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Mortgage Assignment Laws and Definition

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  What is a Mortgage Assignment?

A mortgage is a legal agreement. Under this agreement, a bank or other lending institution provides a loan to an individual seeking to finance a home purchase. The lender is referred to as a creditor. The person who finances the home owes money to the bank, and is referred to as the debtor.

To make money, the bank charges interest on the loan. To ensure the debtor pays the loan, the bank takes a security interest in what the loan is financing — the home itself. If the buyer fails to pay the loan, the bank can take the property through a foreclosure proceeding.

There are two main documents involved in a mortgage agreement. The document setting the financial terms and conditions of repayment is known as the mortgage note. The bank is the owner of the note. The note is secured by the mortgage. This means if the debtor does not make payment on the note, the bank may foreclose on the home. 

The document describing the mortgaged property is called the mortgage agreement. In the mortgage agreement, the debtor agrees to make payments under the note, and agrees that if payment is not made, the bank may institute foreclosure proceedings and take the home as collateral .

An assignment of a mortgage refers to an assignment of the note and assignment of the mortgage agreement. Both the note and the mortgage can be assigned. To assign the note and mortgage is to transfer ownership of the note and mortgage. Once the note is assigned, the person to whom it is assigned, the assignee, can collect payment under the note. 

Assignment of the mortgage agreement occurs when the mortgagee (the bank or lender) transfers its rights under the agreement to another party. That party is referred to as the assignee, and receives the right to enforce the agreement’s terms against the assignor, or debtor (also called the “mortgagor”). 

What are the Requirements for Executing a Mortgage Assignment?

What are some of the benefits and drawbacks of mortgage assignments, are there any defenses to mortgage assignments, do i need to hire an attorney for help with a mortgage assignment.

For a mortgage to be validly assigned, the assignment document (the document formally assigning ownership from one person to another) must contain:

• The current assignor name.
• The name of the assignee.
• The current borrower or borrowers’ names. 
• A description of the mortgage, including date of execution of the mortgage agreement, the amount of the loan that remains, and a reference to where the mortgage was initially recorded. A mortgage is recorded in the office of a county clerk, in an index, typically bearing a volume or page number. The reference to where the mortgage was recorded should include the date of recording, volume, page number, and county of recording.
• A description of the property. The description must be a legal description that unambiguously and completely describes the boundaries of the property.

There are several types of assignments of mortgage. These include a corrective assignment of mortgage, a corporate assignment of mortgage, and a mers assignment of mortgage. A corrective assignment corrects or amends a defect or mistake in the original assignment. A corporate assignment is an assignment of the mortgage from one corporation to another. 

A mers assignment involves the Mortgage Electronic Registration System (MERS). Mortgages often designate MERS as a nominee (agent for) the lender. When the lender assigns a mortgage to MERS, MERS does not actually receive ownership of the note or mortgage agreement. Instead, MERS tracks the mortgage as the mortgage is assigned from bank to bank. 

An advantage of a mortgage assignment is that the assignment permits buyers interested in purchasing a home, to do so without having to obtain a loan from a financial institution. The buyer, through an assignment from the current homeowner, assumes the rights and responsibilities under the mortgage. 

A disadvantage of a mortgage assignment is the consequences of failing to record it. Under most state laws, an entity seeking to institute foreclosure proceedings must record the assignment before it can do so. If a mortgage is not recorded, the judge will dismiss the foreclosure proceeding. 

Failure to observe mortgage assignment procedure can be used as a defense by a homeowner in a foreclosure proceeding. Before a bank can institute a foreclosure proceeding, the bank must record the assignment of the note. The bank must also be in actual possession of the note. 

If the bank fails to “produce the note,” that is, cannot demonstrate that the note was assigned to it, the bank cannot demonstrate it owns the note. Therefore, it lacks legal standing to commence a foreclosure proceeding.

If you need help with preparing an assignment of mortgage, you should contact a mortgage lawyer . An experienced mortgage lawyer near you can assist you with preparing and recording the document.

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What Is Assignment of Mortgage: What You Need to Know

We will explore the idea of mortgage assignment in this thorough guide, going over its definition, steps involved, potential consequences, and more. So read on to learn more about this important facet of the real estate market, whether you’re a homeowner, a prospective buyer, or just inquisitive about mortgages.

What is Assignment of Mortgage?

The assignment of mortgage, often simply referred to as mortgage assignment , is a legal process that involves the transfer of a mortgage loan from one party to another. This transfer typically occurs between mortgage lenders or financial institutions and is a common practice within the mortgage industry.

The Key Parties Involved

• Assignor: The person transferring the mortgage is known as the assignor. The initial lender or financial organization that gave the borrower the mortgage loan is often the assignor.
• Assignee: The assignee is the party receiving the mortgage assignment. This could be another lender or financial institution that is buying the mortgage, often as part of a financial transaction.
• Borrower: The borrower is the individual or entity that initially took out the mortgage loan to finance the purchase of a property.

Why is Assignment of Mortgage Necessary?

Assignment of mortgage occurs for various reasons, and it serves specific purposes for all parties involved.

1. Loan Portfolio Management

Mortgage assignment is a common practice used by lenders to better manage their loan portfolios. Lenders might raise funds to offer more loans or issue new mortgages by selling or transferring mortgage loans to other financial organizations. This procedure aids in keeping their portfolios risk-balanced and liquid.

2. Risk Mitigation

Lenders may also assign mortgages to mitigate risk. When they transfer a mortgage to another entity, they are essentially transferring the associated risk as well. This can be a strategic move to reduce their exposure to potential defaults or financial instability.

3. Secondary Mortgage Market

The secondary mortgage market plays a significant role in the assignment of mortgages. Many mortgages are bundled together into mortgage-backed securities (MBS) and sold to investors. Assignment of mortgages allows lenders to participate in this market, which provides additional funding for new mortgage loans.

The Assignment of Mortgage Process

The process of assigning a mortgage, or deciding to sell your mortgage , involves several steps and legal requirements. Here’s a breakdown of the typical process:

1. Agreement between Parties

The assignor (original lender) and assignee (new lender or investor) must enter into a formal agreement outlining the terms and conditions of the new mortgage assignment. This agreement includes details such as the transfer price, terms of the loan, and any specific warranties or representations.

2. Notice to the Borrower

Once the agreement is in place, the borrower is typically notified of the assignment. This notice informs them that the servicing of their mortgage, including collecting monthly mortgage payments, will now be handled by the assignee. The borrower is advised to send future payments to the assignee.

3. Recordation

In many jurisdictions, mortgage assignments must be recorded with the appropriate government office, such as the county recorder’s office. This recordation provides public notice of the transfer and ensures that the assignee has a legal claim on the property.

