By Michael O’Connell

Due diligence has taken on an entirely different shape in the post financial crisis world. Increasingly, regulators, investors and banking executives are looking deeper into the individual loan files whenever a pool of loans sells, is acquired through merger or is securitized. The industry has come to the realization that if we hope to be successful with a portfolio we purchase, make the most of a new entity we acquire or make the best use of the capital markets to fuel our businesses, we must mitigate all of the risks that are working within that portfolio. These risks are higher for seasoned loans, which are subject to many problems that will be detailed in this paper.

Michael O’Connell is Chief Operations Officer at Nationwide Title Clearing, Inc. (NTC) and has been with the company since 2005.

Fannie Mae and Freddie Mac have consolidated their securitization infrastructure, which could mean more opportunity for tapping the capital markets for liquidity.

The ratings agencies are already responding to pressure from investors for more information about the loans that back MBS. We have been pleased to see the major rating agencies upgrading their systems to better gauge this risk. Most recently, two of the largest of these firms announced changes to the way they would be evaluating the collateral files of the mortgages that back securitized pools.

Fitch Ratings and Moody’s Investors Service, both in New York, each announced updates recently that will impact their prime RMBS ratings criteria for seasoned loans. This is so important because even with the new safeguards put in place by originators post-crash, the loans that are already in portfolio are still subject to the risks from problems hiding in the collateral file.

The companies told news outlets that they took the action as a step toward assessing several risk factors “including contractual representations and warranties.” In addition, one of the firms, Moody’s, includes a risk assessment of deals based on both reps and warrants and a review of the data quality by an independent third party. Fitch said it was basing its assessments on additional criteria related to seasoned, performing loans, including the strength of reps and warrants, according to published reports.

“Loans that are already in portfolio are still subject to the risks from problems hiding in the collateralfile.”

This is a step in the right direction. In the past, the ratings agencies did not make this kind of assessment when rating mortgage backed securities, certainly not specifically related to the collateral file. This should allow the agencies to uncover risk

hiding in the file, such as missing key documents or assignments to another entity that were not indexed into their servicing system. This will go a long way toward protecting investors from investing in securities where problems with the underlying assets erode the value of the security over time.

Unfortunately, the truth is that the problems hiding in many of these files pose serious risks to the industry long before the loans are ever evaluated by the ratings agency. It’s going to be up to the industry to catch these problems before they get far. Failing to do so will attract negative attention from the industry’s chief regulator.

The Consumer Financial Protection Bureau has correctly identified the servicing transfer, post default servicing, as a source of potential risk, as there are many errors that can make their way into the collateral file during this process. Earlier this year,the agency put new rules in place that require processors   to   maintain   accurate   records, promptly credit  payments,  and  correct  errors  on  request. The

“The problems hiding in many of these files pose serious risk to the industry long before the loans are ever evaluated by the ratings agency.”

hope is that these rules will allow servicers to mitigate the risk that documents and key financial information are not accurately transferred.

In our experience, there are a number of problems that are currently impacting a significant subset of all seasoned loans currently held in portfolio by the nation’s servicer’s business – and any other company doing business with that servicer.

The Threats the Industry Faces and the High Cost of Failure

Far and away, the most significant threat most industry players will face due to problems in the loan file is buyback.

Between 2011 and 2013, the former GSEs, Fannie Mae and Freddie Mac, issued buyback requests for over $81 billion in loans. The settlements that have come from these requests have slowed the overall growth of the industry and kept other investors from re-entering the market. This is one of the most powerful   forces   driving  change  and a new level of due diligence.

“Having to wait for payment until loan files are perfected is nearly as bad as a buyback request.”

While this may sound like a loan origination issue, we have found that document handling from Post Closing in the mortgage loan servicing business is just as important – or even more important – because handling this function poorly will allow risk to hide in the collateral file when loans are later released or securitized or when servicing is transferred.

Another threat is a secondary market that remains sluggish due to the reluctance of new or institutional investors to re-enter the market. These investors have been satisfied to sit on the sidelines and observe the efforts of the government agencies as they work to remove risk from the system and perfect a lending process that will not lead us to a repeat of the historic downturn.

