Conference call on June 13 2017. Discussion on what should be in a whole loan collateral file.
Steve Hodgdon: Hi. This is Steven Hodgdon at Modern Asset Management. www.modernassetmanagement.com
Here again today with Dion DePaoli of Secure Debt Exchange Systems. We’re going to talk about another step in underwriting, which is understanding what’s in a collateral file, and what you need to know to make sure that you’re buying a good loan. We’re going to understand assignments of mortgage, and allonges, and what other collateral is in there. We’ll go through a file that Modern owns and Dion will go through the underwriting steps that are necessary to make sure we’re doing what we should be. All right, take it away.
Dion DePaoli: Hi everybody. All right, just to kind of start off with, when SDXS is engaged for due diligence, we get raw data from a seller. I’m going to show us what that raw data looks like and then what we do to transition that into a file that the investor can work with. This particular set of assets was a larger pool, so we received a lot of information from the seller. Some of that comes over in various pieces, whether it might be collateral files or servicing information, accounting history, and so on and so forth. Then we go in and we aggregate that information into each individual loan file. For this particular demonstration, we’re going to use this file here.
Typically the seller will send over a collateral file, and they can range in a variety of sizes. This particular collateral file has 583 pages, so there’s a lot of information in the PDF. First we pull out all of the documents that are important and noteworthy and we have a proprietary structure to our file. If you use us for due diligence, you’ll always see our asset file set up like this where we have a collateral folder, which is going to contain information about the mortgage, note, title, etx. Before I go through that, let me just point out that in every single file, there’s this SDXS asset folder index. If you didn’t want to just click on stuff and see what was in it, you can actually open this up and it’s a little index of what’s in each folder.
We have each of these files broken down. We have collateral, we have credit, which is going to be origination documentation. We have a legal folder, which includes bankruptcy and foreclosure if there is any. The folder’s still there regardless of any legal proceedings. We also have a property folder, which will contain some property information, and then the servicing folder, which is sort of an ongoing compilation of what’s been happening with servicing. We’ll dig into some of the details as we go through this. Then, in every file, we also have this digital asset data file. This serves as a quick look at the due diligence that was done. It looks a lot like most of our other stuff that we publish. Got a cover and we have the original data for the loan.
We have everything that you’d expect, address, borrower, original note information, current note information, and then further to the right will be a little bit more of the information that would be pertinent to forbearance modification, foreclosure, so on and so forth. When we start due diligence, SDXS orders broker price opinions. We get those from a national vendor that we’ve been working with for many, many years. We also order title reports. Generally, those are owner encumbrance reports. They go back to the last known owner and that report will go over the last ownership change and then any other liens or encumbrances that are affecting title. We’ll take a look at that in just a second.
Our first step is we’ll order those vendor services and then we will start to sort the file. Most of that is going to start to end up in our collateral folder. The collateral is going to be a deed of trust, or a mortgage, the security instrument, depending on the state. This particular asset has a deed of trust. Just as a side note here, deeds of trust and mortgages are instruments that get recorded. We don’t necessarily have any concerns if the copy that we have doesn’t have the recording stamp because once we see that it’s recorded in our title report, it’s the same document.
From there we’d look for the promissory note, which doesn’t get recorded. The promissory note is one of the few pieces of documents that we need to ensure that we have an original. Obviously, as a function of due diligence, you can’t really do that. If the note is missing, it’s not the end of the world. You can do lost note affidavits and then use copies of those as well. The takeaway there is even if some things might be missing from files, there are procedures to handle any of those defects that cure the concerns that might be present with any investor.
Steve Hodgdon: Let me just jump in here for a second. Particularly if you’re new, and this was my experience when I was new is, you won’t know what’s missing in a file and you’re told that you can overcome breaks in chain and you can overcome a missing note. Yes you can, but sometimes you wind up having to pay a lot of money to an attorney to make an appearance to get things done. I would think that part of your work is making sure that you’re as clean as can be on the way in, and we don’t have to buy broken loans. There are plenty of loans that aren’t damaged that can be bought.