4. Continuation of Monthly Mortgage Payments

For the borrower, the most noticeable change is the address where monthly payments are sent. Instead of sending payment to the original lender, the borrower will send them to the assignee. It is crucial for borrowers to keep records of these changes to avoid any confusion or missed payments.

Implications of Mortgage Assignment for Borrowers

While the assignment of mortgage primarily involves lenders and investors, it can have implications for borrowers as well. Here are some important considerations for borrowers:

1. No Change in Loan Terms

Borrowers should be aware that the assignment of mortgage does not change the terms of their loan. The interest rate, monthly payments, and other loan terms remain the same. The only change is the entity to which payments are made.

2. Proper Record-Keeping

Borrowers must maintain accurate records of their mortgage payments and correspondence related to the assignment. This helps ensure that payments are correctly credited and can be vital in case of any disputes or issues.

3. Communication with the New Lender

If borrowers have questions or concerns about their mortgage after the assignment, they should reach out to the new lender or servicer. Open and clear communication can help address any issues that may arise during the transition.

4. Property Taxes and Insurance

Borrowers are still responsible for property taxes and homeowner’s insurance, even after the assignment of mortgage. These payments are typically not affected by the transfer of the loan.

The Role of Mortgage Servicers

Mortgage servicers play a crucial role in the assignment of mortgage process. This section will explore the responsibilities of mortgage servicers, their relationship with borrowers, and how they manage mortgage loans on behalf of investors or lenders.

Legal Requirements and Regulations

Assignment is subject to various legal mortgage requirements and regulations that vary by jurisdiction. Discussing these legal aspects will help readers understand the legal framework governing the assignment of mortgages in their region and how it impacts the process.

Impact on Credit and Credit Reporting

The assignment of mortgage can have implications for borrowers’ credit reports and scores. Explore how mortgage assignment can affect credit histories, reporting by credit bureaus, and what borrowers can do to protect their credit during and after the assignment.

Assignment of Mortgage vs. Assumption of Mortgage

Differentiating between assignment of mortgage and assumption of mortgage is important. This section will explain the key differences, where one party takes over the mortgage and liability, while the other party merely transfers the loan to a new lender.

Impact on Property Taxes and Insurance

Taxes and insurance are essential components of homeownership. Explain how the assignment of mortgage may affect property tax payments and the homeowner’s insurance policy, as these are often escrowed into the monthly mortgage payment.

Potential Challenges and Disputes

Discuss common challenges or disputes that can arise during or after the assignment of mortgage, such as miscommunication, incorrect payment processing, or disputes over ownership rights. Offer advice on how to handle and resolve these issues.

Foreclosure and Default Scenarios

In the unfortunate event of mortgage default, understanding how the assignment of mortgage affects foreclosure proceedings is crucial. Explain how the assignee handles foreclosures and what options are available to borrowers facing financial difficulties.

Future Trends and Innovations

Explore emerging trends and innovations in the mortgage industry related to the assignment of mortgages. This could include the use of blockchain technology, digital mortgages, or other advancements that may impact the process.

In the complex world of real estate and mortgage financing , the assignment of mortgage plays a pivotal role in the movement of funds and management of risk. It allows lenders to efficiently manage their portfolios, mitigate risk, and participate in the secondary mortgage market. For borrowers, understanding the process and implications of mortgage assignment is essential to ensure the smooth continuation of their monthly mortgage payments.

As you navigate the world of homeownership or consider entering it, remember that the assignment of mortgage is a routine occurrence designed to benefit all parties involved. By staying informed and maintaining open communication with your lender or servicer, you can ensure that your mortgage loan remains a manageable and secure financial commitment.

In summary, purchase of mortgage is a vital mechanism within the mortgage industry that facilitates the transfer of mortgage loans from one party to another. This process helps lenders manage their portfolios, mitigate risk, and participate in the secondary mortgage market.

For borrowers, it means a change in the entity collecting their monthly mortgage payments but typically does not alter the terms of the original loan. Keeping accurate records and staying informed about the transition are crucial steps to ensure a smooth experience for homeowners. So, whether you’re a homeowner, lender, or investor, understanding assignment of mortgage is key to navigating the real estate landscape effectively.

This article is for informational purposes only and does not constitute legal, tax, or accounting advice.

Written by Alan Noblitt

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Assignment of Mortgage (AOM) Service

Protect your investment with the right partner.

When loans are bought and sold, it’s good practice for buyers to take control of the process and partner with an experienced third party to ensure that assignments are done correctly. When a buyer is in control of the assignment, careful follow-up will ensure that everything is signed, returned and sent for electronic recording.

If the buyer is not on the county record as the loan owner, it can put the investment at risk. This is especially important for non-performing loans, which are commonly sold. It’s critical that paperwork is done timely and correctly on these loans. For this type, portfolio modifications or foreclosure is the resolution. The new owner of the asset must be on record with a proper chain of title to follow this path. An investor who is not listed in the real property records as the owner will not be notified of adverse incidents or situations. This can be critical information to managing your assets properly.

The rejection of a lien release by the county is another potential risk when the loan on record is not in the investor’s name.  A borrower who pays off a loan may suffer as a result of difficulty in releasing the lien , resulting in poor service to the customer.

How Our Assignment Service Works

Our assignment solution is built around good communication with our clients, allowing us to work quickly and efficiently. We rely on our proprietary system, Eclipse TM , and a team dedicated to your success. Here’s how the process works:

• You provide the legal names of the assignor and assignee and we load the information into Eclipse, eliminating the need to re-enter every assignment and providing you with easy-to-access, real-time insight into file statuses
• Once the appropriate source document is provided (recorded mortgage/DOT/title policy), MetaSource generates an assignment document using county specific rules to eliminate obstacles that can lead to rejection
• The assignment is recorded electronically, where possible, and sent by mail using our in-house sending and tracking system where e-recording is not an option
• When the recorded assignment is received from the county, your assignment is imaged for further routing and the original is returned to you or your designee

We manage the assignment process every step of the way until the recording process is complete.

Tracking Missing Assignments

Missing intervening assignments is another potential challenge that may arise. Tracking down missing assignments is time consuming, but becomes even harder if those assignments belong to companies that have gone out of business. In that case, an experienced document services provider can provide valuable help.

MetaSource leverages its database of contact information for companies and their authorized employees to get problems resolved quickly. Even servicers and investors with staff to handle this problem can leverage our extensive database to determine how quickly problems might be solved.

Contact us to learn more about our assignment of mortgage service

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Understanding how assignments of mortgage work.

The bank or other mortgage lender that provides a borrower with the funds to purchase a home often later transfers or assigns its interest in the mortgage to another firm. When this happens, the borrower will start sending monthly mortgage payments to the new owner of the mortgage instead of the original lender. Some other things, such as the available modes of payment, many also change.  However, the general terms of the mortgage, such as the interest rate and payment amounts, will stay the same.

