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Welcome to the 21st century.

It's almost funny. While so many aspects of the secondary mortgage market are highly sophisticated and high tech, the backroom remains mired in 18th-century real estate law and pounds of paper. Contrast the need to execute and sometimes record mortgage assignments with coupon stripping and repackaging of mortgage cash flows, book-entry issuance and transfer of mortgage-backed securities (MBS), and electronic funds transfers for purchases of mortgages. We can move interests in securities electronically. We can move money electronically. But we still have to move interests in mortgages manually.

During MBA's Document Custodian Conference in Atlanta this past September, a great deal of discussion focused on assignments of mortgages and deeds of trust. Although the policies of Fannie Mae, Freddie Mac and GNMA (the agencies) vary somewhat, execution of interim assignments is generally required when mortgages are transferred between unrelated parties in transactions before the ultimate sale of mortgages to Fannie Mae or Freddie Mac or the issue of a security guaranteed by GNMA. Assignment also are necessary when servicing is transferred.

Mortgage assignments, whether they need be recorded or not, just don't fit in with today's mortgage banking industry and the volume of transactions transferring interests in mortgages. These transactions encompass bulk transfers from mortgage originators to wholesalers, transfers to wholesalers of table-funded loans closed in the name of a mortgage broker, sales of mortgages to Fannie Mae or Freddie Mac by retail or wholesale lenders, transfers of servicing, and pledges of loans to warehouse lenders. In 1991, sales of mortgage servicing alone totaled approximately $200 billion.

Meeting assignment requirements is expensive. When assignments must be recorded, expenses soar as local governments seek to balance budgets by increasing service fees. In addition to in-house personnel expense and recording fees, delivery of assignments involves mail and courier costs, custodial costs, notary costs, etc. Are assignments really necessary? If they are necessary in today's legal environment, can that environment be changed to permit a new mechanism consistent with the evolution of mortgage banking and advances in technology? First, though, what is an assignment and why is it considered necessary when selling mortgages and transferring servicing?

The creation and transfer of mortgages and notes are governed by state law. A mortgage transaction involves two documents, a note that evidences the borrower's personal obligation to repay a mortgage loan, and a mortgage or deed of trust that gives the lender a security interest in the real estate securing the obligation. The general rule is that the mortgage follows the note and the party that holds the note is entitled to enforce it. This is the case where possession is more than nine-tenths of the law. However, in those states where "mortgages" are the prevailing security instrument, assignments are necessary to transfer interests in mortgages. In those states where deeds of trust are the generally accepted security instrument, executed assignments generally aren't necessary. Nonetheless, the agencies appear to favor such assignments to establish a clear chain of title although they may not require recordation of the assignments.

The effect of state recording laws further complicates the situation. Recordation of interests in real property in the local land records provides constructive notice of a party's interest and is binding upon third parties. Clearly, recordation of mortgages gives the mortgagee a first-priority lien interest. Although some case law exists suggesting that recordation of assignments is necessary to protect the mortgagee's interest, some legal commentators have analyzed state law and have argued persuasively that recording statutes, when carefully analyzed, don't apply to secondary market transfers of mortgages. Rather, to the extent recording statutes apply to assignments of mortgages, they are geared, not toward resolving disputes between mortgagees, but toward protecting borrowers in transactions with mortgagees. For example, the recording statutes would protect borrowers who provide payoffs to the record mortgagee rather than an undisclosed transferee. However, it would seem that the federally required notifications of changes in servicers address the potential problems more directly and efficiently.

To put the assignment issue in context, let's take a relatively ordinary mortgage banking scenario in a "mortgage state" where recordation is required and review the assignments that one of the agencies requires. If the mortgage is table funded by a wholesaler, there will be a recorded assignment from the mortgage broker to the wholesaler. If the wholesaler sells directly to the agency and sells the servicing concurrently to an unrelated servicer, there must be a recorded assignment from the wholesaler to the servicer. Then, there must be an unrecorded assignment from the servicer to the agency. Next, let's assume that, after a while, the mortgage servicer wants to add some capital to its balance sheet and sells the servicing to another servicer. In some states that require an orderly chain of parallel transfers by assignment and note endorsement, the servicer would have to record the transferor servicer's assignment to the agency and an assignment from the agency to the new servicer. Last, the new servicer would have to execute a new unrecorded assignment to the agency.

The agencies have been sympathetic to industry concerns about the forests of paper that have been necessary to meet their assignment requirements and have made some concessions. Yet, because of the uncertainty created by variations in state statutes and case law, the agencies have understandably tended to be conservative in order to ensure that their interests are protected. Although legal commentators might provide persuasive arguments as to why recordation is unnecessary, those arguments aren't binding upon state courts. However, notwithstanding the recent "tinkering" that the agencies have done with their requirements, the basic system remains intact, inefficient and costly. It definitely is time to explore alternatives.

What are some realistic alternatives? It's too early to make specific recommendations. It would seem appropriate for the mortgage banking industry through MBA to work with the agencies and other interested parties, such as the real estate bar and the title industry, to identify 21st-century mechanisms for eliminating the paper while safeguarding the legal interests at stake. MBA is ready.
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Title Annotation:recording of mortgage assignments' incompatibility with modern mortgage banking
Author:Slesinger, Phyllis K.
Publication:Mortgage Banking
Date:Nov 1, 1992
Words:1001
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