Without these investors to fuel future growth, future mortgage demand may not be met. To win them back, we must replace the memory of their experience during the crisis with the security that comes from an enhanced level of due diligence.

We should also remember that for those lenders that sell whole loans as a way to fuel additional business, having to wait for payment until loan files are perfected is nearly as bad as a buyback request. Their businesses are just as effectively stalled.

Finally, we cannot ignore the risk of punitive action, either by the courts in the case of a judicial foreclosure or by the industry’s regulators. In either case, the costs – as have been made quite clear in recent news reports – can be extraordinarily high.

Uncovering the Hidden Risks

So, where then are these risks hiding in the loan portfolio? In our experience, there are many problems hiding in the loan collateral file that, if not uncovered, will cause significant problems at some point in the future.

The risk factor that results in the most errors in the file after the processor releases the loan file comes from preparing  documents based on unverified or insufficient data. More errors occur here than anywhere else in the process. When they occur, they create rep and warrant risks. Specifically, there are a number of risks that we have identified that spring directly from these errors:

• No mortgage or multiple mortgages
• Missing assignments or Lost Note Affidavits (LAAs)
• Missing modification or multiple drafts of modifications
• Missing title policy requiring retrieval or replacement
• Flawed documents in the chain of assignments

“There are many problems hiding in the loan collateral file that, if not uncovered, will cause significant problems at some point in the future.”

Many seasoned loans were originated before the financial crash or before the borrower experienced economic difficulties. Many of these loans entered the default servicing process and were assigned to special servicers or attorneys for processing. Some of these borrowers were able to cure their default and the loan re-entered the system, but was never properly assigned back to the original servicer. If such a loan were later sold, a break in the chain of title would post a serious complication.

We have also seen custodial handling exceptions that cause problems when the loans are ready to transfer. While these trailing docs are routinely collected, audited, and stored securely by the document custodians, it’s reviewed only on a sample basis with limited data sets. Rather it is monitored by the individual servicer. Typically, problems here are not identified until the loans are ready to transfer department.”

“Up to 90% of the loans have errors in the file that would prevent them from passing the QualityAssurance

Finally, there are many problems that come out of multi-branch operations because these organizations can be very difficult to monitor unless the company has set up a method for centralized review of the loan files.

These are errors that can cause problems when the loan is put up for sale or is bundled into a pool for securitization. In fact, some of our clients have found, after a close inspection of the loans in the pool, that up to 90% of the loans have errors in the file that would prevent them from passing the Quality Assurance department. These are loans that will get the attention of the ratings agencies in the future. They are also the files that will attract negative attention from federal regulators.

The industry must adopt an approach that will reduce or eliminate these errors. Fortunately, there is an approach that will do exactly that.

Successful Risk Mitigation for Loan Sales or Securitization

When it comes to errors in the loan’s collateral file, the best approach to mitigation comes from a culture of prevention.

Prevention involves conducting a collateral documentation review and mortgage/assignment chain audit as part of the servicer’s document preparation process. This is typically a two- part process that involves a research phase and an internal process for document review.

In the research phase, the servicer searches the public record to ensure that there are no breaks in the assignment chain that could compromise future assignments or a lender’s lien position, right to foreclose, validity of documents, etc.

Before preparing the document for a new assignment, the servicer must determine whether or not the current loan beneficiary is clear on a property by reviewingland records to examine the entire chain. It is likely that servicers will require the aid of expert researchers during this phase, as they have the skills  to  properly conduct  a thorough review of land records to examine all documents that are of public record on the property, from the mortgage forward, to determine if the assignment chain is complete.

“We have found that a signing authority database will allow servicers to be certain that documents are only signed by someone with the proper authority.”

The second part of prevention has to do with the establishment of internal processes for document review, and signing that allows the servicer to effectively manage and control all authorized signers with a very high level of accountability. Protocols should be established for signer authentication and all employees must follow them before any document is printed and executed. It is also important that every document be scrutinized for accuracy, executed properly and the process documented so that if the integrity of any document is called into question, servicers can support their process.

