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Payoff pain relief.

With last year's record payoff activity, the reconveyance unit got swamped. State law penalties for late reconveyances make this a costly place to have backlogs. Outsourcing may be the path that leads to payoff paradise.

There are several murky quagmires in the business of mortgage banking. These are areas of the business where mistakes are the costliest. Fines, suits and unhappy customers lurk in these zones, and regulators pounce on offenders with vigor.

One such quagmire is the process of reconveyance, or releasing a lien in a timely fashion. Failure to do so within a set time period or in the legally required manner can result in thousands of dollars in fines and an equally costly amount of administrative headaches.

Reconveyance is the term used for releasing a lien held by a mortgage lender at the local country recorder's office. The reconveyance process is known by different names in various parts of the country. In the southern United States, this process is known as "issuing the release." In the Midwest, this is known as issuing a "satisfaction." In the West, it's known as "issuing a reconveyance." The most accurate term is simply "reconveyance" or "reconveying the property." This action takes the mortgage company's name off the county recorder's records.

Last year was a record year for mortgage reconveyances. "We estimate that there were about 10 million residential mortgage loans paid off last year," says Hunter Wolcott, president and chief executive of Miami-based Reserve Financial Management Corporation. "At any given time, there are about 96 million households in the United States. Last year's prepayment numbers are about four times higher than a normal year," says Wolcott. "The summer months are especially busy for payoffs. Typically, there is a 40 percent difference between the peak and trough for payoffs."

Freddie Mac reported a total liquidation rate of 14.6 percent of its portfolio, for a total of $52 billion during 1991, according to Robert Davis, manager of shareholder relations. In 1992, this figure jumped to $136 billion in total payoff value. That meant that in 1992, Freddie Mac had a total portfolio liquidation rate of 33.3 percent.

So how did servicers handle all this payoff volume? "Very gingerly," says Robert Zulcosky, president of Winter Park, Florida-based Independent Mortgage Servicing Corporation. "We had about 13 percent runoff in 1992, which is about double that of a normal year. Fortunately, we were able to replace the runoff with the purchase of flow servicing." Independent Mortgage Servicing Corporation has a servicing portfolio of roughly 38,500 loans in 36 states, primarily on the East Coast.

Zulcosky says, "Paying off the loans was not so bad. It was creating, typing and handling all of the documents discharging the loans. That was where all of the work was. You have to be careful to meet the requirements of each state regarding discharges. We had to beef up our staff with temporary help to shovel the paper out."

He adds, "About five years ago, we were late with a discharge. We learned very quickly that discharges of mortgages are not something that you can fall behind on. For example, the state of Virginia requires the release of a mortgage within 30 days after the final payment is tendered."

A costly experience

Every state in the union has legal mandates pertaining to reconveyance. In South Carolina, a mortgage company can be fined up to half the amount of the mortgage. The following is an actual case that resulted in a fine of $9,000 on a $71,000 mortgage.

The loan in question was originated in July 1984 by a small mortgage company in a southwestern state. The loan was subsequently purchased by a savings and loan. The savings and loan was merged with another savings and loan, which was eventually placed in receivership by the Federal Savings and Loan Insurance Corporation (FSLIC). The loan was assigned out to a bank, which held this loan in trust for a Wall Street firm.

The original loan amount was $71,000. The loan was paid off by the borrower in early 1992. Because the loan file with the necessary original loan documents was not made available to the servicer (or outside consultant) by the custodian until May 1992, it wasn't discovered that the original loan file was missing an assignment from FSLIC to the bank holding the loan in trust for the Wall Street firm. The Wall Street firm was responsible for recording the assignments and did, in fact, hire an outside specialist to record the assignment.

In mid-May 1992, the borrower informed the servicer that based upon the state statute, after 60 days a penalty of $100 per day was due to the borrower, and that this penalty was, in fact, now in force. In late June 1992, the borrower informed the servicer of a 20-day notice that he planned to "proceed with filing an action to obtain a release...and collect the penalty."

The bank's trust department was aware of the situation and acknowledged knowing of "blanket assignments," and in early July, a copy of the assignment was obtained. Five days later, a release of mortgage, a copy of the note, certified copy of the mortgage and a copy of the blanket assignment were mailed via overnight mail to the borrower.

However, the release of mortgage signature was incorrect and had to be redone and remailed by the bank's trust department. Eight days after the discovery of the assignment, the release was sent to the borrower. In early August 1992, the release still had not been recorded and the lien was not released because the borrower, also an attorney, wanted substantiation of the merger or a copy of the authorization to place the institutions into receivership. There was some confusion as to how to sign off on the release because of the way FSLIC took possession of the two savings and loans. This further compounded the delay to the tune of $100 per day in penalties.

