The bursting of the housing bubble and the subsequent Great Recession exposed poor final-document management in mortgages. Looking back, the chaos emanating from poor final-document handling seems wholly disproportionate to the fault. The industry was employing the standard office technologies of the day: Microsoft[R] Excel[R] spreadsheets and faxes were used as well as the ubiquitous emails. However, the problem was worse than it appeared. * Absolute time to record was not the right measure to apply. Time in recording needs to be thought of in relative terms. How fast is a post-closing specialist at entering data in an Excel spreadsheet compared with a nefarious member of the mortgage community utilizing differential time to his or her advantage? * Fraud operates in real time (nanoseconds), while documents are bound to legal time (days, weeks and months). * While final-document handling is surging ahead in legal time, it needs to go much faster to catch up to real time. Fortunately, there is a movement afoot in the industry to close the gap with effective document-management technology solutions and processes. * The benefits will be reaped mostly by early adopters who will gain a significant competitive edge. But as information technology (IT) evolves, it's clear that this is just the initial phase in an ongoing process.
Timely and accurate final documents are critical
The return of final documents such as the recorded security instruments--which include mortgages and deed of trusts as well as final title policies to the lender after loans close--has been a requirement for decades. The expectation is for lenders to obtain the final documents in a timely manner (generally within 90 days of loan closing) and to ensure that the documents are accurate.
Final documents may also include a recorded assignment, power of attorney, a Federal Housing Administration (FHA) Mortgage Insurance Certificate (MIC) or Department of Veterans Affairs (VA) Loan Guaranty Certificate (LGC).
Correspondent lenders that sell their loans in the secondary market have agreements to deliver trailing documents within a specified time period--generally 120 days from the time a loan is purchased.
For IT purposes, final documents are mere zeros and ones. These digits, though, are more powerful than the usual data strings. These are contracts--legally enforceable agreements.
Errors and omissions in this data have greater than the usual consequences. When final documents are not returned within expected time frames and/or documents are defective, risks and costs increase for lenders and servicers. Correspondent lenders that fail to deliver final documents may also find themselves confronting penalties provisions in their agreements.
Detective and late documents spark a range of additional costs to cure, including re-recording fees and human resource expenditures. Sometimes documents cannot be satisfactorily corrected and the result is a "scratch-and-dent" loan with a loss in asset value. Although missing or defective trailing documents is not a primary reason for loan repurchases or indemnification, it contributes to the overall lack of risk-management controls.
Take notice of the time gap involved here. Mortgage final documents are tethered to arcane legal systems. The time gap is roughly 120 days versus nanoseconds in IT.
Mortgage meltdown exposes lack of controls
This difference in these two time frames became especially clear when the mortgage market melted down. During the boom days, it was not uncommon for an agent of a settlement company to...