We have found that a signing authority database will allow servicers to be certain that documents are only signed by someone with the proper authority. By linking each individual signer’s name to the authorizing signing authority document in the database, and preventing any document from being signed unless and until that link is validated, servicers can be certain that document is signed correctly.

It is important that the servicer’s signing executives are also trained to inspect every document they execute to ensure the forms are complete and compliant. Any supporting source documentation  as  well  as  any  company  research  should  be provided to verify accuracy.

“The only solution that can be applied to these problems involves a more aggressive approach to due diligence before loans are sold or pooled for securitization.”

An eRecording system that allows authorized signers to electronically affix their signature to documents that are submitted electronically to a County Recorder’s office is a great addition to any servicing enterprise. Current systems are very efficient and observe all Notary laws and signing best practices.

In cases where the problem already exists and the servicer is fortunate enough to have uncovered it before the loan is transferred or pooled for securitization, curative action must be taken. There are many ways things can be done incorrectly, but generally only one way to do them correctly. When corrective actions must be taken, they may be more complex than doing the job right the first time. In many cases, the services of a professional will be required.

Finding the Problems to Mitigate the Risks

While prevention is the recommended approach for mitigating these risks in the future, the reality is that millions of loans are already in portfolio with problems hiding in their files, many of them very serious. The only solution that can be applied to these problems involves a more aggressive approach to due diligence before loans are sold or pooled for securitization.

This will require the industry to abandon the assumption that just because the origination file met the standards set forth by the investor and the regulator that the servicing file will also meet the same standards. Because most of the problems we have discussed above are introduced into the file post-close, we can never make this assumption.

In our experience, making this assumption has allowed some serious problems to remain hidden in the collateral file for years. We have seen:

• Loan amount discrepancies between the mortgage and the servicing database
• An incorrect property listed on the title policy
• A different borrower name on the title policy than on the loan documents
• Files that don’t reflect the beneficial rights to service the loan

Even when the loan has closed and been approved by the investor, there are still significant issues that can occur with the origination files. We have seen files:

• Without a note
• With missing Allonges
• Without a loan application
• Without a title policy

“Instead of making an assumption that a closed and funded loan means a good loan file, the collateral file must be inspected as part of the due diligence process.”

Instead of making an assumption that a closed and funded loan means a good loan file, the collateral file must be inspected as part of the due diligence process. In our experience, there are more than 40 critical inspection points within the file that should be inspected as part of a complete due diligence process.

When problems are identified, they can be cured, as described above. Finding problems too late reduces the chances that they can be cured before incurring significant expense. This process may involve locating,  recreating  or  ordering  new  documents for

the file. In fact, we consider it a best practice to perform your loan file due diligence even before a buyer has been identified for the loans you plan to sell. The days of waiting to perform due diligence until an agreement has already been made in principle are over. That is now too late.

To find out more about a due diligence process that can both uncover and cure problems in the collateral file in a timely and affordable manner, call Nationwide Title Clearing today.

Read more...

By Michael O’Connell

Due diligence has taken on an entirely different shape in the post financial crisis world. Increasingly, regulators, investors and banking executives are looking deeper into the individual loan files whenever a pool of loans sells, is acquired through merger or is securitized. The industry has come to the realization that if we hope to be successful with a portfolio we purchase, make the most of a new entity we acquire or make the best use of the capital markets to fuel our businesses, we must mitigate all of the risks that are working within that portfolio. These risks are higher for seasoned loans, which are subject to many problems that will be detailed in this paper.

Michael O’Connell is Chief Operations Officer at Nationwide Title Clearing, Inc. (NTC) and has been with the company since 2005.

Fannie Mae and Freddie Mac have consolidated their securitization infrastructure, which could mean more opportunity for tapping the capital markets for liquidity.

The ratings agencies are already responding to pressure from investors for more information about the loans that back MBS. We have been pleased to see the major rating agencies upgrading their systems to better gauge this risk. Most recently, two of the largest of these firms announced changes to the way they would be evaluating the collateral files of the mortgages that back securitized pools.

Fitch Ratings and Moody’s Investors Service, both in New York, each announced updates recently that will impact their prime RMBS ratings criteria for seasoned loans. This is so important because even with the new safeguards put in place by originators post-crash, the loans that are already in portfolio are still subject to the risks from problems hiding in the collateral file.

