DS News

72 but have never fully been charged with the role of maintaining the files, other than the documents they are aware of. All too often, the custodian is simply not up-to-date with third- party activities that have a negative impact on the security of the files, data, and documents that never made it to the custodian to begin with. We have seen literally hundreds of thousands of collateral files with important documents missing, sometimes even the promissory note. Even today, this problem could be considered epidemic. For most of the past 50 years of mortgage lending, the investor requirements have focused on a solid origination and loan underwriting process, the assumption being that if the loan was underwritten correctly, the chances of a problem would be very small and servicers could always dig up the documents they needed in the event of a problem. For too long, concerns about the integrity of the collateral files or subsequent documents filed against the loan at the county level were not given the level of attention warranted. DIGGING UP LOST DOCUMENTS For the most part, investors were right in assuming that most lenders underwrote the loans according to their guidelines, actually had the correct paperwork signed, and delivered the loan as agreed. While investors may never have seen the documentation, they had good reason to believe that it was sitting in some vault somewhere, safe and sound. In truth, we have found loan documents for the same deal housed in a number of vaults, sometimes owned by different companies. More files than you can imagine have gaping holes in the document stack, leaving servicers and investors at risk. Since the crash, loan portfolios have been bought and sold a number of times, sometimes leaving a trail of documents in their wake, or even worse, the correct documents resulting from these sales never made it to the county recorders or the collateral file to begin with. It didn't take long for us to realize that document custody had to be more than just putting a box of loan files under lock and key. ere had to be some ownership assumed for the completeness of the files. One of the most serious problems our industry faced during the foreclosure crisis was the inability to provide the courts with proper documentation indicating who had standing to foreclose. In judicial foreclosure states, this problem proved to be very costly. In some states, the inability to produce the signed note meant the servicer's case was lost. A single lost mortgage assignment clouds a title and gave defense counsel the opportunity to stop the process. We were on the front lines, working to help servicers perfect their collateral files in order to move forward. e work was hard, and in the end, many regretted the decision they had made to not worry about the problem before it became a costly issue. NEW OPPORTUNITY FOR OLD PROBLEMS Today, foreclosures have returned to a more historically normal level, but there are still portfolios of loans being traded without complete documentation to back them up. is really became an issue a few years back when the former GSEs decided to begin selling off some of their distressed assets. We saw huge pools of nonperforming or reperforming loans hit the market. Fortunately, there was an appetite for the product and sales were brisk, but soon problems emerged. Side letters and rebuttals from buyers along with repurchase requests began to come back to the sellers, requesting additional information on loans in the pool or failing that, for the buyer to take back the loans. is began to happen to other investors who were also beginning to sell these seasoned pools back into the market. Many were realizing that they were still spending an unexpected amount of time and money responding to requests for information about loans that they had sold months or even years before! In the process of cleaning up these portfolios for sale, we found that the custodial exception reports were not accurate, the non-note collateral was not properly married to the note collateral and there were backlogged queues filled with improperly indexed trailing documents. Seeing the extent of the problem, we visited with a number of the ratings agencies only to find that there was no mention of collateral reviews in their requirements. In a "summary of requirements" document we finally received from one of these agencies, collateral review was listed among the requirements but marked "not required." e agencies were primarily concerned with the loan's servicing history and its origination documents. Today, we're seeing portfolio sellers invest in perfecting their collateral files before they ever put the pools up for sale. It gets them a better price for their assets but it also eliminates all of the cost and hassle of responding to requests for additional information during and after the sale. Even so, wouldn't it be better if document custodians could just provide complete documentation for every loan file in their care? A BETTER WAY FORWARD e job of the document custodian must evolve. It must become more than just the task of stacking up documents and storing them away. A custodian must be a partner to the investors and servicers, with solid procedures in place to ensure the integrity of the collateral. We need to leverage technology to create an auditable record of the documentation during the life of the loan. A better document custody solution should live up to the following requirements. 1. It must still meet the initial basic mandate. To keep the documentation safe, the provider should offer a state-of-the-art vault, with advanced physical security, fire and other disaster protection, and climate control. 2. It must go beyond the basic mandate of storage only and include remediation support. e staff must be able to perfect the files by hunting down missing documentation or creating new documents, if required. Expert staff should be able to source information from the custodian's exception report, the servicer or subservicer, the public record, and its own researchers to complete the file. 3. It must be able to scale. While we will hopefully never see a foreclosure crisis like the one we so recently lived through, we can expect to continue to see large pools of loans bought and sold across the industry. e document custodian of the future should be able to house and remediate massive pools quickly to keep the industry moving. e future lies with digital solutions wherever possible. With the possibility of the industry one day adopting blockchain technology, the electronic generation and storage of the note, at a minimum, must become a priority. e electronic storage and protection of collateral documents is inevitable and has to be where our future investment lies. Even if we stay with a paper note for the near future, there is already no reason to store the rest of the collateral in the same fashion. ere is less risk of corruption or loss surrounding a solid digital process than storing reams of paper on open shelves. e GSEs certainly appear to be onboard with the idea, so what are we waiting for?

• Cover