Part 3 – Investing in Real Estate Notes from A-Z
Coordinate Interim Servicing
In a perfect world, you wouldn’t have to do anything: the seller’s note servicer and your note servicer would reach out to each other and coordinate the loan transfers while you are free to work on your other tasks. Actually, it doesn’t have to be perfect. Sometimes, you work with competent people and, especially, when they’ve worked with each other before on other loan transfers, you can experience the perfect scenario.
When working with services for the first time, it’s important to oversee the process and make sure that the coordination is taking place. You do this by finding out who the point of contact is for loan transfers at the seller’s servicer and doing the same for your own servicer if you don’t know yet.
Advise each of them by e-mail and/or phone of the sale of the real estate notes. They will usually want to see the MLPA so they’ll have evidence of the sale as well as know the exact cut off, closing, and servicing transfer dates.
Once you make sure the two sides are talking to each other, you should be good to go. They will coordinate sending out the appropriate “Hello” and “Goodbye” letters that are required by RESPA. They will coordinate the final accounting, wire any monies owed to the you, the new lender, and transfer digital images of the loan file, including correspondence with the borrower.
If it’s the first transfer you’ve done with these servicers, it’s a good idea to check on the progress of the transfer every couple of weeks to make sure everything is on track.
Issues with Interim Servicing
How the servicer conducts interim servicing was outlined in your loan purchase agreement (MLPA). Make sure that you are familiar with what they can and cannot do. The people coordinating the transfer, generally, will have nothing to do with loss mitigation and doing anything with the loan other than transferring it.
Also remember that you own the loan as of the closing date and, unless contrary to what your agreement says, you have the right to continue with foreclosure or other loss mitigation efforts. This is more difficult to do because the servicer isn’t “yours” but it shouldn’t prevent you from doing what you need to.
We’ve had interim servicers tell us that they couldn’t do certain tasks and that we would have to wait until the transfer was completed. Generally, the interim servicer will not initiate any new activities regarding a loan in transfer.
However, if something’s already in progress such as a foreclosure, there shouldn’t be an issue since another vendor is usually involved. Immediately upon purchasing a loan, we will contact the foreclosing trustee or attorney for a non performing note and work to get everything back on track if needed.
Righting the Ship
It’s typical with the non performing loans that we buy that the next task to foreclose hasn’t been completed or a decision hasn’t been made that stalls the progress of the foreclosure. We strive to “right the ship” for all of our non performing assets as soon as we are able to get the timeline going again.
Once you’ve verified that the servicers are coordinating the transfer and have taken any necessary action to advance the process for your loans, at most you should just check in every couple of weeks until the transfer is completed. While you’re waiting, you should receive the physical collateral file within 3-7 days of completing your note purchase.
Physical Collateral File
The seller typically ships the file to you or your custodian by FedEx, UPS, or other overnight delivery service that provides tracking for their packages. If you use a custodian for your files, they should provide documentation to you (a bailee letter) when they receive the file along with an inventory of the contents.
In general, the more original documents you have in the file, the better. If you are ever challenged in court, you want to have the ability to provide as many original documents as possible. You don’t want to give the borrower the benefit of missing documents to challenge the validity of the debt.
Custodian or Self Storage
There are custodial services such as those provided by Wells Fargo and other third party companies that will store your physical collateral file in a safe, secured environment for a fee.
If you lose things, don’t want to worry about keeping your files secure, or just want to outsource the extra work and responsibility, this might be the way to go for you and might be worth the added expense.
Fire Rated Safe
We choose not to use a custodian because we want to have complete control of the file and not have to go through a third party to find what we need. We feel that no one will care for our assets as much as we do so we keep this task in house instead of outsourcing it.
If you decide to hold your own collateral as well, I suggest that you get a safe with industry standard fire protection. You’ve just paid a lot of money for that paper, spend a few more to make sure it stays safe from the elements and the chance of a fire.
The safe is primarily for document protection. I want to prevent the problems I will have to deal with if the loan files get damaged or destroyed. I’m not worried about a burglary since the loan file is not something that could be sold on the black market for cash. It doesn’t work that way!
Upon Delivery of File
Once we receive the physical collateral file, we conduct a thorough inventory to see what’s there and to make sure nothing vital is missing. We want to have as many original documents as possible but copies will suffice for most things.
Original Note and Allonges
The critical items that need to be original are the note and the allonges. The note is the original loan agreement or contract signed by the buyer. These are critical to have in case the borrower makes claims that you don’t own the loan or in some foreclosures or court proceedings when you are required to produce the original note.
Allonges are any official additions to the note. Allonges are commonly used in place of endorsements that are directly stamped on the original note to indicate a change in ownership. (Endorsement of a note is identical to endorsing a check to someone else.)
