When transaction costs and property rights collide: The case of the mortgage electronic registration system (MERS)

This paper analyzes the fragility of the property rights regime in the United States, using a historical case study of the land ownership recording system. My analysis covers the evolution of the system from the 1630s original recording statutes through four major changes in the system: the introduction of title abstracting in 1840s, title insurance in the 1870s, Torrens registration in the 1890s, and the Mortgage Electronic Registration System (MERS) in the 1990s. My analysis focuses on understanding why these efforts failed to improve the quality of the public recordkeeping. I argue that such failure was driven by how the efforts’ proponents prioritized their proposals' diffusion, legitimacy, and efficacy at improving the public recordkeeping. I find that of the four, the one public effort to improve the quality of recordkeeping benefited from greater legitimacy, but failed to diffuse. By contrast, the three private efforts diffused more broadly, but MERS—the effort that explicitly interacted with the public record—had at best mixed effects on the quality of public recordkeeping. My findings suggest that these mixed effects on the public record had to do with the MERS founders’ sacrificing the improvement of the public record in favor of their effort’s diffusion. To better understand MERS founders’ choices, I compare the choices made by MERS to those of the Depository Trust Corporation (DTC), a private company that digitized the trade clearance on U.S. stock exchanges in the 1970s, and served as a model for MERS. I find that MERS deviations from the DTC model furthered its diffusion at the expense of its social mission and, in so doing, put into question MERS’s potential as the most successful reform of the U.S. land ownership recording to date.