21st century banking meets 18th century recording system

by Henry J. Lane, Attorney with Lane and Hamer P.C.

The dramatic increase in mortgage foreclosures over the last several years has had the side effect of highlighting some relatively obscure corners of the home finance system and some of the stresses that have developed over the last several decades.

Until the 1970s, the home mortgage system functioned pretty much in the way depicted in that holiday classic: It's a Wonderful Life. Local savings banks took deposits from individuals and used the money to make mortgage loans to local residents buying homes in the community. State imposed limits on branch banking and depression era federal regulations limited the size of banks and the types of loans they were able to make. As local banking regulations eased, and federal programs encouraged the creation of a secondary market for mortgages, local banks began to sell their mortgages to larger institutional investors, through the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, two private "companies” created by Congress to increase the availability of home mortgage loans.

As large institutional investors and Wall Street investment banks got involved in packaging and selling home mortgage loans, they developed sophisticated bonds and related investment vehicles to quickly trade the packages of home mortgage loans to take advantage of minor fluctuations in interest or exchange rates.

Of course, major institutional banks and Wall Street traders had long ago stopped using paper documents or currency to document financial transactions and were perfectly comfortable with electronic book entry accounting for financial records. Unfortunately, the home mortgage loans that were the subject of various exotic investment vehicles being traded were trapped in a paper based 18th century recording system. Since 1731, in Worcester County, every mortgage that secures a home loan must be recorded at the Registry of Deeds to be effective. And since 1731 recording a mortgage has required bringing a physical mortgage document to the Registry of Deeds where it is copied. Historically, the documents were copied in longhand by a scribe. In later years, transcription was done by typewriter, and finally in the middle of the 20th century copy machines came into use. The 21st century has brought the use of scanning technology, but the requirement for bringing a physical document to the Registry for recording remains although persistent rumors suggest that "online" recording will soon be available.

Historically when a mortgage loan was sold, the mortgage itself was transferred to the new owner and the transfer was documented by recording an Assignment at the local Registry of Deeds, again requiring delivery of a paper document and the $75.00 recording fee. Since the single package of home mortgage loans being traded on Wall Street may include hundreds of mortgages, the problem becomes apparent. In order to properly document the transfer of such a large package of loans, someone has to prepare the Assignment for each individual underlying mortgage, have an authorized individual sign the Assignment, locate the appropriate Registry of Deeds, physically deliver the Assignment and pay the applicable recording fee.