With more activity and more investor interest in the nonperforming loan market recently, it’s a good idea to know what steps should be taken to protect your interests when buying or selling these assets.
In the last few months, both Citigroup and Wells Fargo have brought sizeable packages of troubled mortgages to the market, according to reports in American Banker. More private investors in the market are starting to emerge as well.
So it seems like a good time to go over what documentation is necessary, whether you’re buying or selling in the nonperforming loan market. Proper documentation is more important than ever when dealing with nonperforming residential mortgages—it determines your risk level for recouping your investment and protecting it through legal channels.
What should be done to ensure a line of defense is in place?
No. 1, due diligence is imperative. The collateral files impact the pricing, so you cannot bypass performing due diligence.
It is also critical that files are reviewed to verify whether the chain of title is unbroken, and to determine whether there are any current liens on a property. A current owner search can accomplish this, and will identify any open liens that could affect your position, such as delinquent property taxes, code violations and municipal liens. A current owner search will also identify the assignment chain, and ensure that all assignments have been properly filed and recorded with the county.
Next, it’s a very good idea to verify that the note endorsement or allonge chain, or chain of attachments, match the assignment chain.
Though this verification isn’t currently required in all jurisdictions, being proactive in this regard can prevent delays in the future. If the chains are broken, then having a process in place to repair them in a timely manner is a necessity.
When this process can’t be handled in-house, it should be outsourced to a professional firm with the industry experience and knowledge to ensure smooth execution.
Why is all of this so important? Improper or mishandled documentation can lead to delays in selling loan pools and executing foreclosures. Investing a little extra money now is well worth it when you consider the amounts you could face in the cost of litigation, or in the potential loss of interest in the asset.
Ensuring all the documentation is in order doesn’t cost a fortune, and just makes good business sense.
Mike Wileman is president and CEO of Orion Financial Group.