Dion DePaoli: Yeah, that’s a good point. Let me come back to that because I’ll show everybody, again a little bit of the process and that gets us to that finish line prior to purchase. Here we’re going through the information the seller provided us and we’re pulling out things that are useful, which will be all the collateral documents. You see this particular file has a good set of collateral documents. We’ve got a deed of trust, we’ve got a note, we have riders and amendments that were attached to the collateral documents. We have a pre-payment rider, we have an amendment to the note. We have an adjustable rate rider and then we also have a modification that took place on this loan at one point in time.
As a side note, it’s always a good idea to ensure that either the modification was recorded, or that when you get one that you record it so that you give constructive notice. You’re also going to ensure that you don’t ever lose the modification. Then you’re going to have a title policy. In some files you will end up with a title commitment and you can use the commitment to get a policy, but what you really are looking for is the actual title commitment, at the very least the guts of it. When the loan closes, you’ll have the actual schedules that are inside the policy and then there’s a jacket that goes with it … There’s the jacket. The jacket gives some other clauses and so on and so forth.
You need one of those two things to protect the superiority of the instrument that you’re purchasing. As we sort all of this out, we are ensuring that the data that was provided to us at bid is the data that is correctly coming from those documents. For instance, the original note amount needs to be the original note amount from the note. And any modification data that was supplied needs to match up with the modification documents that are in the file as well.
We will go through and pull some of the credit file information. We don’t overly segment this, so it really depends on what the seller’s original file is. For this particular file, it didn’t have a tremendous amount of credit documentation, but we have the original 1003, which is the borrower’s uniform residential loan application. This is nice to have – we get a glimpse of what the borrower is doing at the time of origination. Whatever job they have could be changed. They may have lost their job, etc., but this gives us a good idea of where they came from, what they were doing.
This will also tell us a little bit about the purpose of the loan. This particular loan was a refinance. We understand that they’ve obviously been in this house for a little while, 1997, and that might give us insight into dealing with the borrower in ongoing servicing once the loan is purchased. A 1008 is called a transmittal summary. It’s used to take the application information, that origination and send it over to underwriting. It’s more of a summary page of what’s going on with the borrower, what’s supposed to be going on with the loan. This particular file, we had certification and then we had a truth and lending act that was un-executed.
Very rarely are you going to tap back into the credit file to use for anything in foreclosure, defense. You’re usually not going to go too far into the original credit, provided you have a good standing security instrument and you’re holding the note. In this particular file we didn’t have any legal work, so there’s nothing to talk about there, but if there was any bankruptcy information or any foreclosure information, we’d drop it in there.
Depending on the seller, you may have a series of property inspections. You might have a series of broker price opinions that have been ongoing since their ownership. In this particular file, we can see that we have the original appraisal back from origination and we had the seller’s BPO, which was validating the BPO number that they gave us, and then this BPO report as of July, was ours upon purchase.
The next folder down is our servicing folder, which tends to be a catch-all. You’ll have correspondence that goes out to the borrower. We tend to put any insurance information that’s in there. In this file, there was a lender place insurance letter that went out. We purchased this file in July and one month later, the homeowner’s insurance was expiring, so we made note of that. Then, dating back to the modification that’s in place, this was the original proposed terms that went over to the borrower before the modification was entered into. These added authorities were a situation with this particular borrower where the daughter was put on, and added to be able to deal with the account in absence of her father from being able to communicate with the servicing company.
As we sort through all of that, we get it into our own little buckets, then we really start digging into the file. It’s organized, we understand what’s there, and with that organization, we also begin to identify what’s missing, and we’ll start to take notes. That’s really when the asset data file will start to take some meaningful structure. We generally start by grabbing all of the servicing notes – you see a copy of the servicing notes here. You may also find an independent copy in servicing folder, but it’s here again, for the quick reference. We then start reviewing the servicing notes. This set of servicing notes goes back three years, 2016-2013.
