NPL buyer Kondaur Capital Corp. introduced its new subsidiary called DKR Collateral Dynamics (DCD), a third-party service that offers a full-range of collateral review ensuring that in "analyzing a note or security instrument all the missing links in the chain of ownership are filled," according to Kondaur Chairman Jon Daurio.
Daurio, whose firm specializes in buying NPLs backed by one-to-four family residences, is going to be speaking tomorrow at this week's ASF 2011 conference in Orlando at a panel called Mortgage Loan and Property Disposition Strategies.
"The problem is the collateral is the key to most liquidation strategies,” Daurio said. "In more and more cases, such as in greater Ohio, the judges in those cases have ruled that the servicers foreclosing on the loans cannot foreclose on those loans because they do not have standing, meaning that they cannot prove that they have the right to be the foreclosing party because there is a problem with the chain in the ownership of the loan. Many times there is a deficient or missing link. DCD offers a unique, quick, cost-effective service that both lays out and completes the chain frequently by finding persons with authority to execute documents on behalf of defunct entities, creating missing and necessary documentation, etc."
Specifically, the new unit is offering the following services: review and document preparation services (including: assignments, quit claim deeds/grant deeds/ warranty deeds, reconveyances/ lien releases/ satisfactions, allonges (a summary of the contract), attorney bailee letters, and lost note affidavits); document retrieval; and document imaging.
Using what's called “Collateral Dyna Rating”, DCD will award “A” through “F” ratings to collateral, the top “A” rating means the collateral is perfect. Collateral with a “-(dash) FF” rating shows that it contains a fatal flaw or if it is not fixed, then ownership cannot be proven.
This gives the confidence if there is a question regarding the title or ownership of a loan before a court of law. "If a loan is given an F grading, this means it has a fatal flaw that unless cured, the owner will have no standing to foreclose," Daurio explained. He added that what DCD does for owners of nonperforming loans about to foreclose is that it shortens the process by preventing delays due to collateral issues. "The potential delay period is different for every state, so by fixing it from the beginning, DCD offers cost saving for servicers and for investors, this would help them understand on what they are bidding for so that they know the right price."
Collateral issues have become a problem given the presence of unseasoned participants, many of whom might not have the basic knowledge about the two key documents needed to track the chain of title, which are the note and the security instrument.
According to Daurio, the note usually gets endorsed, and the security instruments then get assigned when a loan is sold, although the security instrument may sometimes not be recorded. He said that there are a number of new entrants who are unfamiliar with basic understandings of lost notes, endorsements (which may involve allonges) and the assignment of a mortgage that may involve the Mortgage Electronic Registration System or MERS.
State of the NPL Market
In terms of the nonperforming loan market in general, Daurio said that although there were some rumblings in mid-2010 about the market peaking, he said that with respect to the trades in January about which he had heard the ask was much higher than the bid and as a result, the ask has actually come down for these deals. "In terms of pricing, the market has somewhat stabilized, I don't really see that changing," he said.
He noted that 2010 saw more activity compared to that seen cumulatively from the previous three years, $30 to $50 billion, about half of that traded in the secondary market. "Our belief is that even with $30 billion to $50 billion, that is still a small amount of nonperforming product floating around," Daurio said, noting that at least 10% of first-lien loans are currently in defaultSo if there are $1 trillion in default, there's probably only 2.5% that's being traded."
Despite the small percentage of loans that are active in the NPL market, Daurio thinks that "there is a thaw in the market. But I don't think there will be giant strides going forward."
He thinks that his company's place as a servicer is that "we are leading in changing the way nonperforming loans are being serviced. Whereas with the bigger players, borrowers have to talk to the various departments, our individual asset managers assist a borrower in all aspects from loss mitigation, to collection to liquidation until the end of the transaction."