Moody's Investors Service weighed in on the widespread foreclosure-document problems with a report Wednesday questioning whether custodians followed industry standards in tracking and holding original mortgage notes in their files.
The report also identified specific document defects that could prevent servicers from foreclosing.
While one major custodian told Moody's that the original note is present "in almost all of their files," at least one major securitization law firm did not routinely check the custodial receipts before a securitization closing.
Yehudah Forster, a Moody's vice president and senior analyst, wrote that the vast majority of notes and key documents exist.
"But exactly how large that 'vast majority' is, precisely how disorganized the files of custodians and servicers are, and how practically findable the existing documents are, is uncertain," Forster wrote.
More problematic is that securitization agreements are "ambiguous" as to which party would be responsible for curing missing or defective documents, he said.
While sponsors typically would have to repurchase problem loans out of a pool, Forster wrote, they "may not have honored these requests, if anyone made them."
Though Moody's tried to buttress servicer claims that most defects are curable, it admits that there are cases in which document defects will prevent a servicer from being able to foreclose on a defaulted borrower.
"This may be especially true when the originator is out of business and cannot re-execute corrective documents," Forster wrote. "And in cases where the servicer cannot or repeatedly fails to produce the correct documents, courts may not be sympathetic."