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Mortgage assignments - headed for extinction?

It won't happen tomorrow, and it won't happen next week or even next year. But in the not too distant future, paper mortgage assignments may become as common as dinosaurs--outside Jurassic Park.

The Mortgage Bankers Association of America (MBA) in conjunction with Fannie Mae and Freddie Mac is exploring "New Age Delivery." The phrase represents a proposal for grounding the mortgage note for the life of the mortgage loan immediately after origination. Subsequent transfers of the loan, as well as transfers of servicing, will be registered in an electronic clearinghouse--essentially a computer. What we will have is a book-entry system for transfers of mortgages and servicing rights sponsored by participating mortgage investors. These will include not only Fannie Mae, Freddie Mac and GNMA, but also conduits, portfolio lenders and any other investors in mortgages.

The proposed system is analogous to the system used to establish ownership of book-entry securities--including Fannie Mae MBS, Freddie Mac PCs and Ginnie Maes. The concept is still in the early stages of development, and we expect that it will be refined as it is discussed and analyzed further. Currently, it provides for the following:

* Mortgage investors will establish a system for electronically registering ownership of and interests in mortgages. Submitting information to the resulting book-entry data repository (clearinghouse) will be recognized as the official means for establishing constructive notice of title to and interests in the registered mortgages. The repository could be an entity created from scratch, or it could be operated by an existing facility.

* Lenders will provide closing agents with electronic closing instructions. Upon funding of a mortgage loan and recordation of the security instrument (mortgage or deed of trust) in the public land records with the clearinghouse probably designated as the mortgage of record, the title company, closing agent (independent closing agent/escrow agent/attorney), or lender will transmit electronic data to the clearinghouse to register a loan and have it assigned a permanent identification number (the data could be limited to borrower/original payee/loan amount/date, or could be very extensive to include property description/census tract and so on.

* Immediately upon closing, the closing agent also will fax the clearinghouse an image of the note. The clearinghouse or the closing agent also will notify the warehouse lender that the loan had been originated and send the original note to the designated custodian. The warehouse lender then will electronically register its interest in the mortgage loan with the clearinghouse.

* All future loan transfers or assignments to secondary market entities, as well as transfers of servicing, will be registered electronically through the book-entry system.

* If mortgages designate the clearinghouse as the mortgagee of record in the manner that book-entry securities are listed in the name of a primary bank having a book-entry account with a Federal Reserve Bank on behalf of the true investor, the clearinghouse will receive important notifications affecting the mortgage lien; for example, notices of foreclosure of junior liens, notices of federal asset forfeiture actions, bankruptcy notices and notices of environmental actions affecting the underlying property.

* Mortgage notes will remain with the original document custodian until payoff or foreclosure. Custodians will hold the notes on behalf of the registered owner. Custodians will release satisfied notes to closing agents who will record satisfactions.

The book-entry concept is the logical outgrowth of several initiatives undertaken by the Inter-Agency Technology Task Force. This task force, in which MBA assists Fannie Mae, Freddie Mac and GNMA, is dedicated to streamlining mortgage banking functions. Activities focus on reducing paper in mortgage loan transactions, eliminating redundant data-entry activities by various industry sectors and establishing uniform formats for agency submissions to the extent feasible.

The current systems for establishing and tracking mortgage ownership is extremely cumbersome and expensive. The generally accepted rules are that ownership of a mortgage note is established by possession of a note endorsed in blank, either directly or through a custodian holding notes on behalf of a third party, and by execution and delivery of a mortgage assignment, which may or may not need to be recorded. However, even where assignments need not be recorded to establish legal rights, the need for their execution, delivery, verification and storage is very costly. Therefore, the elimination of mortgage assignments has been targeted by the Inter-Agency Technology Task Force as a significant objective.

Because mortgage assignments are creatures of state law, a logical question is whether registration of a mortgage interest in the book-entry clearinghouse will be sufficient under state law to establish enforceable legal rights. Although the proposed book-entry concept seems a drastic departure from existing practice, there is good reason to believe that the book-entry system will mesh with the existing legal framework. A tangible mortgage note and recorded mortgage will still be executed, and the note will be held by a third party consistent with current practice. What will differ is that an interested party must refer to the book-entry system, rather than an executed assignment, to determine on whose behalf the custodian is holding a note of any given time.

It appears that to make the concept work without changing state law, mortgage investors will have to impose a contractual requirement for mortgage sellers and servicers to participate in the book-entry system and comply with clearinghouse rules. Investors can easily change mortgage eligibility requirements to condition loan purchases on registration of loans in the clearinghouse and recordation of the mortgage in the public land records in the name of the clearinghouse. Clearinghouse rules would be modeled after Article 8 of the Uniform Commercial Code, which addresses book-entry securities.

Enforcing this contractual requirement will not harm borrowers. Although the public land records under New Age Delivery would not disclose the current mortgage servicer or owner of the mortgage, with the growth of the secondary market, the public land records under our existing system rarely disclose the borrower's current servicer. In states where mortgage assignments don't need to be recorded, the public land records may disclose only the original mortgagee notwithstanding successive transfers of equitable ownership and transfers of servicing rights. Instead, updated information regarding servicing transfers is delivered to borrowers in the manner provided for under federal law.

Although the impact of New Age Delivery on borrowers will be minimal, the book-entry concept will definitely change the way many sectors of the mortgage finance industry to business. During June, MBA hosted a series of focus groups to present the book-entry concept to the various sectors that will be affected: mortgage lenders, of course; warehouse lenders; closing agents; and document custodians. The purpose of these meetings was to identify the costs and benefits of the concept, needed concept enhancements, work flow changes, and the level of receptivity of each industry segment. Our findings will be incorporated in a white paper will present the issues involved for general comment. This white paper should be available sometime this coming autumn.

MBA and the Inter-Agency Technology Task Force welcome your comments on New Age Delivery and the whole loan book-entry concept. In order to have a meaningful white paper that will identify important concerns and constraints, as well as benefits, MBA needs to hear from you. In order to develop the best system, all the relevant issues must be identified and adequately aired so that a broad consensus can be reached. Preliminary indications are that the mortgage assignment is a very endangered species.
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Copyright 1993 Gale, Cengage Learning. All rights reserved.

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Author:Slesinger, Phyllis K.
Publication:Mortgage Banking
Date:Jul 1, 1993
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