Magazine article Mortgage Banking

A Tip for the Frugal Mortgage Banker

Magazine article Mortgage Banking

A Tip for the Frugal Mortgage Banker

Article excerpt

Here's a secret on how to save your company some money and headaches if you issue residential mortgage-backed securities (MBS), particularly Ginnie Maes. The secret doesn't involve either fancy front-end systems or electronic loss-mitigation tools. It's reengineering at its easiest, but, admittedly, it's not sexy. Actually, we're going to talk about paper.

Most mortgage lenders do not know they can save money simply by amending their closing instructions to require use of the American Land Title Association (ALTA) Short Form Title Policy for single-family residential mortgages. The Short Form, which is available in nearly all jurisdictions, is a one-page policy that incorporates by reference the boilerplate insurance coverage of the standard long-form policy. Schedule A basically identifies the insured lender, the amount of coverage, the borrower, the property and endorsement coverages. Schedule B contains preprinted exceptions from coverage and affirmative coverages (an addendum may be attached in limited instances to identify additional exceptions).

Your socks are still on, I'm sure. But savings is savings. I'll explain.

A cornerstone of our secondary market system is that critical MBS pool documents are generally reviewed and held by private third-party custodians or by bank affiliates or corporate trust departments of MBS issuers to make sure that required documents meet controlling guidelines. It's a check-and-balance approach. Ginnie Mae has a two-step certification process--initial and final certification. Recertifications are necessary when custodians change. Fannie Mae and Freddie Mac, which require fewer documents, have one pool-certification step and require recertifications. In all cases, the legal burden remains on the lender to enforce the mortgage obligation.

Custodians are retained by mortgage lenders, not the agencies. However, each agency has established its own certification and general mortgage eligibility guidelines. Although these guidelines have been revised and clarified over the years, questions about the sufficiency of documents invariably arise because the requirements sometimes differ among agencies. Many different people are trying to apply the guidelines, and guidelines simply cannot address the myriad variations in completing documents and the intricacies of state law. Not being either lawyers or real estate professionals, custodians do not want to exercise discretion as to whether a document complies with stated guidelines. When questions arise about the sufficiency of a document, an exception is usually taken and the document is returned to the mortgage lender for corrective action. This costs the company time and money.

The agencies differ in their approaches to title. Under Ginnie Mae's guidelines, custodians must review title evidence (generally title policies) as part of the final certification process. Ginnie Mae enforces tolerances as to the number of pools that may lack final certification at any given time. Ginnie Mae requires issuers to post letters of credit when its tolerances are exceeded.

For conventional conforming residential home loans, Fannie Mae and Freddie Mac require their customers to warrant that each securitized loan is a valid and enforceable first lien and to provide sufficient evidence of title; again, this is generally title insurance. The title evidence is not part of the certification process. However, issuers of Fannie Mae and Freddie Mac MBS increasingly contract with their custodians to store title evidence, and the documents (usually title policies) are reviewed to a greater or lesser extent for sufficiency. …

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