Magazine article Mortgage Banking

Welcome to the 21st Century

Magazine article Mortgage Banking

Welcome to the 21st Century

Article excerpt

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. …

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