Reading through the servicing notes takes a little bit of time, but it gives you a good idea of what’s been going on with the file. For instance, as I just explained, we saw in the servicing folder that they were adding an additional account bearer to be able to deal with the servicer. This is the daughter called in with authorization so she can pay and deal with the servicer as necessary in her father’s absence, so they provided her with a form to do so. She then can help service the account, which is obviously in everybody’s best interest, right?
From time to time when we go through these servicing notes, we may see concerning comments. The borrower’s doing something or something’s missing in servicing, we may go ahead and highlight that independent cell so that as a quick reference for you as the investor as you come back and you’re scrolling through this, maybe you haven’t had to touch the file in a couple months, it’ll give you a little scroll and you can say, “Oh yeah, okay, now I’m starting to remember what was going on in this file,” which happens for us all the time. You bought the loan, and then it’s four or five months later there’s a bump in the road and you’ve got to revisit and remind yourself, who is it, what was going on, what were some of the issues, so this serves as sort of a quick reference guide.
As we go through, we develop our own commentary, which ends up serving as direction to the particular investor. Oftentimes when I go back through these, I immediately turn to our comments and go, “What’s the snapshot of what was going on with this loan when we bought it?” Again, this is a pretty easy, breezy file. They’ve been paying. There wasn’t a lot of turmoil here. We made note that there’s an excessive amount of judgments. Daughter was added to the account. They had been paying on time. They have a substantial amount of equity, and they have a decent term left. All in all, this was a really a pretty decent loan.
In situations where the loan may have a little bit more hair on it, we’ll have a lot more detailed notes and we may address particular disposition strategies or concerns. If this was a nonperforming loan, if there were liens and/or encumbrances on the title, we may address those and briefly talk about what you as the investor should be concerned with if you were to pursue some of those strategies.
I’m going to pause there to go back to the folder so that we can start to take a look at the title report, which is something I know everybody likes to take a peek at. This was Nationwide Title Clearing, one of the vendors that we use. We also use Pro Title. When we get this owner and encumbrance report, it tells us is who the property is currently vested in. This is our borrower, so this should match who’s on the note mortgage, obviously the property address, right? They’ll generally give us some tax information, which is going to be current tax information and aggregate back through any delinquent tax information.
I know a lot of folks spend a bunch of time rummaging through county websites. We generally don’t do that. We generally rely on our O&E report to tell us what the back taxes are. In this particular case, this account was being handled pretty well by apparently the daughter. This deed information is the sale, so this is how our borrower came into ownership of it. The grantor was the one who sold it to our borrower who is the grantee. Obviously at one point in time here there was a marriage scenario that needed to be addressed. That doesn’t create any issues for us. I’m not going to go through every particular scenario here, but I think one of the most controversial ideas is when we get into the chain of ownership of the mortgage itself.
Before I go through that for those people that want to do a little light reading, on our website we have a blog portion with some articles on it. One is called “Assignments and Endorsements.” An endorsement is what you’re actually doing to the note. An assignment is what you do to the security instrument. Endorsements that are on separate pieces of paper are called allonges. An endorsement, which we’ll take a look at this one too, to see if there’s an example, but allonges didn’t come around until the late 1980s and they were a function of securitization.
An allonge is really just a “pay to the order of.” It’s the same thing that you write on the back of a check when you endorse that check. The article has some pretty substantial details on what the important ideas are when it comes to the nature of an endorsement and the nature of an assignment, what it does, what it doesn’t do, what you should be concerned about. If you have some time, you’re curious about it, give it a read. It’s out there on our website. Www.SDXS.US
Now we’re going back to the chain of assignments for this particular loan. We will take the title report and summarize that for the sake of the investor into the asset data file. That is the summary ownership. This summary ownership will be exactly in line with what we have on the left for the mortgage information. We see the originating lender was New Century Mortgage. The mortgage is, it syntax the lender that we’re not looking for the assignment because they’re the one that’s actually in the security instrument itself. This particular mortgage was a mortgage made by New Century with a nomination to MERS, mortgage electronic registration system. At some other time we can talk a little bit more about MERS, but MERS acts as an agent for the mortgagee. They do have power to assign out the legal interest of the loan.
