Transfer agent and registry: one record, on-chain and off

Graduate · enrolled learners

This lesson opens with MERS and the foreclosure crisis, 2007 to 2012.

What happened

MERS, the Mortgage Electronic Registration Systems, was a private electronic registry the mortgage industry created in 1995 to track ownership and servicing rights as loans were bundled and sold between lenders and securitization entities, so that loans could change hands without recording and paying a fee for each assignment in the public county land records. MERS was named as mortgagee of record and nominee on the public record while beneficial ownership moved among private parties, tracked in the MERS database, which by 2011 held about 31 million active loans. When the foreclosure wave hit from 2007, the gap between the private record and the public and legal one came under attack. Servicers were found to have signed or notarized foreclosure documents improperly, the practice called robo-signing, and several halted foreclosures in September 2010; foreclosures brought in MERS's name were challenged, with courts reaching different conclusions; and in 2011 Massachusetts's highest court, in U.S. Bank v. Ibanez, upheld a ruling that securitization trusts had failed to show they held the mortgages they had foreclosed on. In April 2011 federal banking regulators found that MERS had failed to maintain adequate oversight and internal controls and ordered it to ensure the accuracy and reliability of its data. No single dollar figure captures this, so the recorded loss is zero, but who owned a mortgage, and who could foreclose on it, became contested, because the record of who owned what had split into two that did not always reconcile.

The decision point

Ownership of an asset must live in one authoritative record, because ownership is only provable to the extent a single, trusted record establishes who owns what, and when the record of ownership splits into two that diverge, ownership becomes unprovable no matter that the asset exists. MERS is the case: a private registry was allowed to stand apart from the authoritative legal record of who owned each mortgage, and when it mattered, at foreclosure, ownership was contested and, in cases such as Ibanez, could not be shown. A tokenized real-world asset creates exactly this risk by design, because it has two records of ownership, the token on-chain and the legal title off-chain, and if those two are not kept as one reconciled, authoritative record, they will drift, and a holder who owns the token may not provably own the asset, or the legal owner off-chain may differ from the token holder on-chain. The transfer-agent and registry function is what keeps them one. So the decision when structuring a tokenized asset is to make the on-chain token and the off-chain legal title a single authoritative record of ownership, reconciled so a transfer of one is a transfer of the other, because two records of the same ownership that can diverge are a MERS in the making, and a token whose on-chain ownership does not bind the off-chain title is a receipt for an asset whose owner cannot be proven.

Orientation and Year One are open: anyone can read them without an account. From Year Two onward the lessons are for enrolled learners, because progress through the later years only means anything if it is tracked against a record.

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