The mortgage servicing industry has lost the benefit of the doubt with judges, regulatory agencies and attorneys representing debtors, and according to a panel of industry experts, proper documents and filing procedures are a critical tool for buyers and sellers to make the most of investment opportunities in distressed and delinquent mortgage portfolios.
“We are put to our proof, which means that we have to prove every fact that we want to make in court. Nothing is assumed to be true,” said Barry Johnson, an attorney who heads the consumer finance department at the SettlePou law firm, during ASR sister publication's National Mortgage News Buying and Selling Distressed Mortgage Portfolios Conference in New York on Tuesday.
Mortgage cases are shifting to become more fact-intensive, rather than legal-intensive, meaning investors’ attorneys need witnesses to explain the circumstances in a case. But since it’s nearly impossible to track down the loan officers and underwriters that originated a mortgage, “I tell my story through documents,” Johnson said.
“The note is key,” Ronald Friedman, managing partner of the Capital Asset Management Group. “The old lost note affidavit doesn’t work anymore.”
Friedman explained that loan portfolios get different levels of scrutiny depending on characteristics like the type of loan and when the mortgages were originated.
“If we find a ’05-’06 pool, you can only imagine what the compliance and documentation looks like,” he said. “We’re going to do more due diligence on a pool like that than we would a pool originated in 2000 or 2001.”
The proper chain of custody must be demonstrated through documents properly filed in municipal land records. Mike Wileman, president and CEO of Orion Financial Group, cited Property Records Industry Association data from 2004 estimating that the mortgage industry had a 12.5% rejection rate with land recording documents, which cost the industry $600 million per year.
“When a loan goes through four or five servicers, a lot of documents can get lost in the process,” added Jerry Azure, senior vice president of default services at BSI Financial Services.
In some cases, specialty servicers like BSI can work with previous servicers to track down missing documents, but not always, particularly when a servicer has gone out of business. “On the legal end, if we don’t have everything, it causes delays,” Azure said.
Since documentation affects investors’ ability to collect on debt, the better the records in a loan pool, the better pricing a seller will get, said Christopher Link, vice president of acquisitions at Harbour Portfolio Advisors. Sellers that provide full representations and warranties and help buyers cure inadequately documented files are rewarded with higher prices.
Link said that the portfolios in some deals will have a blended price that takes into account tranches of higher-priced, well-documented loans and lower tranches of loans with missing documents.
“The worst the documentation, the cheaper we buy the stuff,” he said. “Having a full set of docs makes the trade much smoother.”