The lender was New Century. MERS then assigned out the loan to residential funding corporation. Here we have one column that’s talking about whether or not the AOM is recorded and another column on whether or not there is an accompanying allonge or endorsement. You’ll note that MERS has a recorded assignment, which coincides with our title report right here, but it doesn’t have an accompanying allonge. That’s because MERS doesn’t have an equitable interest in the loan. They cannot endorse the loan to anybody else. They can assign.
The next party with both legal and equitable interest was residential funding corporation, and we made note of the defect of the lack of recording of this assignment, and we did have the allonge to correspond. RWLS holdings took in an assignment as a corrective intervening instrument because of the lack of this recorded AOM. In other words, what happened here is New Century made the loan, put it with MERS, Residential Funding Corporation at one point in time owned the loan. That AOM was never recorded. It might have been lost because it wasn’t recorded, which wasn’t unusual back in the day. As such, the seller to us went back to MERS, got a new assignment that … You’re sort of skipping over Residential Funding Corporation and you’re still consolidating the ownership into RWLS, so it still gives them standing. That was a corrective instrument that resolves the chain. There’s different ways to do that depending on whatever is going on from up the chain.
As we go through this, we look for that. Then, as we complete this due diligence, we create with the seller what’s called a stipulation clause. In a full sentence, it is stipulations to close. For this particular loan, we would have stipend for anything that was missing. We would have said a condition for us to buy this loan would have been, we need to get this allonge, we need to get this assignment. I can show you an example of that for this particular pool.
Steve Hodgdon: Just to jump in, the real reason that this is important is if you go to foreclose, that you don’t have standing to execute on the property unless it’s been assigned to you in proper fashion and the chain is complete. Because of all the robo signing stuff that was going on in the early 2000s, people really, really pay attention to this and are very happy to kick you out. You’re the bad guy, to protect the local voting constituent who’s saying that these people don’t have the right to take my home from me. It’s a big deal to take somebody’s home and so you want to make sure you’re doing everything you’re supposed to. You shouldn’t buy anything that you can’t execute on. It’ll mean you’re just buying an unsecured loan.
Dion DePaoli: Yeah, just to add to that idea a little Steve, depending on the counterparty that you’re interfacing with and the quality of the file, you generally wouldn’t … There’s always going to be stuff missing.
This is the pool workbook. We do everything from a pool and then we break into the individual loan. This is all the aggregated data that came through on the pool. We had a list of missing documents, we had original bits to the seller, updated data from the seller because there’s usually a gap between the data and the due diligence data. This is all the BPO data. This is all of the common history for all of the loans in the entire pool. This is our stipulation list for this trade.
I don’t think a lot of buyers actually get to this. I think they just take the file and they’re done. We had to go back to the seller and we had to stip for all kinds of stuff. We were missing force place insurance. We needed stuff to be explained to us that was in the file for accounting. We had some AOMs that were missing. We put it over in one nice, complete list and we say, “Solve all this to our liking and then we’ll proceed to settlement.” That’s really the cycle that we go through. We bid, we get an award, we go through due diligence, the output of that due diligence, our stipulations to the seller to complete funding. Then once those stipulations are met you start moving through the settlement process, which would be reviewing the contract and setting up final pricing and so on and so forth.
Steve Hodgdon: That’s a lot like you’re buying and house and you go through a house and you have a list of things you want the seller to do in order for you to buy the house. So much of the stuff traded in the marketplace, particularly the lower bandwidth, is sold as is, where is, with no representations of warrantees or very limited guarantees. I hear that at paper source conferences and meet-ups where people went in and they can’t believe the problems that they’re trying to dig out when the seller told them, “Oh, it’s all okay.” That is all okay for the experienced note investor who will discount the note knowing that he’s going to have to jump through a bunch of hoops to get it done, but it’s certainly not a place, I think, for me when I was brand new. It was a big problem, my first note.