If you need help with a mortgage, consider finding a financial advisor to work with .

Mortgage Assignment Basics

Mortgages are assigned using a document called an assignment of mortgage. This legally transfers the original lender’s interest in the loan to the new company. After doing this, the original lender will no longer receive the payments of principal and interest. However, by assigning the loan the mortgage company will free up capital. This allows the original lender to make more loans and generate additional origination and other fees.

At closing, borrowers sign a document granting the original lender the right to assign the mortgage elsewhere. This means the original lender doesn’t have to ask for permission to assign the mortgage but can do so whenever it wants to. Often this occurs within a few months after the closing, but it can happen at any time during the term of a mortgage. Once a loan has been assigned, it can be assigned again.

The assignment of mortgage document uses several pieces of information to accurately identify the specific mortgage that is being transferred. These generally include:

The name of the borrower

The date of the mortgage

The jurisdiction where it was recorded

The amount of money that was originally loaned

A legal description of the home or other property used as collateral to secure the loan.

Although a lender doesn’t need to request the borrower’s permission before assigning a mortgage, the lender does have to notify the borrower after the mortgage has been assigned. This notice will generally provide the new lender’s name, contact information and mailing address or other information need to make payments.

Effects of Mortgage Assignment

When a mortgage is assigned, the original terms of the mortgage remain unchanged. The monthly principal and interest, interest rate and total number of payments required to pay the loan off will be the same as on the mortgage when it was signed at closing.

A company assigned a mortgage may have different methods of accepting monthly payments, such as online payments, paper checks or money orders. A borrower who wants more payment methods may be able to get a new mortgage holder to provide them upon request.

Some things may change, however. For instance, the new owner of the mortgage may have a different method of handling escrow payments that are used to pay property taxes and the premiums for hazard insurance. The law requires mortgage companies to charge no more than one-twelfth the annual cost of property taxes and insurance each month. However, they can also require borrowers to maintain a cushion of up to one-sixth the annual total required to pay taxes and insurance. If a new mortgage company has a different policy on this cushion, it could change the total monthly payment.

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The borrower also does not need to notify the local taxing authorities or the hazard insurance provider about the assignment. The new holder of the mortgage is required to handle these notifications.

Borrowers should check the information about where payments are supposed to go. This need to be accurate so payments will be directed correctly to the holder of the mortgage and the borrower will receive credit for them.

Another important matter that may change when a loan is assigned is the procedure the mortgage company will follow in the event of default. Borrowers should make themselves familiar with the notification methods used by the new mortgage to let them know if payments are not being received and foreclosure is in the offing.

The Bottom Line

Home mortgages are often assigned by their original lenders to other companies. Assignment usually doesn’t change much for the borrower, except that the payments will go to a different address. The original loan amount, interest payment, term and monthly principal and interest part of the payment will stay the same. Assigning mortgages frees up money for the lenders to make more loans. Borrowers don’t have to be told a mortgage will be assigned, since they agree to this at closing. However, they must be notified after an assignment and told how to contact the new mortgage holder.

Mortgage Tips

A financial advisor can help you evaluate home buying and other important financial moves. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now .

Borrowers can find out whether and where their mortgage has been assigned through the Mortgage Electronic Registration Systems (MERS). This is an organization created by mortgage companies to track mortgage assignments. Borrowers can use a free online service provided by MERS to find out who owns their mortgage.

Mortgage rates are more volatile than they have been in a long time. Check out SmartAsset’s mortgage rates table to get a better idea of what the market looks like right now.

Photo credit: ©iStock.com/ArLawKa AungTun, ©iStock.com/ridvan_celik, ©iStock.com/damircudic

The post Understanding How Assignments of Mortgage Work appeared first on SmartAsset Blog .

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What is an Assignment of Mortgage?

In real estate, an assignment of mortgage is the transfer of a mortgage, or mortgage note , to another party which typically happens on the servicing side or lender side. This is commonly seen one when lender sells or transfers your mortgage to another lender. Lenders typically have the right to to sell mortgages and assign them to new parties, but don’t typically allow borrowers to do the same. When a borrower transfers their mortgage obligation to a new party, this is called an assumed mortgage.

Assignment of Mortgage Examples

Examples where you will find assignment of mortgages include:

• Example 1. A lender selling your mortgage to another lender for servicing.

Here’s Property Shark’s definition of assignment of mortgage .

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Promissory Notes, Mortgage Assignments, and MERS’ Role in Real Estate

After the fall out of the subprime mortgage crisis that triggered the Great Recession, the effects still linger when looking at homeownership statistics in the United States. Nearly 10 million homeowners lost their homes to foreclosure between 2006 and 2014. Damaged credit and traumatized psyches paired with stricter lending standards and soaring median home prices mean that some former homeowners will never own another home.

Today, the United States is seeing the highest rates of unemployment since the Great Depression at nearly 15%  due to the COVID-19 pandemic, and of those who still own a home, nearly 4.1 million borrowers are struggling to make their monthly payments. Many are turning to forbearance for momentary relief from their mortgages.

For many homeowners, the question of what happens to their mortgage after closing day might not ever come up. Until the threat of foreclosure or the need for forbearance arises, most borrowers simply send in their monthly payments with no questions asked.

Now is a good time to consider the process after closing, and how it affects their property rights. Here are some of the questions to ask.

What happens after a real estate closing?

• At closing, the borrower signs the mortgage, the deed, and the promissory note
• The mortgage and the deed are recorded in the public record
• The promissory note is held by the lender while the loan is outstanding
• Payments are sent to the mortgage servicing company
• The mortgage may be securitized and sold to investors
• The mortgage may be transferred to another bank
• The mortgage servicing rights may change to another company
• When the mortgage is paid in full, a mortgage lien release or satisfaction with a number referencing the original mortgage loan is recorded in the public record to show the debt is no longer outstanding
• The promissory note is marked as paid in full and returned to the borrower

Banks often sell and buy mortgages from each other as a way to liquidate assets and improve their credit ratings. When the original lender sells the debt to another bank or an investor, a mortgage assignment is created and recorded in the public record and the promissory note is endorsed.

What are Loan Transfer Documents?

Assignments and endorsements prove who owns the debt and subsequently who has the authority to bring foreclosure action.

Mortgage Assignments

A Mortgage Assignment is a document showing a mortgage loan has been transferred from the originator to a third party.

Note Endorsements

In addition to the assignment, the originator of the loan or the most recent holder of the loan must endorse (or sign over) the promissory note whenever the loan changes hands. Sometimes, the note is endorsed “in blank,” which means that any party that possesses the note has the legal authority to enforce it.