The companies told news outlets that they took the action as a step toward assessing several risk factors “including contractual representations and warranties.” In addition, one of the firms, Moody’s, includes a risk assessment of deals based on both reps and warrants and a review of the data quality by an independent third party. Fitch said it was basing its assessments on additional criteria related to seasoned, performing loans, including the strength of reps and warrants, according to published reports.

“Loans that are already in portfolio are still subject to the risks from problems hiding in the collateralfile.”

This is a step in the right direction. In the past, the ratings agencies did not make this kind of assessment when rating mortgage backed securities, certainly not specifically related to the collateral file. This should allow the agencies to uncover risk

hiding in the file, such as missing key documents or assignments to another entity that were not indexed into their servicing system. This will go a long way toward protecting investors from investing in securities where problems with the underlying assets erode the value of the security over time.

Unfortunately, the truth is that the problems hiding in many of these files pose serious risks to the industry long before the loans are ever evaluated by the ratings agency. It’s going to be up to the industry to catch these problems before they get far. Failing to do so will attract negative attention from the industry’s chief regulator.

The Consumer Financial Protection Bureau has correctly identified the servicing transfer, post default servicing, as a source of potential risk, as there are many errors that can make their way into the collateral file during this process. Earlier this year,the agency put new rules in place that require processors   to   maintain   accurate   records, promptly credit  payments,  and  correct  errors  on  request. The

“The problems hiding in many of these files pose serious risk to the industry long before the loans are ever evaluated by the ratings agency.”

hope is that these rules will allow servicers to mitigate the risk that documents and key financial information are not accurately transferred.

In our experience, there are a number of problems that are currently impacting a significant subset of all seasoned loans currently held in portfolio by the nation’s servicer’s business – and any other company doing business with that servicer.

The Threats the Industry Faces and the High Cost of Failure

Far and away, the most significant threat most industry players will face due to problems in the loan file is buyback.

Between 2011 and 2013, the former GSEs, Fannie Mae and Freddie Mac, issued buyback requests for over $81 billion in loans. The settlements that have come from these requests have slowed the overall growth of the industry and kept other investors from re-entering the market. This is one of the most powerful   forces   driving  change  and a new level of due diligence.

“Having to wait for payment until loan files are perfected is nearly as bad as a buyback request.”

While this may sound like a loan origination issue, we have found that document handling from Post Closing in the mortgage loan servicing business is just as important – or even more important – because handling this function poorly will allow risk to hide in the collateral file when loans are later released or securitized or when servicing is transferred.

Another threat is a secondary market that remains sluggish due to the reluctance of new or institutional investors to re-enter the market. These investors have been satisfied to sit on the sidelines and observe the efforts of the government agencies as they work to remove risk from the system and perfect a lending process that will not lead us to a repeat of the historic downturn.

Without these investors to fuel future growth, future mortgage demand may not be met. To win them back, we must replace the memory of their experience during the crisis with the security that comes from an enhanced level of due diligence.

We should also remember that for those lenders that sell whole loans as a way to fuel additional business, having to wait for payment until loan files are perfected is nearly as bad as a buyback request. Their businesses are just as effectively stalled.

Finally, we cannot ignore the risk of punitive action, either by the courts in the case of a judicial foreclosure or by the industry’s regulators. In either case, the costs – as have been made quite clear in recent news reports – can be extraordinarily high.

Uncovering the Hidden Risks

So, where then are these risks hiding in the loan portfolio? In our experience, there are many problems hiding in the loan collateral file that, if not uncovered, will cause significant problems at some point in the future.

The risk factor that results in the most errors in the file after the processor releases the loan file comes from preparing  documents based on unverified or insufficient data. More errors occur here than anywhere else in the process. When they occur, they create rep and warrant risks. Specifically, there are a number of risks that we have identified that spring directly from these errors:

• No mortgage or multiple mortgages
• Missing assignments or Lost Note Affidavits (LAAs)
• Missing modification or multiple drafts of modifications
• Missing title policy requiring retrieval or replacement
• Flawed documents in the chain of assignments

“There are many problems hiding in the loan collateral file that, if not uncovered, will cause significant problems at some point in the future.”

