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A mortgage or deed of trust is simply a written pledge of real property by a borrower to secure a debt. These security instruments provide the backbone of the mortgagor/mortgagee relationship and define the legal rights and obligations afforded to each party. Yet mortgages and deeds of trust are mysterious to many, given their length and perceived complexity. This mystery naturally leads to confusion and mistrust between the parties. “Who said you could do that?” is a common refrain of borrowers from all across the country.

Yet, when read closely, standard security instruments use straightforward language and establish clear, unmistakable guidelines for both borrowers and servicers. The real issue in understanding the rights and obligations of the parties under a security instrument - as is often the case in default servicing - is knowing where to look.

This article will dissect in detail the language in standard security instruments (mortgage and deed of trust) authorizing the servicer to secure a property to protect the collateral of the outstanding debt (including repair) and obtain hazard claim proceeds when a property has suffered insurable damage.

Most mortgage documents and/or deeds of trust contain similar language. The differences conform to a state’s legal precedent, as well as statutory and administrative requirements. The standard mortgage documents approved by Fannie Mae and Freddie Mac contain language approved by the appropriate executive agency in each state, including the required distinctions. These documents will be the subject of our review.

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Securing and protecting the property

The mortgage document explicitly charges the mortgagor to maintain the property, in order to protect the mortgagee’s security interest. Upon failure to do so, the mortgagor agrees explicitly to grant the mortgagee the opportunity, at the mortgagee’s election, to enter the property and repair, at the mortgagor’s expense.

For example, Form 3033, the Fannie Mae/Freddie Mac Uniform Mortgage Instrument for New York State, states, in part:

(a) Maintenance and Protection of the Property: I will not destroy, damage or harm the Property, and I will not allow the Property to deteriorate. Whether or not I am residing in the Property, I will keep the Property in good repair so that it will not deteriorate or decrease in value due to its condition.

Additionally, the mortgage goes on to state, in part:

If: (a) I do not keep my promises and agreements made in this Security Instrument … or (c) I have abandoned the Property, then Lender may do and pay for whatever is reasonable or appropriate to protect Lender’s interest in the Property and Lender’s rights under this Security Instrument.

The lender’s actions may include, but are not limited to: (a) protecting and/or assessing the value of the Property; (b) securing and/or repairing the Property; … Lender can also enter the Property to make repairs, change locks, replace or board up doors and windows, drain water from pipes, eliminate building or other code violations or dangerous conditions, have utilities turned on or off, and take any other action to secure the Property. Although Lender may take action under this Section 9, Lender does not have to do so and is under no duty to do so. I agree that Lender will not be liable for not taking any or all actions under Section 9.

I will pay to Lender any amounts, with interest, which Lender spends under this Section … when Lender sends me a notice requesting that I do so.

Similarly, in California, the uniform Deed of Trust reads, in part:

Borrower shall not destroy, damage or impair the Property, allow the Property to deteriorate or commit waste on the Property. Whether or not Borrower is residing in the Property, Borrower shall maintain the Property in order to prevent the Property from deteriorating or decreasing in value due to its condition.

If (a) Borrower fails to perform the covenants and agreements contained in this Security Instrument … or (c) Borrower has abandoned the Property, then Lender may do and pay for whatever is reasonable or appropriate to protect Lender’s interest in the Property and rights under this Security Instrument, including protecting and/or assessing the value of the Property, and securing and/or repairing the Property. Securing the Property includes, but is not limited to, entering the Property to make repairs, change locks, replace or board up doors and windows, drain water from pipes, eliminate building or other code violations or dangerous conditions, and have utilities turned on or off. Although Lender may take action under this Section 9, Lender does not have to do so and is not under any duty or obligation to do so. It is agreed that Lender incurs no liability for not taking any or all actions authorized under this Section 9.

Any amounts disbursed by Lender under this Section 9 shall become additional debt of Borrower secured by this Security Instrument. These amounts shall bear interest at the Note rate from the date of disbursement and shall be payable, with such interest, upon notice from Lender to Borrower requesting payment.

Not only does Form 3033 place a duty on the mortgagor to maintain the subject property (Section 7), it clearly and unequivocally allows the mortgagee to enter the subject property if the mortgagor fails to do so (Section 9). The mortgagee, upon election, can perform a number of enumerated actions, including, but not limited to, repairing the property prior to any foreclosure action.

The trigger for a mortgagee to enter and repair a property is not contingent upon the mortgagee completing a foreclosure sale or having full title to the subject property.

Rather, the mortgagee can exercise its rights upon failure of the mortgagor to fulfill his/her duties and obligations under the mortgage/deed of trust (Section 7 and Section 9).

