1997 Vintage – What to do when the Chain Breaks – In The Future, MERS Will Help

Well isn’t this a blast from the past…

The Missing Assignment Dilemma

It is an all too familiar story. Lender A originates a note secured by a mortgage or deed of trust and sells it on the secondary market to Lender B. Lender B then sells the mortgage to Lender C who sells it to Lender D. In each case, the seller endorses the note, reflecting the transfer to the new buyer. However, while Lender A recorded an assignment to Lender B, and Lender C recorded an assignment to Lender D, Lender B failed to record an assignment to Lender C. When the note goes into default, Lender D sends the loan to its foreclosure attorney, a title check is made, and Lender D is advised that there is a problem. It is known as the “missing assignment” problem.

In all but a handful of states, Lender B’s failure to record the assignment causes havoc in the disposition of the mortgage. The failure to record places the interest claimed by Lender D as outside the chain of title; a legal nullity in most states. Lender D cannot sell, encumber, release or foreclose on the mortgage. In short, it is as if Lender D held no interest in the mortgage.

At first blush, it might seem that the missing assignment problem is an investor problem. Afterall, the ownership of the loan rests with the investor, not the servicer. Unfortunately, Fannie, Freddie and nearly all major conduit servicing guidelines place responsibility for the proper assignment of mortgages on the servicer. Thus, by undertaking the servicing of a loan, the servicer is representing and warranting that the investor has proper title to the mortgage.

It is a large responsibility, made more overwhelming by the frenzy in the transfer of mortgage ownership and servicing rights. Caught in the rush, due diligence teams often overlook the very practical need to have a properly recorded chain of title. Moreover, title endorsements, which are available to protect lenders from just such occurrences, are seldom obtained.

MERS, the Mortgage Electronic Registration System, was in part created to solve this very problem. Under the MERS system, MERS becomes the mortgagee of record with one recorded assignment from the lender to MERS after the loan is originated and recorded in the public land records. From that time forward, all transfers of ownership or servicing rights are recorded by the MERS computer system (known as a book entry system) eliminating the need to record in the land records subsequent mortgage assignments.

MERS becomes operational this year and those lenders which properly use MERS will eliminate the missing assignment problem for new loans entering the MERS system. Unfortunately, MERS will not correct the missing assignment problem for older loans.

Until all loans in a servicer’s portfolio are registered with MERS, servicers must have in place systems and procedures to identify and correct missing assignments. Generally, a servicer will discover a missing assignment problem at one of three stages: when a loan is sold, released or foreclosed.

Servicers tackle missing assignment problems through a variety of means. Most often, the Lender which failed to record an assignment of the mortgage is located and the assignment is obtained. Sometimes, a lawsuit is filed to obtain a judicial determination that the investor indeed owns the mortgage. Occasionally, a title company can be convinced to write around the problem if the title company is provided a copy of the endorsed note.

While there are a variety of avenues to resolve missing assignments, all take time, lots of time. Until recently, servicers had the discretion in their operations to take the time to solve the problem. Unfortunately, the winds have changed and a new animal known as “real foreclosure time frames” has entered the picture. Under those time frames, imposed by investors, servicers are required to complete certain tasks within certain times, regardless of missing assignment problems.

Freddie Mac has estimated that the third leading cause of delay in foreclosure is delay resulting from missing assignments. In an effort to minimize losses, both Fannie and Freddie have tightened foreclosure time frames to the point where any delay is too much delay. Moreover, these major investors have made it very clear that penalties will be assessed for foreclosures outside the time frames. Because the resolution of the missing assignment problem is so time intensive, the missing assignment problem should rise to a new level of concern for servicers.

To ensure timely foreclosures and avoid the delays inherent in missing assignments, Freddie Mac described the following best practice:

“When acquiring new servicing portfolios, address missing mortgage assignment problems and other loan documentation deficiencies through due diligence reviews. Maintain a database of information (contact names and telephone numbers) to help you locate representatives of prior servicers who may need to sign missing assignments.

Have a dedicated staff member aggressively work missing assignments, payment disputes and other problems that may result in lengthy delays.

Ask the title company if it will accept evidence of the original note endorsed to Freddie Mac instead of attempting to cure missing assignments.”

Today, most major services have developed lists of contact persons if they locate a lender which has failed to record an assignment. Generally, these lists are maintained by a member of the foreclosure department. The lists are seldom placed onto computer databases, and little is done to ensure the integrity of the lists. It is generally a hodgepodge of information passed down from clerk to clerk.

The new foreclosure time frames and threat of penalties for failure to meet the time frames, requires a more industrious approach to missing assignments. Due diligence teams should be focused on the problem and proper title company endorsements should be considered. In existing portfolios, notification of a missing assignment problem should trigger immediate action by the servicer; the problem must be corrected quickly or significant damages could accrue. Databases should be developed identifying the individuals who have the ability to execute assignments on behalf of seller.

But all of this is still not enough. As is so often the case, the missing assignment needs to be signed by a party who the servicer does not know. Thus, in the example above, Lender D has no relationship with Lender B. In order to avoid penalties and ensure the timely foreclosure of the loan, Lender D must find Lender B as soon as possible.

To aid lenders in resolving this problem, the mortgage banking law firm of The Wolf Firm developed what is known as the Missing Assignment database; a web based database accessible from any web browser (http://www.wolffirm.com/assignment). The database is comprised of two separate databases; the Existing Company database and the Company No Longer In Existence database. The Existing Company databases holds the names and addresses of over 15 million U.S. businesses. By typing in the name of Lender B, a servicer can obtain Lender B’s address and telephone number.

This assumes, of course, that Lender B still exists. If Lender B changed its name, was bought out or was taken over by the FDIC/RTC or some court, it would not be an existing company and thus would not show up on the database. Therefore, a second database was developed for lenders which are no longer in existence called the “Company No Longer In Existence” database. Searching this database returns the name of the company or entity now responsible for the defunct entity. Thus, if a servicer enters Directors Mortgage, the database returns Norwest Mortgage. Similarly, if a servicer enters the name of a defunct bank or savings and loan, the database returns the FDIC office now responsible for that entity.

The Wolf Firm Missing Assignment database is only one tool to aid servicers in their need to quickly resolve missing assignment problems. Servicers are encouraged to employ better due diligence and to create their own databases to aid in the resolution of this growing problem.

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