Dion DePaoli: That’s very true. Some of these lower level trades or lower bandwidth street level trades, the files have been skinnied down so much. They’ve traded, they’ve traded, they’ve traded, they keep getting skinnier and skinnier and skinnier and you get to a point where the right stuff’s not in it anymore. This is one of those cases where a lot of the stuff that you see here is stuff that we’re asking for that would be from current servicing. As an example, in this actual trade, these were three loans that we had to deal with differently because they were owner financing. Two of them got kicked out because of due diligence. We actually didn’t settle on them because they were not able to meet the stipulations that we put forth, so we didn’t buy them. We gave the seller an opportunity to cure the defect. The seller couldn’t cure the defect, and so they got kicked out.
As another example, this particular loan file, we had a defective AOM chain that we addressed and the seller was unable to deal with it on the first go-around, so we had to continue to work on this. I make it sound like it’s, hey, you give them a list and everything gets solved. That’s not always the way it goes. You generally want to have the seller be responsible for providing you with everything that is necessary for you to take proper legal and equitable ownership of the loan. You don’t want to be the party that they tell, “Oh, you’re going to have to go chase all that stuff down.”
If it’s an institutional guy, they’re going to have better connections than you to be able to go track down AOMs or get things signed by parties that you don’t know that are more than likely out of business for several years. You put it on them, make it a condition of purchasing the loan and if they can’t meet it, then you just don’t buy it. You have to be disciplined with that idea. Just like a lender is disciplined with requirements from any particular borrower in terms of income asset down payment. If those things aren’t met, they don’t get the money. That’s that. If you stick to that disciplined approach, you don’t have to sweat this stuff. We bought all these loans and all of this is in the past. We don’t go back to this stuff.
There’s always a little rigamarole as the transaction closes in terms of getting some of the newer AOMs over into your file and then out for recording. Sometimes there’s some clerical errors and stuff like that, but once you get past that, it’s gone, you’re moving forward. It’s difficult enough to deal with borrower in distress loan, you don’t want to be having to go back and touch AOM chains and deal with all of that potential headache.
Let’s go back to this particular file. Real quick, before I leave the title report, there’s some other niceties to some of these O&E reports. Generally what will happen is, no matter who your vendor is, they’re going to give you some sort of summary report in front of the actual documents. We’ve got a copy of the deed. We’ve got a copy of the disclaimer deeds. There’s going to be a copy of the actual recorded mortgage in here, all of the recorded AOMs. When we go through the file, as an example, you’ll see that in our collateral folder, we have this sub-folder called assignments and allonges. The allonges are going to be the allonge chain that we were documenting over here, but sometimes we’ll have one single AOM file will a couple pages in it. Maybe we’ll have several AOMs.
For us, this isn’t that important because I’m not overly concerned if we have a digital copy of it, I’m concerned if it shows up on our title report because if it’s not showing up on our title report, it’s not stamped. It was never recorded. That’s my concern. There’s a great example, right? Here’s a copy that’s recorded, there’s the stamp, and here’s a copy that isn’t. If this is sitting in file, that doesn’t give me any peace of mind until such time as I see it over here in the title report and I can validate that it’s recorded. Adversely, when we have defects in those chains, we have to do this every so often because your title report providers are human too. They may miss stuff.
When I look at a chain and I’m like, well wait a minute, I’ve got that recorded. I’ve got a copy of that recorded AOM right here. You send it back over to the title company and you say, “Hey look, this is missing from the report. It’s obviously recorded, it’s obviously part of the chain, please update the report and send it back.” That kind of stuff happens. You also do that same kind of shuffle back and forth with the seller too, where they’ll be like, “Hey, look, it’s recorded. Somebody screwed up on your guys’ side.” The takeaway here is what you find in our file when we go through this, and I think a lot of buyers make this mistake, is that they go start looking through the data that the seller gave as if that’s the data that matters. That’s not the validation data. The validation is the title report. This is just nice to have.
