REQUIRED READING: The soaring number of residential foreclosures, personal bankruptcies and mortgage modifications taking place today is exposing the failure of many originators and servicers during the boom years to properly record and store vital mortgage documents.
Finding and correcting missing documentation at this critical transition point can delay a foreclosure, hold up the proof-of-claim process in a bankruptcy proceeding or delay – or even prohibit – the lender from selling off the asset to a third party.
This is a serious issue for mortgage companies and banks that are trying to protect their assets in foreclosure and bankruptcy proceedings, as well as for lenders that are trying to modify mortgage loans. It is especially so for those that cannot handle the compliance processes themselves.
Similarly, loan investors are having a more difficult time both buying and selling mortgages, because proof of clear title to the property and other documentation is lacking. Often, all of the necessary loan documentation is not all in one place; the collateral file may be with the custodian, and the servicing file may be somewhere else. This creates a perfect storm of problems and confusion.
At the risk of being pessimistic, it appears that this situation is only getting worse, because delinquencies, foreclosures and bankruptcies will likely increase in the foreseeable future.
No document consistency
How did this happen? One of the causes can be attributed to the many acquisitions in the mortgage business over the 10 years prior to the collapse. Often, when one company acquired loans from another company, there were no consistent paperwork, filing, or documentation procedures and systems in place between the two companies. In many cases, neither documentation nor assignments were done properly when a loan was purchased. Loan documents were either not entered in correctly or were put in the wrong folders.
In addition, mortgage companies were too busy ‘blowing and going’ – originating as many mortgages as they could and neglecting proper documentation. Compliance and other back-office functions were deemed to be the less sexy part of the business, thus too often did not get the attention they deserved.
The current surge in federal oversight has completely changed all of that, beginning with the Dodd-Frank financial reform, which focuses clearly on the issues of appraisals, disclosures on originations, interest-rate changes and more. The new law generally allows federal oversight of banks doing mortgage lending, so anything that raises questions of financial stability is subject to scrutiny. Faulty or missing documentation is an open invitation for the federal regulators to come in and look around.
Here is a typical example of what went on. A few years ago, there was a servicer that had a lot of trouble with lien releases. Customers were getting angry because they could not refinance or buy new houses as a result of their lien releases not being recorded.Â
As it turns out, the company's process for completing lien releases, combined with missing assignments, caused the lien releases to be rejected. The volume of rejected documents became too great, and they simply piled up – eventually costing the company $1 million just for our company to sort through all of the documents, retrieve the missing ones and record the proper documents at the recording office.
Compliance and documentation is becoming a big issue with the courts. Judges in foreclosure cases are demanding that recorded documents be valid before they will grant a foreclosure. Courts are sometimes taking their liberties with the law to make sure people are not foreclosed upon unfairly, and they are insisting the current owner of the mortgage have the proper documentation and prove they own the loan before they order the foreclosure. That is making it difficult for many lien holders to protect their interest in a mortgage, because they are unable to prove, by way of recorded assignments, that they really own the mortgage and can foreclose on defaulted borrowers.
Paper cuts
For investors, making sure that the proper paperwork has been completed is critical. Buying a loan with bad or inadequate documentation sets them up for potential losses in the future. Also, having a good process in place prior to accepting a deed-in-lieu of foreclosure from a borrower is extremely important. Providing enough time to search the records of the property to know all liens on it can help a company avoid inheriting something that it does not need.
Similarly, this can keep a company from selling the loan later if the documentation and title are not in proper order.Â
Investors have paid as little as $700 for real estate owned properties (REOs), in part, because the loans had poor documentation. They are only willing to pay that much because they know have to invest a lot of money not only into the property, but also into cleaning up the title chain to transfer the home into their name.
Companies with REO properties on their books that are trying to get rid of them must put a process in place to prove they have clear title and can transfer the property to the new buyer quickly and efficiently. By doing that, and by simplifying the process for the buyer, they give themselves a better opportunity to increase the sale price on their portfolio.
In addition to cleaning up the messes of the past, companies must continue to comply with the basic federal and local regulations. For example, when loans are paid, servicers only have a certain period of time to release the liens. It is imperative to have a process in place that releases the lien within the time frame promulgated by each state – sending the release to the county in a timely manner is just the beginning.Â
In the long run, that proverbial ounce of prevention is definitely worth a pound of cure – if you're lucky to have a cure at all!
Mike Wileman is president and CEO of Orion Financial Group, based in Southlake, Texas. He can be reached at (888) 316-7466.