While these documents are supposed to be recorded in the public land records systems, sometimes there’s a “break” in the chain. A missing mortgage satisfaction or assignment can cause a huge headache for homeowners when they go to sell. Without knowing who the official mortgage lienholder of the property is, the home can’t be sold. The title agent in charge of the closing is tasked with fixing the issue so that clear ownership rights can be established and the final mortgage payoff can be sent to the right lender if needed.

What is Mortgage Securitization?

In the last 30 years or so, the buying and selling of mortgage loans between lenders, banks, and investors has grown more complicated. When a mortgage is turned into a security, it’s pooled with similar types of loans and sold on the secondary mortgage market. The purchasers or investors in these securities receive interest in principal payments.

Securitization is good for lenders because it allows them to sell mortgage loans from their books and use that money to make more loans.

Where securitization goes wrong, as we saw during the housing crisis, is when bad or “toxic” assets are pooled together and sold on the secondary market to unsuspecting investors. Subprime mortgage-backed securities had received high ratings from credit agencies and offered a higher interest rate, but they also were the first to hemorrhage losses when borrowers began defaulting on homes with underwater mortgages.

Securitization isn’t an inherently good or bad process, it’s simply a mechanism by which banks liquidize assets, increase their credit and ratings, and clear their balance sheets.

For homeowners, securitization means that the mortgage isn’t owned by a single lender and is instead part of a pool of mortgages owned by investors. A mortgage service company is responsible for collecting the mortgage payments and sending it to the proper investors. Securitization also means that tracking the note and who has the authority to enforce it can get messy.

What is the Mortgage Electronic Registration System, Inc. or MERS?

The MERS system is a private, third-party database system used to track servicing rights and ownership of mortgages in the United States. This system of registering the promissory note and mortgage was created to make transferring these documents easier on the secondary mortgage market.

How does MERS work?

For some real estate transactions, the mortgage originator will designate MERS as the mortgagee at closing. These loans are called MERS as Original Mortgagee (MOM) loans. When buying a home, a borrower should see clear language on the mortgage or deed of trust document granting and conveying legal title of the mortgage to MERS as mortgagee. This gives the company the right to act on behalf of the current and subsequent owners of the loan.

In other transactions, the loan may be assigned to MERS in the public record at a later date after closing.

After MERS is designated as a nominee to act on behalf of the lender, it tracks the transfers of the loans between parties and acts as a nominee for each holder. This eliminates the need to file separate assignments in the public record each time the loan is transferred. If a lender sells the loan, MERS will update this information in their system.

Even though MERS is designated as the mortgagee, it doesn’t own the debt or hold the promissory note. MERS doesn’t service mortgages or collect payments on mortgages.

Benefits of MERS

Some of the benefits of the MERS system include:

• No document drafting fees
• Eliminates the need for multiple assignments each time the loan changes hands
• Reduces recording costs
• Saves time and administrative costs for lenders and servicers
• Provides the identification of servicers and investors for free for homeowners and lenders
• Used by Lenders to find undisclosed liens
• Used by municipalities to find companies responsible for maintaining vacant and abandoned properties
• Mortgage Identification Numbers (MIN) are assigned to each loan for easy tracking
• Selling of loans and servicing transfers are more efficient in the secondary market
• Obtaining lien releases when a lender goes out of business is simplified
• Cost savings by the mortgage industry is theoretically passed on to homeowners

Does MERS really save consumers money?

The MERS system is not meant to act as a replacement for public land records. However, some states, including Kentucky, New York, Texas, Alabama, and Delaware have sued the company that controls MERS for lost revenue from missing record filing fees. In the case of Kentucky , the state alleged that MERS did not record mortgage assignments with Kentucky County Clerks as they were transferred between banks. At $12 a recording, all those transfers without corresponding mortgage assignments add up to big bucks.

Despite numerous lawsuits challenging MERS over its mortgage assignment authority, the company that controls MERS usually receives favorable judgments . In 2016, courts in Texas ruled that MERS’ mortgage assignments were valid and dismissed two cases. County recorders in Pennsylvania also brought cases claiming that MERS and MERS System members failed to record mortgage assignments when transferring promissory notes, a violation of Pennsylvania recording laws. MERS emerged as the winner of these lawsuits as well.

Kentucky and other states argue that skipping out on these fees hurt the consumers and taxpayers in their states.

What is MERS role in foreclosures?

Depending on the state, a foreclosure process might be either judicial (reviewed by a judge in court) or nonjudicial. In the past, MERS, acting on behalf of lenders, has been named as the plaintiff in foreclosure proceedings. Sometimes MERS was even listed as the beneficiary in nonjudicial notices.

Whether or not MERS has the authority to file foreclosure as either the plaintiff or beneficiary is hotly contested. Some states have ruled that MERS doesn’t have standing to foreclose since it doesn’t have any financial interest in either the property of the promissory note.

MERS Splits the note and the mortgage

A court case from 1872, Carpenter v. Longan , established that where the promissory note goes, a deed of trust or mortgage must follow and, according to the United State’s Uniform Commercial Code (UCC) , the promissory note must also have a clear chain of title.

Foreclosure proceedings during the Great Recession proved to be complicated by the MERS system. Within the MERS system, a note and mortgage may be transferred multiple times, so to avoid an endorsement each time, the note is “endorsed in blank.” In one foreclosure after the other, borrowers were able to demonstrate that the subsequent assignments of the promissory note had gone unendorsed.

Although the MERS systems has helped the mortgage industry, title agents, and even borrowers better manage and understand who has the servicing rights and holds the authority to foreclose, several borrowers facing foreclosure have argued that the system impermissibly “splits” the note and the mortgage between the note holder and MERS as the beneficiary of the deed of trust or mortgage.

This process of bifurcation, it’s claimed, causes the relationship between the mortgage and note to become defective and subsequently unenforceable.

Homeowners facing foreclosure, especially in the aftermath of the housing bubble burst of 2008, were successful in delaying or avoiding foreclosure by arguing that the authority to foreclose was not satisfactorily established due to breaks in the chain of assignments and endorsements.

However, Article 3 of the UCC establishes anyone who possesses the note has the legal authority to enforce it. So foreclosing parties have countered that possession of the note should be enough.

As a result, some states, like Michigan, have ruled in favor of these borrower’s arguments by requiring reunification through valid assignment before foreclosures may proceed. Others have ruled that reunification is not necessary since MERS would be authorized to foreclose for the note holder on their behalf. In 2015, The Nevada Supreme Court actually clarified previous rulings by stating that the involvement of MERS actually cures the defect. This is because the note holder could potentially or theoretically direct or compel MERS to assign the deed of trust, resulting in reunifying the instruments.