The allonges, we want to make sure that we have copies of because these are what are necessary. These don’t get recorded. These should be in files. I want to give an example of an actual endorsement… This is an endorsement. You won’t find allonges because they’re on the note. That’s the preferred method, right? Technically speaking, you don’t have to make an allonge. You can just put ‘pay to the order of’ on the note. The beauty of that is, you won’t ever lose the endorsement because it’s always on the note and you shouldn’t lose the note. This is an example of the endorsement and we were to look at this particular file, since we’re here.
If we look at our ownership summary, we marked it. Sometimes I’ll mark it and say endorsement and sometimes … I’ll mark it as an endorsement on my note.
I want to make this point because again, I think some of this stuff is confusing to folks. These endorsements may not coincide with an actual assignment. Let me say that again. Steve can own a loan and he can endorse the note to me. What the endorsement’s doing is it’s assigning the cash flow, the equitability of the loan to me. Maybe he’s using the loan as collateral, which is done very often. Steve isn’t relinquishing ownership. He’s assigning the cash flow to me and you do that through an endorsement or an allonge.
Steve Hodgdon: When I would sell partial, that’s how you do that.
Dion DePaoli: Yeah. This form, especially with conventional loans, this is very common. They were swapping money back and forth, they were syndicating some of these notes with other investors and so on and so forth. However, you can have an endorsement without there being an assignment but you can’t have an assignment without there being an endorsement. You’re going to legally transfer the loan. I’m going to legally transfer the loan to Steve. I need to also give Steve that same equitability.
Once you read the article that I mentioned, you’ll have some ideas about cleaning that up. If you legally own the loan, just like legally owning the property, a piece of real property and you give a tenant the equitable right of possession, you still legally own the property and you can take back that equitability of possession at some point. That’s sort of the general idea.
All right. Last couple things here that we kind of go through. I guess we’ll just use this one. We can dig into our comments. This guy had inconsistent pay history, divorcing his wife, lots of debt on subject property, minor repairs noted. Went through a modification and then here’s us giving some disposition advice. The one part that we didn’t dig into was the accounting history. You should get accounting history even with defaulted loans. I think we do a lot of work with investors post-purchase. They have us do some due diligence on what they bought because they want to know what to do with it and want to make sure that they didn’t buy a lemon.
You should always have an accounting history. Even if a loan is not performing, there’s still accounting that’s taking place because advances are being made, etc. This is the accounting history for this loan. We can see that there are payments. We’ve got a due date, and when the actual payment was done. We set these calculations up so they’re easy to read. Then how those are applied to the account. You know what will be a good little example here Steve, now that we’re thinking about it, your friend and mine, the bankruptcy file.
Steve Hodgdon: Oh yes.
Dion DePaoli: This is a good example just to give you an idea of why it’s important to get this information. This loan was in bankruptcy and upon our acquisition, we understood that there was funds that were being held. This has some ongoing work from Dion because we had to get to the bottom of some stuff. We had some money sitting in what’s called un-applied. In other words, money came in from the bankruptcy trustee and it wasn’t being applied to the account. That was exciting upon acquisition because when you buy the loan, you also buy those funds that are sitting in un-applied because those funds can’t be released unless they advance the payment date to the benefit of the borrower, so they would transfer to the new owner.
Long story short, we had a very knockdown, drag-out fight over this loan because the servicer that was working on this loan for the seller during our interim servicing period, which is the period of time after the actual settlement, before our servicer takes over. They treated this loan unilaterally. They made advances that were outside of standard bankruptcy procedures. They applied funds to release them to their advantage and we had to go back through this. It took me, what, three or four months?
