing costs, I could've got 4.625%.

I've done this quite a few times since I bought my house. Every time the interest rate drops, I exercise the built-in put option on the mortgage and do a "no cost" refi. This way I make sure my interest rate is never more than 0.25% higher than the lowest rate. I call this "stepping down the ladder." The 0.25% number is the typical penalty on my loan amount for doing a "no cost" refi versus paying the closing cost.

I must make it clear that what I did worked for me, in the time period so far. It will not work for everybody. Nor will it work in all rate environment.

With a "no cost" refi, I don't pay any closing cost at the time of closing. My principal balance doesn't increase either. After the refi, I pay a lower interest rate than what I had before. I benefit from day one. It removes the biggest uncertainty for any refinancing decision making -- "Is it worth the closing cost?" As long as the interest rate is lower, it's worth it.

"No cost" refi is not really no cost in the strict sense. All parties involved in the refi still get paid. They are paid by the lender via a negative point. Similar to how paying a point buys down the interest rate, a negative point bumps up the rate from what it otherwise would be. For example this time I had a choice between

• pay $3,000 in closing cost and refi to 4.625%; OR
• pay nothing in closing cost and refi to 4.875%

If I choose "no cost" the lender pays the one-time closing cost up front and collects a higher interest over time. If I keep the mortgage past a break-even period, the lender becomes better off. If I don't keep the mortgage for long, I'm better off. Theoretically if I knew which refi will be my last one and I will keep that loan for a long time, I should choose to pay the closing cost. According to the mortgage refinance calculator 3a by The Mortgage Professor, my break-even period between my two choices this time is 9 years. Because I refinance aggressively and because the rate has been falling, I've never held a mortgage for that long. When I refi'd last time, I thought about paying the closing cost because the rate was already low. It only lasted two and half years. I had the same thought this time. In the end I still chose to leave my options open with a "no cost" refi. Let's see how long this one lasts.

For more info and pros and cons on "no cost" refi, please also read No-Cost Mortgages by The Mortgage Professor (link posted by Taylor Larimore in the Bogleheads forum. Thank you, Taylor.).