Additionally, any repair undertaken by the mortgagee will be the responsibility of the mortgagor upon written notice (Section 9).

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Hazard insurance proceeds

Given the strict scrutiny state and local regulatory and judicial officials have taken with regard to foreclosures, servicers possess larger inventories of defaulted properties, for longer periods of time, than ever before. Naturally, properties in default are more likely to suffer damage.

The mortgage document requires a borrower carry insurance coverage to protect the collateral to the mortgage debt. Many of the most common damage occurrences are insurable and may be covered by the borrowers’ insurance policy. The mortgage document provides the servicer the opportunity to file and settle the insurance claim and use the proceeds to either pay down the outstanding debt, or repair the property.

The Ohio Mortgage document states:

Borrower shall keep the improvements now existing or hereafter erected on the Property insured against loss by fire, hazards included within the term “extended coverage,” and any other hazards including, but not limited to, earthquakes and floods, for which Lender requires insurance. This insurance shall be maintained in the amounts (including deductible levels) and for the periods that Lender requires.

In the event of loss, Borrower shall give prompt notice to the insurance carrier and Lender. Lender may make proof of loss if not made promptly by Borrower. Unless Lender and Borrower otherwise agree in writing, any insurance proceeds, whether or not the underlying insurance was required by Lender, shall be applied to restoration or repair of the Property, if the restoration or repair is economically feasible and Lender’s security is not lessened.

If Borrower abandons the Property, Lender may file, negotiate and settle any available insurance claim and related matters. If Borrower does not respond within 30 days to a notice from Lender that the insurance carrier has offered to settle a claim, then Lender may negotiate and settle the claim. The 30-day period will begin when the notice is given. In either event, or if Lender acquires the Property under Section 22 or otherwise, Borrower hereby assigns to Lender (a) Borrower’s rights to any insurance proceeds in an amount not to exceed the amounts unpaid under the Note or this Security Instrument, and (b) any other of Borrower’s rights (other than the right to any refund of unearned premiums paid by Borrower) under all insurance policies covering the Property, insofar as such rights are applicable to the coverage of the Property. Lender may use the insurance proceeds either to repair or restore the Property or to pay amounts unpaid under the Note or this Security Instrument, whether or not then due.

When hazard insurance proceeds are available, Section 5 clearly allows the mortgagee the opportunity to manage the repair of the damaged property. Pursuant to the mortgage document, where the property is vacant and has been abandoned by the mortgagor, the mortgagee can negotiate and secure hazard insurance proceeds. Once the insurance proceeds are secured, the mortgagee has but one of two options: 1) apply those proceeds to the outstanding mortgage indebtedness, or 2) repair the property.

The mortgage document further provides that where the mortgagor has abandoned the property and the mortgagee has secured hazard insurance funds, the mortgagee may repair or use the funds to pay down the mortgage indebtedness.

 

The mortgage document and
servicing strategy

The mortgage document clearly provides the mortgagee the right to preserve and protect the property from damage and grants the mortgagee a number of options where a mortgagor has defaulted on his or her mortgage, abandoned the property, or both. Most servicers have organically or programmatically implemented processes to address and protect assets in the default cycle based on the rights afforded to the mortgagee in the mortgage document. In the current political, economic and regulatory climate, many servicers have begun to re-evaluate how the organization exercises its rights to protect an asset in light of the rights of the borrower. How should the mortgage document factor in to this evaluation?

Each servicer incorporates a variety of economic, social and political factors when developing its approach to managing properties in default. Whatever the strategy, many servicers have placed an increased focus on communication. Communication is key in maintaining relationships with borrowers; with local and state municipalities; with bureaucrats, regulators and legislators; and with the media. Empathy has been of primary focus in communicating with these key groups, but education should be an equal element of this communication as well.

Many of the people most affected by mortgage default have little knowledge of the terms within the mortgage document and how those terms impact the rights and obligations of the parties. Many borrowers are surprised to learn that the answer to the question, “Who said you could do that?” is often, “You did, pursuant to the terms of the mortgage document.”

Although the mortgagee must always be cognizant of local, municipal and state regulatory composition; federal mandates; and statutory obligations, the mortgage document can help frame servicing strategy and execution of adopted protocol. In turn, the mortgage document can assist servicers in communicating the foundation for its servicing strategy, in addition to educating a skeptical public.

All the documents referenced in this article are readily available for viewing and/or downloading via the internet.

 

 

Patrick Nackley is director of marketing and business development at Superior Home Services Inc. He can be reached at patrickn@supersvcs.com.

Property Preservation

Servicing Rights And The Mortgage Document

By Patrick Nackley

‘Who said you could do that?’ is a common refrain of borrowers from all across the country.

 

 

 

 

 

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