Steve Hodgdon: Four months, yeah.
Dion DePaoli: Yeah, four months. BK loan mistreatment. We had to go through this accounting and go knock on the door multiple times to get a resolution. You can see that the way the servicer treated the loan changed the value of the loan for us. That ended up being either A, buy the loan back from us, so it’s important to have those reps and warrants in your contract. This wasn’t the seller doing this, this was their servicer. Or, B, give us the difference. Make us whole since your servicer screwed up, this was the state of the loan. If I would reverse engineer it back to purchase, this is the state of the loan and you owe some money.
The takeaway here is, always get your accounting history, even the non-performing loan. For those that don’t think about that too much, when you go to get your judgment, when you’re filing for your judgment, you’re actually standing in front of the court or the referee or the trustee and you’re saying, “This is what’s owed to me.” If you can’t prove that, if that gets challenged and you can’t prove that, you’re not going to get to claim those funds. A lot of sellers will put the total due into their bid data and they’ll try to force street level buyers to level up based on how much is totally due. The total due is not the same as what the judgment’s going to be.
When sellers come to us that that kind of stuff, I usually knock it down within 10 seconds because unless you’re going to prove all of that up front, I’m not using that. We’re going to use is the unpaid principle balance. You may be just making advances on your own ignorantly, Mr. Seller and your attorney’s over in left field filing for a sum that is different than what your total due is. The point of the matter is, those things don’t always add up and it’s important to have accounting history on defaulted loans.
Steve Hodgdon: In that bankruptcy, we thought the loan balance was what the seller thought and what their servicer said the loan balance was. When we ordered it at Security National, they went thought all that diligence work of recalculating it and looking into the bankruptcy record and seeing that the loan had been changed a bit and that payments … It was, like I said, it was months to get it sorted out, because of choosing the right counter party to buy from, and your relationship with them. They made it good and the borrower was making his payments like he’s supposed to and to his benefit, the balance was reduced, what, about 25%?
Dion DePaoli: Yeah, yeah. It was a lot. Yeah.
Steve Hodgdon: He’s got another $10,000 and he owns his house outright.
Dion DePaoli: This was a terminating bankruptcy plan, so there is no more loan after the bankruptcy plan is over. That was the issue. That was the treatment issue that when they applied the funds, they weren’t applying it like that. This bankruptcy plan pays the loan to zero.
You have any questions you don’t think we addressed here, Steve?
Steve Hodgdon: Let’s go back to, when something’s missing, how do I know that it’s okay that it’s missing. There were unrecorded breaks in the chain. That was a big deal. Some things are curable and some things aren’t. There was a time that you could simply just type up an affidavit and stamp it and it’d be good. Courts don’t take that anymore. What do I have to have? What do I absolutely have to have?
Dion DePaoli: That’s a good question. You have to have a recorded security instrument, so it’s going to be a deed of trust or a mortgage. You have to have that. If you don’t have it recorded, you don’t have any idea of what you’re actual standing is. It doesn’t mean that it’s invalid, it just means that you’re going to have to fight a lot over somebody who will say, “What are you talking about? I’m in first position.” You want a recorded security instrument. You’re going to validate that through your title report.
You want an original note and the original note is going to be in your file. You’re not going to be able to have peace of mind that it’s actually the original until you put your hands on it post-settlement. When you’re purchasing the loan, you need to make sure that’s a stipulation in your contract, that it says the original note and not a copy of the note. If the original note is missing, then that needs to be accompanied by a lost note affidavit. A lost note affidavit is a legal instrument that is created by the entity and person who lost the original note and says, “Hey, I had it in my hand. I lost it. I affirm I lost it and here’s an exact copy of it, and here’s my sworn statement.” That turns into the usable promissory note moving forward.
