Dimon Lil wrote:
Please can we clearly discuss whether the post below is accurate or anywhere near accurate? I put the link to the place I found this and some posters say it way wrong, but are not saying why it is wrong.
Some quick points:
Original Mortgage Loan Documents are considered legal tender.
Not quite - and there are variations from state to state - the promissory note is a financial instrument and the UCC governs promissory notes. "Legal tender" is something used to extinguish a debt.
Any entity bearing an original mortgage loan document is entitled to demand payment for that loan
Again, not quite - there are recordation and assignment requirements that also vary by state
The company servicing the loan does not have to be the entity holding the original mortgage loan document
i. A servicing company may collect payments and hold them internally until the bearer with the original mortgage loan documents calls for payment
Rarely. Payment terms are governed by the Pooling and Servicing Agreement (PSA) between the servicer and the trustee for the securitized trust.
ii. A servicing company works for the holder/purchaser of the original mortgage loan documents, NOT THE BUYER
Maybe- unless the mortgage and accompanying note have been sold to another entity that retains the servicer to perform those functions. Again, the servicer is working under a contract with the trustee of whatever trust holding the notes and mortgages that secure them.
All of the above becomes confused if and when an intervening party like MERS becomes involved to screen the true ownership status through a proxy recordation/transfer scheme.
The rest of the outline has a few misstatements or assumptions but generally explains how a scenario could wind up - but:
1. If 5% of the total bundled loans in the Securitized loan go to foreclosure, the trust loses its tax-exempt rating.
Not neccessarily. I've never seen anything in the tax code that would (or even could) reach in and set that as a rule for a securitized trust. 5% of what? The original note value? 5% of the number of loans? The number of loans changes as the portfolio ages - refi's, sales, etc., so that won't work. If you have anything to the contrary I'd love to see it.
i. Trust A can write off the 5% of bad loans as losses (tax-deductible)
Someone's confused. The trust doesn't pay income taxes - that's the whole point of it as a pass-through entity. The trust's value is contained in the bonds investors have bought in it. As loans are foreclosed, sold, etc., the tranches of bonds either get money from the trustee or don't based on the cash flow from the servicer.
The Original Mortgage Loan Document is in limbo, it could be destroyed, lost, or stuck in storage somewhere long forgotten. It can't be "in limbo." It can definitely be lost, destroyed or simply too inconvenient to find, which is a major headache in jurisdictions that are enforcing presentment of them for a foreclosure.
a. Mortgage Company A (also the Servicing Company) tells title company the title is clear
The title insurer does not ask the servicer - they pull an abstract of title. If the servicer has not filed a satisfaction of mortgage for the property, the title won't be clear and there won't be a sale transaction because there will be no title insurance.
V. Trust A/B/C file foreclosure proceedings against the original loan (Buyer A for Property A) because they are no longer receiving loan payments through the servicing company (Mortgage Company A) or from Mortgage Company B
Can't really happen. The trustee does not know what individual loans are or aren't sold, paid off or going into foreclosure. They know the dollars coming from the pool and the numbers of loans in what status as required to be reported by the PSA with the servicer. The servicer is the only one who can identify a loan and then act on it as the PSA dictates, which usually entails having the servicer put the loan out to a special servicer for foreclosure or bring on the attorneys to do it.
The author paints a scenario that could only theoretically happen if the title company didn't do it's job and was dumb enough to issue a title policy on the second loan. And in that case, it is the insurer's responsibility.
And it's not the same thing as destroying a dollar bill. Dollar bills are currency; mortgages and notes that secure them have to have a chain of custody that is recorded by law, and again depending on the state, may even have to be together.
Finally, there are simple equitable defenses against an attempt to foreclose on a former owner of a property where the loan has been paid off or the property sold. An attorney who files that kind of action risks sanctions for filing such a suit. And just as an affidavit of lost note is often recognized, the records of a prior property sale and affidavits from the parties (new lender and title company) are enough to get a summary judgment dismissal in what can only be described as a complete waste of everyone's time.
Key point - make sure the satisfaction of mortgage gets recorded. In some states there is a legal time limit.