Finally, in late August, some 150 days after the loan had been paid off, the final release was recorded. In the state where this mortgage was held, the beneficiary of the loan is allowed 60 days to reconvey the property. This meant that only 90 days qualified as "penalty days." However, at $100 per day, that added up to a penalty of $9,000 on a $71,000 loan.

The penalty was certainly significant, but the hours spent tracking down the assignment and answering the various complaints had to cost even more than the $9,000 penalty for the innocent firms trying to reconvey the property for the borrower.

Heading off problems

How does reconveyance become a problem area? It's not enough simply to process the documents correctly. First you must understand that the mortgage documents, specifically the mortgage or deed of trust and the note, are recorded with the county recorder for the county in which the property is located. That is the loan originator's responsibility. It is roughly equivalent to when a bank puts its name on your car's "pink slip" or registration. Releasing same is not as simple as with a car, because mortgages are marketable commodities that are bought, sold and transferred many times during their term.

"When a loan is sold, the transaction involves much more than money flows," explains Mark J. Riedy, professor of real estate finance at the University of San Diego. "Transfers of loans and all the documentation with each loan must have assignments. The tremendous volume of refinancings, the failures of savings and loans and banks, and the resulting takeovers by the Resolution Trust Corporation and the FDIC have created paperwork nightmares for mortgage servicers."

"The opportunities for costly errors in the reconveyance stage are serious enough and significant enough to warrant the concern of senior management. For example, lien satisfaction can be filed in the wrong state. It is time-consuming and expensive if property in Oklahoma is accidentally printed on a Florida form. Other errors include releasing the wrong documents, which frequently occurs when servicers fail to verify information when last names are the same, when there is no property address on the reconveyance or when the custodian does not provide documents. Unfortunately, experience shows that senior management seldom is made aware of these types of costly operating inefficiencies. Yet their impact on profits can be significant," concludes Riedy.

"Another part of reconveyance" says Katia Heinlein, vice president and manager at Westmoreland Service Inc., San Diego, "deals with processing correspondence in a timely fashion. Handling of the reconveyance properly means following through on the rejections by the recording entity."

There are county requirements that, if not met, can delay processing. Some of the reasons recordings are rejected include not clearly sealed corporate seals, illegible notary seals and assignments done on dot-matrix printers, which some counties won't accept, according to Heinlein.

Pro-consumer legislatures

States are becoming more interested and more committed to consumer protection, and state legislatures are being pressured by their constituents to write legislation to protect the consumer.

But changes in state laws designed to offer consumer protection, have also made reconveyance even more difficult and time-consuming. Colorado changed its law in July 1992 regarding the release of mortgages. The state had always required the original documents, and in the past, a public trustee was allowed to execute the release. But with the change in state law, the new requirements impede the reconveyance process. The law now requires the signature of three mortgage company board members in the case of a lost note.

Every state uses a different document to release the lien. In many cases, there is a different form for a mortgage, deed of trust and security deed. In addition, if power-of-attorney arrangements are necessary for signing the documents, each state has different wording to match its statute. And finally, virtually every state requires a notarized signature of the officers signing the document.

No consistency

Each and every state is different and also very specific. And the mortgage servicer is responsible for all the details. In some states, you are responsible for releasing these documents within seven days. Sometimes it may take a servicer seven days just to locate the documents and notify the custodian of the payoff. Just to find the documents to begin the reconveyance process is a challenge. Based on our firm's experience, we've identified the industry norm as 30 to 60 days.

Because a property is not deemed reconveyed until it's recorded at the county recorder's office, the servicer is vulnerable until this happens. The timeliness with which a reconveyance is recorded is a portion of the reconveyance process that mortgage servicers cannot control; however, they can still be penalized for these delays.

"In times past, we've noticed that the most common reason county recorders reject a reconveyance used to be an incorrect fee," observes Christine Schein, a Westmoreland reconveyance specialist. Counties often change fees that cause a document submitted with the wrong fees to be rejected, or they may have changed the method of calculating the fee. Now, however, failure to provide a self-addressed envelope is the number-one rejection reason, and fee changes are number two."

So how can mortgage servicers protect themselves from reconveyance problems and penalties? The answer is specialization. For example, lawyers have become more specialized in the mortgage lending business, both in-house and extensively in specialty niches. "Title" became a specialized area that was "outsourced" in the 1950s and 1960s. More recently, we have watched escrow administration, foreclosures and bankruptcy be better served, in most cases, by outsourcing. We believe that the reconveyance process is the next logical function to be outsourced in the mortgage industry.

Outsourcing the reconveyance function simply means transferring the responsibility from an internal department to an entity outside the company that specializes in this specific segment of the overall process. The rationale for this is that these specialized firms are typically efficient at providing the service, and this can save the mortgage servicer money and human resources and help improve profitability. It also creates a "buffer zone" for litigation because both the custodian and reconveyance firm have responsibilities that are designed to protect the mortgage servicer, especially where private investors are included and documents are not maintained in-house. In our view, the benefits of outsourcing far outweigh the "glory" of having your company maintain its own department.