Those are the two things. Then, you really want to have a title policy. This ensures the lender’s lien position, which becomes very valuable if somebody steps forward and says, “No, I’m in first position.” You want the title policy. If you don’t have the policy, you can use the commitment. It has a number. This is both documents. This particular document has both the commitment and the policy in it. Sometimes we’ll just group them up, easy to keep track of. If there’s a modification, you need a copy of the modification. You can’t live up to terms on something that you don’t have a document that’s executed. Preferably these are recorded. This particular seller didn’t record them. Some institutional folks don’t. When you get these, you should record them. If you have a loan that is modified and it falls into default and you’re going to go through some legal proceedings, your attorney will probably tell you to record the modification before they file any complaint or move forward with the legal process.
Then, again, as we talked about with the AOMs, you don’t necessarily have to have those in the file. You have to have those in your title report. Anything that you can’t link up your title report to, you need to go back to the seller and put it on them. When you go through these chains, it it goes from one party to the next. It should be party A then sells to party B and party B sells to party C and it should be a successive chain of title. That’s why we do that ownership summary, so that it’s easy for people to understand.
I think what messes people up with assignment change is when things get put into securities. 80% of the loans in the conventional market were put into security at one time. They’re held in a trust and the trust is managed by US National Bank or PNC or somebody, it’s in a trust and then it comes out of the trust because it fell into default, etc., and that’s where it starts to get a little confusing. Make a line, say, “This is where I started. I started with the lender, who did it go to next? Is that assignment recorded.” That’s where you’ll see that you have a broken chain. If you’ve got a lender and then, all of a sudden, you’ve got this other weird third party that you don’t have an assignment that’s recorded or you have this trailing assignment copy that’s sitting in your file, that’s not going to be sufficient.
Again, the copy of the AOM in your file, really is meaningless. If we saw that, we’d go back to the seller and be like, “Hey, find that original, get it recorded because now you need to tell the county that that is an intervening assignment.” That assignment belongs somewhere back in time in order for the chain to be in proper hierarchy. Then you need to have your original endorsements or allonges. You really don’t have peace of mind knowing that those are all present until you get your file. The one thing that you need to have the physical document for is going to be the note, all of its endorsements and all of its assignments. That’s the one thing that needs to be in the file. Everything else can be in digital format.
Steve Hodgdon: Right.
Dion DePaoli: You can, if a mortgage is missing in your seller’s file, use a copy, you can get a certified copy from the county it’s recorded in. It’s not gone. The benefit of having it recorded is it’s there forever.
Steve Hodgdon: On the recorded documents, the system of record is not your folder, it’s not your file, it’s what’s at the county.
Dion DePaoli: Right.
Steve Hodgdon: You can always go to the county and pay $2 a page, or whatever that local county charges, and reconstruct it, but it’s the stamped copy that makes a difference, otherwise you don’t have standing.
Dion DePaoli: Yeah, you could almost go so far as to say a recorded AOM no longer has a utility because it’s recorded. It’s now done its constructive notice. Having it in your hand is of no consequence once it’s of public record. That’s really it. Everything else can be digitized. You want to have accounting history so that you can support the claims for what’s due underneath the note. You want to have the note and the allonges, and in some cases you can even argue a broken chain of assignments, providing you’re holding the note. Shocking, I know. It’s in the article. That’s the critical piece of information.
Everything else is nice to have. Legal file information, bankruptcy foreclosures, you can get from the attorney. You can get bankruptcy information from Pacer. Original credit information isn’t really changing the world. Every once in a while there’s a situation where you might be asked to produce a HUD or closing statement, but they’re few and far between. The rest of it’s really just due diligence data, property information, servicing information, so on and so forth.
Steve Hodgdon: Let’s bring this thing to a close. You can contact us at email@example.com and firstname.lastname@example.org, We’re here to help you buy notes, solve problems with existing loans. We’re looking for partners to join us in purchases. We have access to what we think is better quality paper than what we see at some of the larger places. We’re looking to build a tribe of like-minded folks and we hope you reach out to us. We want to thank you all for your time today and we’ll see you the next time. Thanks. Bye.