Homebuyers should always ask questions

With the advent of eClosing solutions, eNotes, eVaults, and the MERS eRegistry , the real estate, title, and mortgage industry continues to build systems that improve the homebuying experience.

Despite all the advancements, homebuying can be a confusing and overwhelming process. It’s important to ask questions of the right real estate professionals. Hiring your own attorney to represent your interests in the real estate transaction is always a good idea.

While the pros and cons of MERS is debated, homeowners today will want to keep up with recommendations from the CFPB should they fall behind on their mortgage payments and reach out to their mortgage servicer as soon as possible.

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Amanda Farrell is a digital media strategist at PropLogix. She enjoys being a part of a team that gives peace of mind for consumers while making one of the biggest purchases of their lives. She lives in Sarasota with her bunny, Buster, and enjoys painting, playing guitar and mandolin, and yoga.

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§ 1024.33 Mortgage servicing transfers.

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(a) Servicing disclosure statement. Within three days (excluding legal public holidays, Saturdays, and Sundays) after a person applies for a reverse mortgage transaction, the lender, mortgage broker who anticipates using table funding, or dealer in a first-lien dealer loan shall provide to the person a servicing disclosure statement that states whether the servicing of the mortgage loan may be assigned, sold, or transferred to any other person at any time. Appendix MS-1 of this part contains a model form for the disclosures required under this paragraph (a). If a person who applies for a reverse mortgage transaction is denied credit within the three-day period, a servicing disclosure statement is not required to be delivered.

1. Terminology. Although the servicing disclosure statement must be clear and conspicuous pursuant to § 1024.32(a), § 1024.33(a) does not set forth any specific rules for the format of the statement, and the specific language of the servicing disclosure statement in appendix MS-1 is not required to be used. The model format may be supplemented with additional information that clarifies or enhances the model language.

2. Delivery to co-applicants. If co-applicants indicate the same address on their application, one copy delivered to that address is sufficient. If different addresses are shown by co-applicants on the application, a copy must be delivered to each of the co-applicants.

3. Lender servicing. If the lender, mortgage broker who anticipates using table funding, or dealer in a first lien dealer loan knows at the time of making the disclosure whether it will service the mortgage loan for which the applicant has applied, the disclosure must, as applicable, state that such entity will service such loan and does not intend to sell, transfer, or assign the servicing of the loan, or that such entity intends to assign, sell, or transfer servicing of such mortgage loan before the first payment is due. In all other instances, a disclosure that states that the servicing of the loan may be assigned, sold, or transferred while the loan is outstanding complies with § 1024.33(a).

See interpretation of 33(a) Servicing disclosure statement. in Supplement I

(b) Notices of transfer of loan servicing —

See interpretation of 33(b) Notices of transfer of loan servicing. in Supplement I

(1) Requirement for notice. Except as provided in paragraph (b)(2) of this section, each transferor servicer and transferee servicer of any mortgage loan shall provide to the borrower a notice of transfer for any assignment, sale, or transfer of the servicing of the mortgage loan. The notice must contain the information described in paragraph (b)(4) of this section. Appendix MS-2 of this part contains a model form for the disclosures required under this paragraph (b).

(2) Certain transfers excluded.

(i) The following transfers are not assignments, sales, or transfers of mortgage loan servicing for purposes of this section if there is no change in the payee, address to which payment must be delivered, account number, or amount of payment due:

(A) A transfer between affiliates;

(B) A transfer that results from mergers or acquisitions of servicers or subservicers;

(C) A transfer that occurs between master servicers without changing the subservicer;

(ii) The Federal Housing Administration (FHA) is not required to provide to the borrower a notice of transfer where a mortgage insured under the National Housing Act is assigned to the FHA.

(3) Time of notice —

1. Delivery. A servicer mailing the notice of transfer must deliver the notice to the mailing address (or addresses) listed by the borrower in the mortgage loan documents, unless the borrower has notified the servicer of a new address (or addresses) pursuant to the servicer's requirements for receiving a notice of a change of address.

See interpretation of Paragraph 33(b)(3). in Supplement I

(i) In general. Except as provided in paragraphs (b)(3)(ii) and (iii) of this section, the transferor servicer shall provide the notice of transfer to the borrower not less than 15 days before the effective date of the transfer of the servicing of the mortgage loan. The transferee servicer shall provide the notice of transfer to the borrower not more than 15 days after the effective date of the transfer. The transferor and transferee servicers may provide a single notice, in which case the notice shall be provided not less than 15 days before the effective date of the transfer of the servicing of the mortgage loan.

(ii) Extended time. The notice of transfer shall be provided to the borrower by the transferor servicer or the transferee servicer not more than 30 days after the effective date of the transfer of the servicing of the mortgage loan in any case in which the transfer of servicing is preceded by:

(A) Termination of the contract for servicing the loan for cause;

(B) Commencement of proceedings for bankruptcy of the servicer;

(C) Commencement of proceedings by the FDIC for conservatorship or receivership of the servicer or an entity that owns or controls the servicer; or

(D) Commencement of proceedings by the NCUA for appointment of a conservator or liquidating agent of the servicer or an entity that owns or controls the servicer.

(iii) Notice provided at settlement. Notices of transfer provided at settlement by the transferor servicer and transferee servicer, whether as separate notices or as a combined notice, satisfy the timing requirements of paragraph (b)(3) of this section.

(4) Contents of notice. The notices of transfer shall include the following information:

(i) The effective date of the transfer of servicing;

(ii) The name, address, and a collect call or toll-free telephone number for an employee or department of the transferee servicer that can be contacted by the borrower to obtain answers to servicing transfer inquiries;

(iii) The name, address, and a collect call or toll-free telephone number for an employee or department of the transferor servicer that can be contacted by the borrower to obtain answers to servicing transfer inquiries;

(iv) The date on which the transferor servicer will cease to accept payments relating to the loan and the date on which the transferee servicer will begin to accept such payments. These dates shall either be the same or consecutive days;

(v) Whether the transfer will affect the terms or the continued availability of mortgage life or disability insurance, or any other type of optional insurance, and any action the borrower must take to maintain such coverage; and

(vi) A statement that the transfer of servicing does not affect any term or condition of the mortgage loan other than terms directly related to the servicing of the loan.

(c) Borrower payments during transfer of servicing —

See interpretation of 33(c) Borrower payments during transfer of servicing. in Supplement I

(1) Payments not considered late. During the 60-day period beginning on the effective date of transfer of the servicing of any mortgage loan, if the transferor servicer (rather than the transferee servicer that should properly receive payment on the loan) receives payment on or before the applicable due date (including any grace period allowed under the mortgage loan instruments), a payment may not be treated as late for any purpose.

