Intercontinental Exchange Inc., best known for energy trading and its control of the New York Stock Exchange, is engaged in negotiations that would give it a foothold in the $9.4 trillion U.S. mortgage market.
ICE is in early stage talks to form a partnership with Mortgage Electronic Registration Systems Inc., which documents the ownership and resale of about half of U.S. home loans, according to a person familiar with the matter, who asked to not be identified because the discussions are private.
The Atlanta-based exchange owner has been gauging demand for derivatives that enable investors to bet on defaults by U.S. homeowners, Bloomberg News reported in May. ICE, which earns most of its revenue by owning one of the world’s largest derivatives markets, has recently expanded into new businesses such as equity trading with its 2013 purchase of NYSE Euronext and the administration of interest-rate benchmarks.
“MERS in itself is very valuable,” said Adam Leitman Bailey, an attorney and founder of real estate law firm Adam Leitman Bailey P.C. in New York. The biggest drag on MERS, he added, stems from the consent order with the U.S. government that it’s operated under since 2011, the result of alleged failures to properly manage its business. “If that could be improved, it’s a vastly more valuable commodity,” Bailey said.
Janis Smith, a MERS spokeswoman, and Brookly McLaughlin of ICE declined to comment on the negotiations.
MERS, a unit of closely held Merscorp Holdings Inc. based in Reston, Virginia, began operating in 1997. It was created by the mortgage industry to speed up real estate paperwork -- especially changes in ownership and servicing rights for loans.
The unit and parent -- owned by some of its largest clients including Bank of America Corp., Wells Fargo & Co., Citigroup Inc., Fannie Mae, Freddie Mac and trade groups such as the Mortgage Bankers Association -- were accused by federal regulators of failing to maintain proper oversight and controls amid the “robo-signing” of documents that threw the legality of some transactions into doubt. In 2011, it agreed to fix faults and beef up its staff.
Three years later, MERS still labors under that consent order with federal regulators, including the Federal Reserve, Office of the Comptroller of the Currency, Federal Deposit Insurance Corp. and the Federal Housing Finance Agency. As a result, any major change to its business would need regulators’ approval.
The MERS database largely replaces filings that were historically done by hand, making it easier for Wall Street banks to buy and sell home loans. That helped Wall Street feed a growing appetite for loans bundled into securities, which contributed to a bubble in housing prices that burst in 2008.
Robert Garsson, a spokesman for the OCC, declined to comment, as did Barbara Hagenbaugh of the Fed, Peter Garuccio of the FHFA and Andrew Gray of the FDIC.
ICE has been trying to enter the mortgage market. The company, which owns the biggest clearinghouse of swaps tied to the creditworthiness of companies, was gauging interest among banks and investment firms for a contract linked to a new type of mortgage security that Fannie Mae and Freddie Mac started selling last year, five people familiar with the matter told Bloomberg News in May. Fannie Mae and Freddie Mac have issued $8.2 billion of those bonds.
The interest from ICE comes six years after subprime-mortgage swaps helped fuel the financial crisis. Yet unlike then, the new contracts would be backed by ICE’s clearinghouse, people familiar with the matter said in May. As a result of the 2010 Dodd-Frank Act, most swaps trades are backed by clearinghouses, which help safeguard the financial system by holding funds to back the transactions.
MERS’s role in the financial crisis and its links to a vast number of loan documents in counties across the country left the company facing scores of lawsuits. While it’s defeated most of the legal attacks, some remain active. The company experienced a setback recently when a federal judge in Pennsylvania ruled against MERS in a lawsuit accusing it of sidestepping millions of dollars in real estate filing fees.
MERS, which appealed the decision, called the ruling the “wrong interpretation of Pennsylvania law” and said it has “consistently prevailed” in similar suits in other states, according to an e-mailed statement.
“MERS keeps winning and winning in court, so the game plan is there,” Leitman Bailey said.