Once allonges are executed, they become a part of the note itself.
Lost Note Affidavit
If the note has been lost, you should have an original Lost Note Affidavit. (You should have been aware of and accepted this fact during due diligence. If you are getting a Lost Note Affidavit and didn’t know that the note was lost, that’s a problem!)
Most states will accept a Lost Note Affidavit as a substitute for an original note. Some will not. Some will place restrictions that are problematic.
For example, North Carolina will only let the entity that lost the note, take any enforcement action to collect on the note. We passed on buying that note and averted a disaster. If we purchased that loan, we would have been unable to foreclose. The noteholder that lost the physical note sold the loan to our seller. We would have been too far removed and would have been stuck.
For most other states, any lender-in-due-course (future note holder) can do so.
Mortgages, Deeds of Trust, and Assignments
Having the original mortgage or deed of trust is nice but isn’t really necessary once it’s been recorded. Once a document is recorded, it becomes a part of the public record.
Assignments of Mortgage or Deed of Trust are used to document transfers of the loan. Recordation of Assignments provides notice to everyone of the transfer.
In the past, it used to be common practice for note holders not to record assignments when buying notes, especially when the note holder wasn’t taking action to foreclose. You might purchase a note and find two or three original, unrecorded Assignments in the physical file.
Those prior note holders passed down the work and fees of recording to the eventual note holder that did have to foreclose and would have to go through the process to record assignments in the correct order.
Nowadays, best practice for lenders and note holders is to record any and all unrecorded Assignments as soon as you get them.
When you check your physical file for the first time, check that all previous mortgages or deeds of trust and assignments were recorded. Any assignments that are unrecorded, should be recorded as soon as practicable.
Record as soon as possible
Some sellers are very prompt and will send you the new allonge and assignment reflecting your recent transaction. Others can take a couple of weeks to a couple of months to get these documents to you. The faster they do so, the better for you, especially if you are foreclosing.
Although the loan becomes yours on the day that you buy it, some foreclosure actions can’t proceed until the assignment has been recorded so time is always of the essence when we buy a loan. We try to get the seller to execute the new assignment as soon as possible.
(For judicial foreclosures, you may be able to continue with the foreclosure and then substitute in for the plaintiff later when the assignment is recorded.)
E-record when possible
When I first started investing in notes, we would ship the new assignment by a trackable delivery service to our foreclosing attorney or directly to the county recorder’s office. Once the recipient recorded the document, they’d mail us back the original.
This process usually took two to four weeks. If there were errors, it took longer. The longest it took me to record an assignment was three months! Thankfully, it was for a re-performing note so we didn’t have any pressure to get it done more quickly.
I highly suggest e-recording assignments and other documents whenever you can and as soon as you receive them, unless you have a specific reason for waiting. There are several companies out there that will provide this service.
With e-recording, I can record documents in 1 to 4 days, without the hassle or expense of shipping documents, risking their potential loss, the ensuing problems of getting replacements, and I get to keep the originals.
E-recording saves you time, money, and hassle.
Make sure that there’s an original title policy or a copy that has the policy number on it. The original is preferable, especially if the policy was issued 20 or more years ago. Most other modern policies should have an electronic record with the title company so there should be evidence that your policy was issued to the original lender.
This is critical in the event that you have to make a claim with the title insurance company.
You should have been able to review the title policy during your due diligence. If there’s no title policy, my suggestion is that you get a new one effective as of the day the original loan was originated. You’ll need this if you want to sell the loan or if any issues come up from before the loan was originated.
Physical Collateral File Complete
Once you’ve ensured that you have the essential documents and have received any trailing documents, you can put your file in storage. You’ll probably need to access it from time to time near the beginning but after a few months, you’ll probably not need to access the file again.
At this point, you’ve pretty much done all you can to make forward progress with your files. You’ve ensured that the servicers are coordinating the loan transfers, received all necessary files, recorded your assignments, and given direction to foreclosing attorneys and/or trustees.
The next step in the process is the loan transfer itself.
Servicing Transfer Date
If you’ve properly coordinated the transfer of your real estate notes, this part happens without anything more from you. It will take another week or two for the loan to be completely boarded into your servicer’s system but it’s firmly under your control and doesn’t involve the seller or their servicer anymore.
You’ll get full service from your servicer to prepare and send necessary documents to your foreclosing attorney or trustee. Unless I need something extremely urgent, I’m patient with my servicer and give them a week or two before making requests.
Although the servicer’s bureaucratic process seems slow to me, I understand that they have systems for their onboarding and need to factor in compliance issues. I pay them to service my loans so that I don’t have to worry about these regulations myself.