1. Late fees prohibited. The prohibition in § 1024.33(c)(1) on treating a payment as late for any purpose would prohibit a late fee from being imposed on the borrower with respect to any payment on the mortgage loan. See RESPA section 6(d) (12 U.S.C. 2605(d)).

2. Compliance with § 1024.39. A transferee servicer's compliance with § 1024.39 during the 60-day period beginning on the effective date of a servicing transfer does not constitute treating a payment as late for purposes of § 1024.33(c)(1).

See interpretation of 33(c)(1) Payments not considered late. in Supplement I

(2) Treatment of payments. Beginning on the effective date of transfer of the servicing of any mortgage loan, with respect to payments received incorrectly by the transferor servicer (rather than the transferee servicer that should properly receive the payment on the loan), the transferor servicer shall promptly either:

(i) Transfer the payment to the transferee servicer for application to a borrower's mortgage loan account, or

(ii) Return the payment to the person that made the payment and notify such person of the proper recipient of the payment.

(d) Preemption of State laws. A lender who makes a mortgage loan or a servicer shall be considered to have complied with the provisions of any State law or regulation requiring notice to a borrower at the time of application for a loan or transfer of servicing of a loan if the lender or servicer complies with the requirements of this section. Any State law requiring notice to the borrower at the time of application or at the time of transfer of servicing of the loan is preempted, and there shall be no additional borrower disclosure requirements. Provisions of State law, such as those requiring additional notices to insurance companies or taxing authorities, are not preempted by section 6 of RESPA or this section, and this additional information may be added to a notice provided under this section, if permitted under State law.

12 U.S. Code § 2605 - Servicing of mortgage loans and administration of escrow accounts

Each person who makes a federally related mortgage loan shall disclose to each person who applies for the loan, at the time of application for the loan, whether the servicing of the loan may be assigned, sold, or transferred to any other person at any time while the loan is outstanding.

Each servicer of any federally related mortgage loan shall notify the borrower in writing of any assignment, sale, or transfer of the servicing of the loan to any other person.

Except as provided under subparagraphs (B) and (C), the notice required under paragraph (1) shall be made to the borrower not less than 15 days before the effective date of transfer of the servicing of the mortgage loan (with respect to which such notice is made).

The provisions of subparagraphs (A) and (B) shall not apply to any assignment, sale, or transfer of the servicing of any mortgage loan if the person who makes the loan provides to the borrower, at settlement (with respect to the property for which the mortgage loan is made), written notice under paragraph (3) of such transfer.

Each transferee servicer to whom the servicing of any federally related mortgage loan is assigned, sold, or transferred shall notify the borrower of any such assignment, sale, or transfer.

Except as provided in subparagraphs (B) and (C), the notice required under paragraph (1) shall be made to the borrower not more than 15 days after the effective date of transfer of the servicing of the mortgage loan (with respect to which such notice is made).

Any notice required under paragraph (1) shall include the information described in subsection (b)(3).

During the 60-day period beginning on the effective date of transfer of the servicing of any federally related mortgage loan, a late fee may not be imposed on the borrower with respect to any payment on such loan and no such payment may be treated as late for any other purposes, if the payment is received by the transferor servicer (rather than the transferee servicer who should properly receive payment) before the due date applicable to such payment.

If any servicer of a federally related mortgage loan receives a qualified written request from the borrower (or an agent of the borrower) for information relating to the servicing of such loan, the servicer shall provide a written response acknowledging receipt of the correspondence within 5 days (excluding legal public holidays, Saturdays, and Sundays) unless the action requested is taken within such period.

During the 60-day period beginning on the date of the servicer ’s receipt from any borrower of a qualified written request relating to a dispute regarding the borrower’s payments, a servicer may not provide information regarding any overdue payment, owed by such borrower and relating to such period or qualified written request, to any consumer reporting agency (as such term is defined under section 1681a of title 15 ).

The 30-day period described in paragraph (2) may be extended for not more than 15 days if, before the end of such 30-day period, the servicer notifies the borrower of the extension and the reasons for the delay in responding.

In addition to the amounts under paragraph (1) or (2), in the case of any successful action under this section, the costs of the action, together with any attorneys fees incurred in connection with such action as the court may determine to be reasonable under the circumstances.

A transferor or transferee servicer shall not be liable under this subsection for any failure to comply with any requirement under this section if, within 60 days after discovering an error (whether pursuant to a final written examination report or the servicer ’s own procedures) and before the commencement of an action under this subsection and the receipt of written notice of the error from the borrower, the servicer notifies the person concerned of the error and makes whatever adjustments are necessary in the appropriate account to ensure that the person will not be required to pay an amount in excess of any amount that the person otherwise would have paid.

If the terms of any federally related mortgage loan require the borrower to make payments to the servicer of the loan for deposit into an escrow account for the purpose of assuring payment of taxes, insurance premiums, and other charges with respect to the property, the servicer shall make payments from the escrow account for such taxes, insurance premiums, and other charges in a timely manner as such payments become due. Any balance in any such account that is within the servicer ’s control at the time the loan is paid off shall be promptly returned to the borrower within 20 business days or credited to a similar account for a new mortgage loan to the borrower with the same lender.

Notwithstanding any provision of any law or regulation of any State, a person who makes a federally related mortgage loan or a servicer shall be considered to have complied with the provisions of any such State law or regulation requiring notice to a borrower at the time of application for a loan or transfer of the servicing of a loan if such person or servicer complies with the requirements under this section regarding timing, content, and procedures for notification of the borrower.

The term “ effective date of transfer ” means the date on which the mortgage payment of a borrower is first due to the transferee servicer of a mortgage loan pursuant to the assignment, sale, or transfer of the servicing of the mortgage loan.

The term “ servicing ” means receiving any scheduled periodic payments from a borrower pursuant to the terms of any loan, including amounts for escrow accounts described in section 2609 of this title , and making the payments of principal and interest and such other payments with respect to the amounts received from the borrower as may be required pursuant to the terms of the loan.

A person who makes a federally related mortgage loan shall not be liable to a borrower because of a failure of such person to comply with subsection (a) with respect to an application for a loan made by the borrower before the regulations referred to in paragraph (3) take effect.

A servicer of a federally related mortgage loan shall not be liable to a borrower because of a failure of the servicer to perform any duty under subsection (b), (c), (d), or (e) that arises before the regulations referred to in paragraph (3) take effect.

The Bureau shall establish any requirements necessary to carry out this section. Such regulations shall include the model disclosure statement required under subsection (a)(2).

For purposes of this subsection and subsections (l) and (m), the term “ force-placed insurance ” means hazard insurance coverage obtained by a servicer of a federally related mortgage when the borrower has failed to maintain or renew hazard insurance on such property as required of the borrower under the terms of the mortgage.