Many seasoned loans were originated before the financial crash or before the borrower experienced economic difficulties. Many of these loans entered the default servicing process and were assigned to special servicers or attorneys for processing. Some of these borrowers were able to cure their default and the loan re-entered the system, but was never properly assigned back to the original servicer. If such a loan were later sold, a break in the chain of title would post a serious complication.

We have also seen custodial handling exceptions that cause problems when the loans are ready to transfer. While these trailing docs are routinely collected, audited, and stored securely by the document custodians, it’s reviewed only on a sample basis with limited data sets. Rather it is monitored by the individual servicer. Typically, problems here are not identified until the loans are ready to transfer department.”

“Up to 90% of the loans have errors in the file that would prevent them from passing the QualityAssurance

Finally, there are many problems that come out of multi-branch operations because these organizations can be very difficult to monitor unless the company has set up a method for centralized review of the loan files.

These are errors that can cause problems when the loan is put up for sale or is bundled into a pool for securitization. In fact, some of our clients have found, after a close inspection of the loans in the pool, that up to 90% of the loans have errors in the file that would prevent them from passing the Quality Assurance department. These are loans that will get the attention of the ratings agencies in the future. They are also the files that will attract negative attention from federal regulators.

The industry must adopt an approach that will reduce or eliminate these errors. Fortunately, there is an approach that will do exactly that.

Successful Risk Mitigation for Loan Sales or Securitization

When it comes to errors in the loan’s collateral file, the best approach to mitigation comes from a culture of prevention.

Prevention involves conducting a collateral documentation review and mortgage/assignment chain audit as part of the servicer’s document preparation process. This is typically a two- part process that involves a research phase and an internal process for document review.

In the research phase, the servicer searches the public record to ensure that there are no breaks in the assignment chain that could compromise future assignments or a lender’s lien position, right to foreclose, validity of documents, etc.

Before preparing the document for a new assignment, the servicer must determine whether or not the current loan beneficiary is clear on a property by reviewingland records to examine the entire chain. It is likely that servicers will require the aid of expert researchers during this phase, as they have the skills  to  properly conduct  a thorough review of land records to examine all documents that are of public record on the property, from the mortgage forward, to determine if the assignment chain is complete.

“We have found that a signing authority database will allow servicers to be certain that documents are only signed by someone with the proper authority.”

The second part of prevention has to do with the establishment of internal processes for document review, and signing that allows the servicer to effectively manage and control all authorized signers with a very high level of accountability. Protocols should be established for signer authentication and all employees must follow them before any document is printed and executed. It is also important that every document be scrutinized for accuracy, executed properly and the process documented so that if the integrity of any document is called into question, servicers can support their process.

We have found that a signing authority database will allow servicers to be certain that documents are only signed by someone with the proper authority. By linking each individual signer’s name to the authorizing signing authority document in the database, and preventing any document from being signed unless and until that link is validated, servicers can be certain that document is signed correctly.

It is important that the servicer’s signing executives are also trained to inspect every document they execute to ensure the forms are complete and compliant. Any supporting source documentation  as  well  as  any  company  research  should  be provided to verify accuracy.

“The only solution that can be applied to these problems involves a more aggressive approach to due diligence before loans are sold or pooled for securitization.”

An eRecording system that allows authorized signers to electronically affix their signature to documents that are submitted electronically to a County Recorder’s office is a great addition to any servicing enterprise. Current systems are very efficient and observe all Notary laws and signing best practices.

In cases where the problem already exists and the servicer is fortunate enough to have uncovered it before the loan is transferred or pooled for securitization, curative action must be taken. There are many ways things can be done incorrectly, but generally only one way to do them correctly. When corrective actions must be taken, they may be more complex than doing the job right the first time. In many cases, the services of a professional will be required.

Finding the Problems to Mitigate the Risks

While prevention is the recommended approach for mitigating these risks in the future, the reality is that millions of loans are already in portfolio with problems hiding in their files, many of them very serious. The only solution that can be applied to these problems involves a more aggressive approach to due diligence before loans are sold or pooled for securitization.