The biggest single detriment to the growing reliance on outsourcing is middle management's fear of losing power and people. In so many companies today, salaries are based upon the number of employees supervised and the "power" that managers have over other departments.

Reconveyance professionals have to be experts in payoffs and releases. Oftentimes, this experience assists the mortgage servicer with hidden benefits. The strengths and weaknesses of the mortgage servicer's various departments are easily recognized at payoff. For example, investor/servicer departments are benefited by having a third party that can evaluate proper documentation in the custodial area. The payoff is a good place to spot errors in portfolio purchase contracts because you can quickly identify compliance omissions that may become costly for as long as 30 years.

Often the in-house reconveyance specialist is a paralegal or notary and one of the company's most valuable individuals. But he or she is working in a "dead-end" area in most mortgage servicing companies. The growth areas for mortgage servicing companies are generally origination, purchasing, due diligence or marketing. Rarely is one of the most talented staff members going to be satisfied dealing in the non-profitable, non-growth area of reconveyance. Yet, as often happens, a valued employee is "buried" in this department because he or she does such an excellent job. This talented employee would likely create more value for the mortgage servicer working in a profit center instead of a cost center.

The outsourcing rationale

Today's competitive marketplace requires lenders to perform all mortgage functions quickly, efficiently and with the fewest number of employees. There is no better way of achieving this goal than by outsourcing non-revenue-producing work that can be done in less-costly fashion and with accountability outside the corporation. By following this approach, it allows the best and most talented employees to be put to their highest and best use.

Outsourcing the reconveyance function definitely qualifies under this rationale. Mortgage companies receive the services of highly trained reconveyance experts, often for substantially less than what they are currently paying in-house staff. Furthermore, by outsourcing this function, mortgage servicers can use the highly skilled people this frees up inside their companies to perform other, more central mortgage servicing functions. This whole approach holds great potential to increase a mortgage operation's profitability.

One of the hidden benefits of outsourcing is state law compliance. As documented in the earlier case study, having this hidden benefit can really pay off. But the hidden benefits are the virtually unnoticed compliance issues that don't result in fines.

Every mortgage servicing operation handles a huge volume of telephone calls. Substantial time is spent answering calls, following up on inquiries, returning calls and, finally, diplomatically handling issues.

The skills necessary to be an effective reconveyance specialist are critical because these professionals are in direct contact with the customer. Obviously, it is far better to have a skilled reconveyance specialist resolve a customer issue than have the borrower call his or her attorney. When a borrower is fed up enough to call an attorney it usually means the borrower has already tried talking to countless people inside the mortgage company, with no results, and his or her next step is to try and reach you at home.

The customer service employee in a mortgage servicing company is not that senior a figure in the typical corporate hierarchy. Once the supervisor discovers a talented customer service representative, what's the first thing that happens? That employee is promoted out of the department. Another benefit of reconveyance outsourcing is that you outsource a high-cost department. Customer service is one of the higher-paid positions in reconveyance because of the knowledge and experience required. When you outsource reconveyance, you get these talented, well-compensated individuals dealing with your customers, and there are real benefits associated with this.

This was vividly illustrated to me when the mortgage servicer's liaison to Westmoreland Service was heard "bragging" to her senior vice president that while their business had virtually doubled in the year since using a reconveyance service, they had not added a single person, let alone a customer service person, to the "payoff department."

The penalties for failure to comply with state statutes are listed in Figure 1. The related compliance issues of corporate reputation, customer service and professionalism are critical to your success. Isn't it better to have experts focused on these most important areas of compliance?

Whenever compliance is discussed, the ultimate question lenders always ask is: Are the laws going to get "stricter?" Most servicers in the industry believe that mortgage laws and regulations are going to continue to get more restrictive.

Consumer protection is going to get more attention from state and federal lawmakers and for good reason. The most important single consumer purchase, and certainly the most expensive, is the family home.

Has your company budgeted for stricter mortgage regulations? Most mortgage servicers probably have not. But one way to protect your company from the already stiff penalties that states have set up for reconveyance delays is to enlist the best staff you can to handle this area. There is no absolute insurance against costly compliance problems, but efficient, experienced reconveyance specialists give you at least a fighting chance to avoid one category of penalties.

As the responsibilities inherent in the reconveyance function become more intense and difficult, it may be beneficial to seriously consider new strategies for reconveyance.

Don Gravette is managing director of Westmoreland Service, Inc., San Diego.
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Title Annotation:reconveyance
Author:Gravette, Don
Publication:Mortgage Banking
Article Type:Cover Story
Date:Jun 1, 1993
Previous Article:Nuts and bolts of servicing sales.
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