A servicer of a federally related mortgage shall accept any reasonable form of written confirmation from a borrower of existing insurance coverage, which shall include the existing insurance policy number along with the identity of, and contact information for, the insurance company or agent, or as otherwise required by the Bureau of Consumer Financial Protection.

No provision of this section shall be construed as prohibiting a servicer from providing simultaneous or concurrent notice of a lack of flood insurance pursuant to section 4012a(e) of title 42 .

All charges, apart from charges subject to State regulation as the business of insurance, related to force-placed insurance imposed on the borrower by or through the servicer shall be bona fide and reasonable.

A prior section 2605, Pub. L. 93–533, § 6 , Dec. 22, 1974 , 88 Stat. 1726 , related to advanced itemized disclosure of settlement costs by the lender and liability of the lender for failure to comply, prior to repeal by Pub. L. 94–205, § 5 , Jan. 2, 1976 , 89 Stat. 1158 .

2010—Subsec. (e)(1)(A). Pub. L. 111–203, § 1463(c)(1) , substituted “5 days” for “20 days”.

Subsec. (e)(2). Pub. L. 111–203, § 1463(c)(2) , substituted “30 days” for “60 days” in introductory provisions.

Subsec. (e)(4). Pub. L. 111–203, § 1463(c)(3) , added par. (4).

Subsec. (f)(1)(B), (2)(B). Pub. L. 111–203, § 1463(b)(1) , substituted “$2,000” for “$1,000”.

Subsec. (f)(2)(B)(i). Pub. L. 111–203, § 1463(b)(2) , substituted “$1,000,000” for “$500,000”.

Subsec. (g). Pub. L. 111–203, § 1463(d) , inserted at end “Any balance in any such account that is within the servicer’ s control at the time the loan is paid off shall be promptly returned to the borrower within 20 business days or credited to a similar account for a new mortgage loan to the borrower with the same lender.”

Subsec. (j)(3). Pub. L. 111–203, § 1098(4) , substituted “Bureau” for “Secretary” and struck out “, by regulations that shall take effect not later than April 20, 1991 ,” before “establish”.

Subsecs. (k) to (m). Pub. L. 111–203, § 1463(a) , added subsecs. (k) to (m).

1996—Subsec. (a). Pub. L. 104–208 amended heading and text of subsec. (a) generally. Prior to amendment, text consisted of pars. (1) to (3) relating to requirements for lenders of federally related mortgage loans to disclose to applicants whether servicing of such loan may be assigned, sold, or transferred, directed Secretary to develop model disclosure statement, and required signature of applicant on all such disclosure statements.

1994—Subsec. (a)(1)(B). Pub. L. 103–325 substituted “(B) at the choice of the person making a federally related mortgage loan—

“(i) for each of the most recent”

for “(B) for each of the most recent”, redesignated cls. (i) and (ii) as subcls. (I) and (II), respectively, and realigned margins, substituted “or” for “and” at end of subcl. (II), and added cl. (ii).

1991—Subsec. (j). Pub. L. 102–27 added subsec. (j).

Amendment by section 1098(4) of Pub. L. 111–203 effective on the designated transfer date, see section 1100H of Pub. L. 111–203 , set out as a note under section 552a of Title 5 , Government Organization and Employees.

Amendment by section 1463 of Pub. L. 111–203 effective on the date on which final regulations implementing that amendment take effect, or on the date that is 18 months after the designated transfer date if such regulations have not been issued by that date, see section 1400(c) of Pub. L. 111–203 , set out as a note under section 1601 of Title 15 , Commerce and Trade.

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• Mortgage Servicing Rules, the FDCPA, and Your Legal Rights

Sometimes a homeowner can make a defense to a foreclosure based on a mortgage servicer’s violation of rules governing this industry. They also may have rights that they can assert under the federal Fair Debt Collection Practices Act (FDCPA). These defenses may not defeat the foreclosure entirely, but they may delay it or give you some leverage in negotiations.

The FDCPA will not apply in many circumstances, but states may have similar debt collection laws that apply to foreclosures.

Federal mortgage servicing rules are generally meant to encourage mortgage servicers and homeowners to find alternatives to foreclosure. They also provide requirements for communications between the lender and the homeowner. If the lender fails to give you proper notice of the foreclosure under the rules, you may be able to delay the foreclosure until you receive notice. Also, if you submit your loss mitigation application 38 days or more before the foreclosure sale, this will trigger additional steps that the lender must take before proceeding with the sale. If it proceeds with the sale anyway, you can ask a court to cancel the sale, which will delay the process and give you more time to move or explore alternatives. You can also report a mortgage servicer to the Consumer Financial Protection Bureau (CFPB) if it violates these rules.

Does the FDCPA Cover Foreclosures?

People usually think of the FDCPA as a debt collection law, but it can be relevant to foreclosures in some cases. The language of the law is ambiguous, but some courts have ruled that a person or entity that tries to collect a payment on a mortgage or pursue a foreclosure can be defined as a debt collector within the meaning of the law. (Often, this will be the attorney of the foreclosing party.) On the other hand, some courts believe that the FDCPA does not cover foreclosures because collecting a debt is a different activity from enforcing a security interest. The U.S. Supreme Court ruled in 2019 that the FDCPA does not generally apply to non-judicial foreclosures. This precedent may affect how courts will view the FDCPA in relation to judicial foreclosures.

The U.S. Supreme Court decision in Obduskey v. McCarthy & Holthus LLP held that businesses engaged in only non-judicial foreclosure proceedings are not generally “debt collectors” under the Fair Debt Collection Practices Act.

Even if the FDCPA does not cover foreclosures, debt collection laws in your state may cover foreclosures. You can consult an attorney to determine whether your state’s law may extend further than the federal law.

Asserting Your Rights Under the FDCPA

The impact of the FDCPA on foreclosures often relates to the notice requirements under the law. A foreclosing entity that meets the definition of a debt collector must provide written notice within five days of first communicating with the debtor. This notice will identify the creditor, state the amount of the debt, and tell the consumer that they have 30 days to verify the debt. As a result, if you are at risk of foreclosure, you can dispute the existence or amount of the debt within 30 days of getting the notice. Continuing collection efforts before the debt is verified violates the FDCPA. Inappropriate charges that form part of the debt also violate the FDCPA, as does a failure to provide the homeowner with a verification of the debt. Moreover, failing to provide the homeowner with the required notice violates federal law.

While identifying an FDCPA violation may not necessarily save your home, you can recover any monetary damages resulting from the violation, in addition to statutory damages up to $1,000.