This will require the industry to abandon the assumption that just because the origination file met the standards set forth by the investor and the regulator that the servicing file will also meet the same standards. Because most of the problems we have discussed above are introduced into the file post-close, we can never make this assumption.

In our experience, making this assumption has allowed some serious problems to remain hidden in the collateral file for years. We have seen:

• Loan amount discrepancies between the mortgage and the servicing database
• An incorrect property listed on the title policy
• A different borrower name on the title policy than on the loan documents
• Files that don’t reflect the beneficial rights to service the loan

Even when the loan has closed and been approved by the investor, there are still significant issues that can occur with the origination files. We have seen files:

• Without a note
• With missing Allonges
• Without a loan application
• Without a title policy

“Instead of making an assumption that a closed and funded loan means a good loan file, the collateral file must be inspected as part of the due diligence process.”

Instead of making an assumption that a closed and funded loan means a good loan file, the collateral file must be inspected as part of the due diligence process. In our experience, there are more than 40 critical inspection points within the file that should be inspected as part of a complete due diligence process.

When problems are identified, they can be cured, as described above. Finding problems too late reduces the chances that they can be cured before incurring significant expense. This process may involve locating,  recreating  or  ordering  new  documents for

the file. In fact, we consider it a best practice to perform your loan file due diligence even before a buyer has been identified for the loans you plan to sell. The days of waiting to perform due diligence until an agreement has already been made in principle are over. That is now too late.

To find out more about a due diligence process that can both uncover and cure problems in the collateral file in a timely and affordable manner, call Nationwide Title Clearing today.

Read more...

By Michael O’Connell

Mortgage lenders and servicers who operate in the secondary market are familiar with the documentation requirements to ensure smooth transitions of their assets into that market but often overlook a critical element: property records.

This paper is designed to give step-by-step guidance on how to use property records to ensure a clear title conveyance and reduce the risk of buyback or inability to foreclose.

Michael O’Connell is Chief Operations Officer at Nationwide Title Clearing, Inc. (NTC) and has been with the company since 2005.

Mortgage lenders and servicers who operate in the secondary market are familiar with the documentation requirements to ensure smooth transitions  of  their  assets  into  that  market. Most due diligence reviews typically address credit history, property valuations, ability to repay, and legal and regulatory compliance— all extremely important — but often overlook a critical element: property records.

As a recent paper by Duke University stated, “A $13 trillion residential mortgage market depends directly on clarity of mortgage title.”¹ As a part of every loan transfer, each loan should undergo a thorough review of what is on land records in order to ensure there are no problems with the beneficial chain.

This paper is designed to give step-by-step guidance on how to use property records to ensure a clear title conveyance and reduce the risk of buyback or inability to foreclose.

Here are the top four ways to use property reports to uncover hidden risks:

 1.      Verify land record source documents

One of the major issues that can roadblock loan servicing transfers is faulty source documentation. Between the loan origination and the current sale there is ample opportunity for breaks in the beneficial chain.

This may not turn up during inspection of the file for a number of reasons. For example, physical files may have additional documents that never made it to the imaged file. The most common example is when a loan was in and out of default and attorneys prepared and potentially recorded assignments but never brought it to the servicer’s attention.

Only a thorough inspection of the recorded documents in county land records can ensure what is actually on record in order to process a transfer seamlessly. But once the inspection occurs, it’s also important to verify the integrity of these documents.

“Only a thorough inspection of county records can ensure what is actually on record.”

For a document to be valid, it must accurately reflect the transfer of ownership from one entity to another, and it must correctly reference the recorded security instrument in every way. The assignor and assignee data must be precise; written exactly as the entities are listed as a registered company. Even missing a simple “Inc.” can potentially change the beneficial rights of a loan, sometimes to a nonexistent entity.

As an example, Servicer A is selling loan servicing to Servicer

1. Servicer B’s official title is “Servicer B Servicing, Inc.” but the recorded document is recorded to “Servicer B” and the “Inc.” is omitted. Although this may seem minor, we have seen examples where this has caused the necessity for expensive corrective action and could potentially hold up a foreclosure if challenged.

