REQUIRED READING: When assigning a loan or a group of loans, servicers need to ensure that their assignments are completely accurate, with no prior break in the assignment chain. It is now a best practice to validate the source information used to prepare new assignments and to document the steps taken and controls in place to ensure accuracy.
Assignment validation is accomplished by conducting a thorough collateral documentation review and mortgage/assignment chain audit prior to preparing a new assignment. The principle is simple: If you base assignments on inaccurate information, you will have erroneous assignments.
Of course, not all loans need this process. Self-originated and MERS-originated mortgage (MOM) loans will generally have no prior assignment chains and need little validation. However, if a portfolio includes complicated acquisitions or securitizations, there are likely deeper issues in servicers' loan files that need to be uncovered and resolved before assignment processing can occur. This process should be completed long before a loan goes into default, if at all possible.
There is no magic wand that will make loan files and assignment chains automatically 100% accurate. It takes a physical review of the recorded documents, detailed land-records research and industry experience to locate deficiencies and determine how to legally mitigate any such deficiencies and assign a loan.
An assignment is only as accurate as the information used to prepare it. So the obvious question is, how reliable is the source documentation, and what can be done about it? The answer is that servicers have to implement a reliable procedure to conduct the collateral documentation review and mortgage/assignment chain audit on their source documentation prior to assignment preparation. Servicers may also benefit from obtaining a partner to consult and review their process and source documentation for any other hidden risks.
Conducting a collateral documentation review and mortgage/assignment chain audit as part of the assignment process mitigates the following risks:
- exposure to costly statutory penalties for late lien releases,
- added litigation by borrowers,
- delays and litigation in the foreclosure process,
- the repurchasing of loans from investors or buyers,
- a threatened lien position, and
- exposure from clouded title.
If most mortgage servicers attempted to adequately review 100% of the loans in their portfolio, the cost would be prohibitive. So, when is the best time to conduct a mortgage and assignment chain audit or collateral documentation review, and how should a servicer implement ongoing procedures to ensure it remains in compliance with new servicing standards?
What should a review entail?
Resolving assignment chain issues for seasoned and complicated portfolios is similar to taking the pieces of a grenade that exploded and putting them back together. Such a review should examine all three of the following sources to conduct an accurate mortgage and assignment chain audit: collateral files, imaging systems and actual land records.
It takes an expert to analyze all the facts to determine the complete and accurate assignment chain. Relying on only one source of information would be looking at only one piece of the puzzle and is likely to lead servicers in the wrong direction.
Keep in mind, just because a loan is supposed to be in MERS does not always mean it is. We have found many examples of loans never having been assigned to MERS on land records, as well as loans that have been assigned multiple times out of MERS by prior investors/servicers – I would assume due to a poor review and preparation process.
The purpose of servicers' assignment reviews is to ensure they have controls in place and the supporting documentation to validate that each assignment is prepared accurately and legally. Conducting reviews based on all three parts (collateral files, imaging systems and property reports gathered from actual land records) ensures the highest level of accuracy.
A starting point
When considering a large undertaking such as this, where to start is an important question. Servicers should identify any complicated acquisitions or securitizations as trouble spots in their portfolios and make them priority No. 1. Due to the likelihood that these files will be problematic, they should be the first ones on the list to get a full mortgage and assignment chain audit and the most attention. The following are three tips on where to start implementing a review step in the assignment process.
First, timing is everything. Servicers should set up a process to conduct the review on loans only as they go through specific life-of-loan events. Here are a few events that are particularly important:
- portfolio transfer,
- modification request,
- 60 or more days in default,
- prior to first legal action, and
- payoff request.
This way, servicers can be sure that the review is thoroughly conducted during key events to reduce their exposure and liability. Additionally, conducting a review at any of these times can uncover a collateral documentation problem, providing servicers adequate time to resolve it.
Second, reviews should be portfolio-specific. Servicers can save substantial research costs if they are able to identify and easily confirm clean portfolios composed of self-originated loans and MOM loans. These loans will generally have no prior assignment chains, so land-records research is typically unnecessary.
Identifying the problematic groups of loans in a portfolio is essential. Seasoned and complicated acquisitions or securitizations should be clearly identified as trouble spots in a portfolio.
Reviews should also be conducted when buying or selling portfolios. If a servicer is buying or selling a loan portfolio, this is an opportune time to have the portfolio thoroughly examined. Taking this step will help servicers prepare loans for future sales, present loan packages to potential buyers and prevent future buybacks. If purchasing a portfolio, servicers can have the files reviewed in advance to avoid purchasing files with hidden risks.
Review practices to avoid
Misleading collateral files. Relying solely on the contents of what was in a collateral file can be misleading. For example, collateral files commonly contain old, unrecorded, fully executed original assignments that can appear to resolve a missing-assignment issue. However, blindly recording this document might actually cloud the title by complicating an assignment chain. Or, unbeknownst to the party that is recording the document, the executed assignment could turn out to be erroneous.
Servicers should first validate what assignments were actually recorded at the county to determine if the unrecorded assignment from the collateral file is necessary and what specific assignments are missing, if any.
During our reviews, we often find that the assignment in the file was already recorded or that something entirely different is on record. We have learned you can never be entirely sure unless you check first.
Downside of custodial reports. It is no longer a good practice to rely solely on custodial reports as a single source of information for a review of the collateral. Custodians are necessary to validate that the documentation in the collateral file meets agency guidelines.
However, it is often discovered that the files are not current and custodians are not reviewing documents in the same way that an experienced assignment provider would.
While they are likely doing everything they are supposed to be doing to meet agency guidelines, custodians do not confirm what is also on land record and often try to match assignments to the endorsement chain, which is sometimes impossible to match exactly. Hence, we sometimes find that the assignment requested by a custodian, if prepared and recorded, could inadvertently cloud title rather than fix the chain. We often have to go back to the custodian on behalf of clients and explain what is truly needed to complete a chain of assignments.
It is good to keep in mind that custodians have a specific purpose and that it is not to validate assignment chains, so servicers should use these reports only in combination with other sources and compare all of the pieces.
Drawbacks to imaging systems. Relying exclusively on imaging systems is also problematic. It is common for the imaging system to be missing a document or to have a document indexed incorrectly. It will cause servicers a lot of distress if there is a key document that is actually of record or contained in the collateral file that is not in their imaging system. This can make it appear that there is a gap in an assignment chain when, in fact, there may not be. Conversely, a document can appear to be in the name of MERS or a servicing firm when, in fact, there are additional unknown assignments on record.
Land-record pitfalls. Relying only on land records will also lead servicers astray in several ways. There may be a valid unrecorded assignment in the collateral file that could be used to resolve the assignment chain issue. It could also be that the last assignment of record was recorded out of order, or that there is an earlier break/inaccuracy in the assignment chain.
Servicers would not recognize these defects if they only retrieved the most recently recorded assignment of record and did not review the entire chain. It often takes a trained expert examiner to review all sources of information to piece the puzzle together to determine what, if any, assignment chain issues exist for a mortgage.
Only after reviewing all information sources (collateral files, imaging systems and land records) and determining there is a missing assignment in the chain should servicers begin the research to locate a prior beneficiary (or authorized entity) to obtain a missing assignment.
Jeremy Pomerantz is senior vice president of marketing and sales at Palm Harbor, Fla.-based Nationwide Title Clearing. This article was adapted from a white paper titled "Understanding Current Assignment Validation & Execution Practices," which is available on Nationwide Title Clearing's website, www.nwtc.com. Pomerantz can be reached at (800) 346-9152, ext. 227, or firstname.lastname@example.org.