Timing is everything

There was a time when th e paper­ work was an aftert hought. Deals were done on a hand ­ shake and details were left for the closing table, a temporary factory line where documents made their way around the table for wet sig­ natures. The paperwo rk that was still required after the close received even Jess attention. Beca use the law made it possible to estab li sh transfers in owners hip of the note and mortgage at any time, many ser­ vieers paid little attent ion to chain-of-title until and unless the deal went into default. Un til recently, that didn't happen that often, at least no t in the conforming market. But things have changed. With one in 10 U.s. mortgages deli nquent or in defa ult, the co urts are filled wi th foreclosure filings and servicers are rushing to perfect loan files that may be called into question by foreclosure defen se att orn eys. In an effort to ensure note endorsements and assignment chains are correct before the forec losure is filed, banks are be ginn ing pre-foreclosure collateral revie ws on delinquent loans in th eir portfolios. Unfortunatel y, many insti tutions are .learning these audits are highl y comple x and few ba nks have the staff on han d to compl ete th em. A good pre-foreclosure collateral review invo lves many movin g pieces and mu ltipl e departments wi th in the bank that must bring together informat ion used in the review. There is also some con fus ion in the industry as to whether an endorsement chain needs to match the assignment chain. In many cases it doesn' t, but this depends upon the investor. Fannie Mae, Freddie Mac, private inves tors and MERS all have different requiremen ts that appl y under different circum­ stances, making this question very difficult to answer generally. While today's market is significa ntl y simp lified whe n it comes to the type and complexity of loan products available to consumers, mos t of the loa ns in default today were origi­ nated when that was not the case. Toda y, banks are dealing with th ousands of combina­ tions of loan types and investors, which can trip up even the most experienced and well-trained emp loyee. A failure to get thi s righ t couId mean the bank wil110se its forec losure action in court and have to begin the process all over again, significa ntl y increasing the loss severity.

There are a few best practices to bear in mind: First, be aware timin g is everything. With a process that condu cts re views at speci fi c life-of-Ioan events, ex­ posure and liab ility are grcJ tl y reduced. It al so allows for adequate time to resolve issues with doc umen tation as the y are un covered. Particu larly important life-of-l oan events include: secu­ ritization, portfolio transfer, modi fication request, 60-day default , prior to first legal ac tion, and payoff request. Another best practi ce is cond ucting portfolio-specific reviews tha t ide ntify and easily confirm clean port folios composed of self-originated loans or MERS originated mo rt­ gages, saving substantial research costs. Se lf-originated loans and MOM loans commonly have sim ple assignmen t chains with lit tle to no breaks. So land records research is typicall y unnecessary. Identifying the probl ematic groups of loan s in a portfolio is very important. Seasoned and complicated acq uisi tions or securitizations should be clearly identifi ed as trouble spots within a portfo lio and require the most attention. They should be the fi rs t ones to get a ful l review. Buying or selling portfoli os is ano ther important time to have the portfolio th oroughly examined, which will prepare loans for future sales and be helpful in presenting loan pac k­ ages to potential buyers.

\Vhen purchasing a portfolio, files can be re viewed in advance to avoid acqui ri ng files with hidden risks. If it is impractica l to review all the fib at once, consider building an on-going wo rkflow process to review the files over a set period of ti me. Whe ther the bank performs the audi t in house or out­ sources it to a specialist, the days of not pa ying very close attentio n to the dea l's paperwork are long over. The sooner the instituti ons reali ze this and begin to sc hedu le ro utine revie ws, th e better.

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