Another example would be that the loan is originated in the name of “Company A”, which then changed its name to (or merged with) “Company B”. The assignment is then incorrectly created from “Company B” (assignor) to the new buyer (assignee), with no reference as to how “Company A” was acquired by “Company B”. This creates a virtual break in the chain of beneficial rights just by “Company B” simply omitting the “FKA” or “SBM” reference to “Company A”,(e,g, Company B formerly known as Company A).

Too many foreclosures have been held up for extensive periods of time as a result of incorrectly prepared documents stemmingfrom prior incomplete or inaccurate source documents being used to prepare the document, or a lack of understanding of how to create assignments that properly keep chains intact. That’s why it’s vital during the transfer of any loan to verify there are no breaks in the chain of ownership and understand the potential implications of seemingly minor details.

• Every document in the report should provide notice to the public at large, and thus the property report describes all the enforceable claims against the property in question. It comes directly from the
• There is only one source. Property reports compiled from databases are unlikely to rise above the standard of being “almost right” (other than title plants directly mirroring public records with complete indexing and images )
• The only source of universally enforceable rights to mortgages comes from the public Sometimes unrecorded documents placed in the collateral files are also used as verification of  beneficial rights, but these can be as big a problem if the documentation used to prepare them was flawed or missing data to begin with. The presence of a document in the file that will not stand up to scrutiny is as bad as no document to begin with.

“The only source of universally enforceable rights to mortgages comes from the public record.”

2. Order an assignment verification report on any seasoned loan with a less-than- certain history.

There is no certainty that an assignment involving a seasoned loan, for servicing rights or securitization, may not be affected by a previous incorrectly prepared assignment. A badly prepared assignment or incorrectly assigned loan may result in nothing more than a cloud on title and certainly not the transfer of beneficial rights.

Seasoned loans can have multiple issues that can affect the ownership of beneficial rights. Here’s just one example:

• A loan is originated with MERS as nominee for a bank or other
• The loan then goes into default and pre-foreclosure and assigned out of MERS back to the servicer or
• The loan is reinstated as current and taken out of foreclosure, but the MERS assignment never makes it to the servicer’s
• The loan is transferred again, and another assignment is prepared from MERS to the trust, or to the new servicer in cases of a servicing
• This results in cloud on title and is an expensive error to correct, sometimes not being discovered until much later after the beneficiary is no longer in business, making a preparation of a new assignment almost.

“The AVR lists the exact chain of assignments, ensuring that any new assignment is prepared from the correct beneficiary.”

The solution is to order an Assignment Verification Report (AVR) on any seasoned loan with a less- than-certain history. The AVR lists the exact chain of assignments, ensuring that any new assignment is prepared from the correct beneficiary. Of course, it’s also essential that the assignment is prepared by a company that understands the details of the requirements and guidelines — making it their responsibility to ensure the assignment chain is intact according to agency guidelines.

An AVR is simply a true account of what is recorded at the county that identifies the current owner of a lien actually filed on a property. Any inaccuracies or breaks in chain are found  and listed on the report.

 

Typically, attorneys prepare assignments to the foreclosing entity from information in the collateral files supplied by the servicer along with title reports. If the files were deficient or didn’t match what was on record at the county, it could create a problem.

“Most property reports do not index the chain of assignments and certainly do not list the flaws within the assignment body itself.”

Of course property reports are used regularly to verify the current beneficiary, but quite often they are flawed or the incorrect report is ordered to begin with. Most property reports do not index the chain of assignments and certainly do not list the flaws within the assignment body itself — flaws that make subsequent assignments invalid in somestates.

A truly validated AVR is the perfect bridge between what is in servicers/custodial reports and what is actually on record at the county. You need reliable reports that identify if there is a gap or cloud on the assignment chain at the county and just as importantly, verification that the information within the body of the assignments on record effectively transfer the beneficial rights of the servicer or investor or not. Note: Some firms now offer AVRs from automated databases, and these are not recommended if you need to know with accuracy what is on land records.

3.      Leverage a new mortgage verification report for newloans

A new mortgage verification report is a search of land records to verify the recorded position of a specific mortgage. The report should list any other open mortgages andsubordinations, as applicable. The report should note if

the subject mortgage has been released and provide a copy of the recorded release, if it is available.

Mortgage lenders, servicers and investors use this report to confirm their lien position shortly after  loan  origination. This is particularly helpful on refinancedloans. Refinanced loans typically have more issues relating to lien position  due to recording  errors or missing documents, such as subordinations or releases  on prior liens. This type of report should be targeted and specialized, saving lenders and servicers the cost of an extensive report that has more information than they need.

“This report should help mortgage lenders and servicers to proactively uncover lien position issues early in the life of the loan.”

This report should help mortgage lenders and servicers to proactively uncover lien position issues early in the lifeof the loan, and ensure they have the mortgage position they expect. Some of the lien position issues that can be identified with this report are:

• Prior lenders that were not paid in full with an unreleased mortgage still on the property or prior lenders that failed to file a required
• Subordinations that were not obtained or recorded, thereby causing a second mortgage or home equity loan to be in first
• Potential fraud with multiple mortgages on record at the same

There is a substantial benefit to ordering this report for newly originated loans that have been designated as a part of a loan transfer. This will help identify, up front, any outstanding defects that could prevent selling the mortgage(s) at a premium or cause difficulty to foreclose later on. Defects can thereby be resolved proactively, while they are new, rather than uncovering problems years later when it is difficult, or evenimpossible to resolve.

4.      Be watchful for original unrecorded assignments in collateral files

Relying solely on the contents of what was in a collateral file can be misleading. Collateral files commonly have old, unrecorded, fully executed original assignments in the file that can appear to resolve a missing assignment issue. However, if you blindly recorded this document, you might actually cloud the title by complicating an assignment chain or recording an erroneous assignment without realizing it.

You should first verify what assignments were actually recorded at the county to determine if the unrecorded assignment from the collateral file is necessary, and also  to  determine what specific assignments

“If you blindly recorded this document, you might actually cloud the title by complicating the assignment chain without realizing it.”

are missing, if any. During our reviews, we very often find that the assignment in the file was already recorded, or something entirely different is on record. We’ve learned you can never be entirely sure unless you check first. If youdiscover an accurately prepared, fully executed assignment that cures an assignment chain issue, more often thannot it is actually useable and enforceable so it is not always wrong. It is a best practice to check first.

However, unrecorded “Assignments to Blank” in the files is a whole other matter for discussion. There has been a longtime industry practice of preparing an assignment but leaving the spot for the assignee blank with the purpose of filling it in later and then filing the assignment in the collateral file for later use. There is a tremendousamount of discussion in the industry surrounding this issue and our opinion is that this practice should be eliminated completely.

The legality is highly questionable of “filling in” the assignee and modifying documents that have already been executed and notarized. A best practice is to always accurately prepare and record assignments in the county at the time of the transfer. This is important to preserve our land records and accurately reflect the assignment chain. Leaving the assignee blank and storing them is a practice that will most certainly beviewed negatively by regulators.

In Conclusion

 Clouded titles are a serious impediment to the secondary mortgage market. With years of unrecorded assignments of mortgage at the county level, due diligence in this area is critical.

“By verifying the land record source documents lenders and servicers can ensure that there are no breaks in the chain of ownership.”

By verifying the land record source documents, lenders and servicers can ensure that there are no breaks in the chain of ownership to trip up the transfer process. Ordering an AVR on any seasoned loan will address the multiple issues that could arise from improper assignments in the loan’s past. Leveraging a new mortgage verification report with refinanced loans in the early stages of origination can save both time and money, as resolving those issues usually will only get harder on the back end. And checking for original unrecorded assignments in collateral files will keep your transfer clear of any problems associated with “Assignment to Blank” documents.

Tracking a loan’s history through source documents and making sure it has an enforceable chain of ownership is more crucial than ever in today’s regulatory environment. Taking these four actions to uncover the risk that is often hidden will smooth the way for successful loan transfer.

1. Levitin, Adam. The Paper Chase: Securitization, Foreclosure, and the Uncertainty of Mortgage Title, Duke University , 2013.

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