Last reviewed October 2023

Foreclosure Law Center Contents   

• Foreclosure Law Center
• Errors and Abuses by Mortgage Servicers & Your Legal Rights
• Foreclosure Trustees & Their Legal Obligations
• Strict Foreclosure Laws
• Expedited Foreclosure Laws & Procedures
• Tax Debt Leading to Foreclosure & Legal Concerns
• Homeowners' Association Liens Leading to Foreclosure & Other Legal Concerns
• Timeshare Foreclosures & the Legal Process
• Investment Property Foreclosures & Your Legal Options
• Manufactured Home Foreclosures & Relevant Legal Concerns
• The Right of Redemption Before and After a Foreclosure Sale Under the Law
• Reinstatement and Payoff to Prevent Foreclosure & Your Legal Rights
• Fannie Mae and Freddie Mac Foreclosure Prevention Strategies
• Divorce and Foreclosure Prevention — Legal & Practical Considerations
• Natural Disasters and Legal Options for Foreclosure Prevention
• Federal Mortgage Servicing Laws Protecting Homeowners
• Fighting a Foreclosure — Legal Options and Issues
• Homeowners' Legal Rights Before, During, and After Foreclosure
• How Liens and Second Mortgages May Legally Affect Foreclosure
• Foreclosure Scams — Legal Concerns & Consumer Protections
• Judicial vs. Non-Judicial Foreclosure Under the Law
• Fighting a Foreclosure in Court & Legal Strategies
• Delaying a Foreclosure
• The Statute of Limitations Defense Under Foreclosure Law
• Using the Legally Defective Affidavit or Declaration Defense to Foreclosure
• The Legally Invalid Assignment Defense to Foreclosure
• Setting Aside a Foreclosure Sale
• Challenging Fees in Foreclosure
• Working With a Foreclosure Lawyer
• Alternatives to Foreclosure — Legal & Financial Considerations
• Foreclosure Laws and Procedures: 50-State Survey
• Foreclosure Law FAQs for Consumers
• Find a Foreclosure Defense Lawyer

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Servicing: Assignments to HUD, Part I: Reasons, Processes and Purpose

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Whether you are involved in reverse mortgage loan servicing, origination or any aspect in between, no doubt you understand and strongly believe in the benefits a reverse mortgage provides to our borrowers. I’m not sure, however, that the industry as a whole understands or appreciates the important role HUD serves with the HECM product. In this two-part piece, the detailed process and aspects of the HUD assignment process will be explored.

Those on the servicing side understand the importance of HUD insurance through its second mortgage and the twofold purpose it serves:

ONE || This second mortgage insures borrowers in the exceptionally unlikely and rare event a lender goes out of business, and

TWO || HUD provides insurance for servicers in the event a loan is not paid back in full. This remedy is essentially handled like any insurance claim, and like traditional insurance, there are different types of claims.

With traditional insurance (auto, home), the most common claims are made when something negative (accidents, injury) happens. I categorize these types of claims in the HECM insurance world as those that are filed for reasons of default. Examples would be when a loan is called due and payable or the loan has been satisfied in any way other than full payment to the lender. These are HUD Claim Type 21 (Foreclosure/Deed in Lieu) and Claim Type 23 (Mortgagor’s Short Sale) processes. Insurance companies also offer incentives for positive records (that is, spotless driving records with no accidents or injuries). In the HECM insurance world, these would include the Assignment to HUD or HUD Claim Type 22 process.

Let’s walk through the complicated territory servicers navigate when a loan reaches 98 percent of its Maximum Claim Amount (MCA), determined by the current loan balance as a percentage of the MCA. The MCA is determined at closing and is defined by HUD as “the lesser of a home’s appraised value or the maximum loan limit that can be insured by FHA.”

When a loan becomes eligible for assignment to HUD at 98 percent of MCA, it must meet certain criteria for

HUD to accept it, take over the servicing and then pay the claim to the lender. To ensure that a loan is ready for this assignment, this criterion is triple-checked well before the balance reaches 98 percent (typically this happens when it approaches 85 to 90 percent). Loans move (slowly) to MCA through the monthly accumulation of interest, mortgage insurance premiums and servicing fees. During this initial review, the servicer is seeking to confirm that the loan is in “active” status.

HUD will not accept a loan for assignment if it is in default or is due and payable. The review focuses on origination documents and ensures that there are no errors on the mortgage, that assignments (if applicable) are in place, and that the servicer has all of the documents required for submission to HUD. If anything is incorrect or out of place in the servicing file, we work aggressively to correct it. As a subservicer, Celink reaches out to its clients involved in the origination process. Rare cases arise when a client (or its subservicer) is unable to fix a document error, which makes the loan’s assignment to HUD impossible.

There may be other reviews of a loan, especially if work is required to complete or fix errors. In short, a final review process follows and this happens much closer to eligibility, around 96-97 percent of MCA. Loans can take years to move to this assignment process.

A majority of loans are paid off or will have moved to default/due and payable status before reaching HUD assignment eligibility. A loan that is eligible at 95 or 96 percent may not be eligible at 97.5 or 98 percent. Additionally, a loan that has lender/force-placed insurance (FPI) or delinquent property taxes is not eligible for assignment. This is true even when the FPI or delinquent property taxes do not create a default status on the loan.

Part II will focus on eligible loans for assignment to HUD and the process of assignment within HUD’s servicing software, HERMIT.

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What Is Robo-Signing and How Does It Affect My Mortgage?

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Robo-signing is when documents are signed by someone who doesn't understand them. It was a problem with mortgage documents in the 2008-10 housing crisis. Mortgages were being transferred between many different parties. This made it hard to know who had the legal right to foreclosure. Robo-signing is not illegal, but the practice is no longer common.

Written by Lawyer John Coble .  Updated November 26, 2021

Robo-signing is when a person signs documents without knowing or understanding their contents. This is a serious problem when it's used with mortgage transfer documents. It can make it difficult to know who has the right to foreclose on your home if you fall behind on your payments. This article will discuss why robo-signing matters, the role it played in the mortgage crisis of 2010, and current laws addressing it.

What Is Robo-Signing?

A robo-signer is a person who signs important mortgage documents without properly reviewing them. This problem contributed to the 2010 housing crisis. Robo-signers didn't have the training to understand what they were signing — sometimes because they were temporary workers. But they were under pressure to meet certain quotas. Employees of major banks testified to having signed thousands of documents per month. Some robo-signers were signing as many as 10,000 documents per month.

Robo-signing often means signing foreclosure documents (like affidavits) without reviewing or understanding them. But it can also mean other things like forging a signature or signing with a false job title. There have also been issues with notary signatures. Affidavits are sworn statements that have to be notarized, a process that ensures someone can attest to the identity of the signer. But some notaries pre-notarized affidavits, while others notarized documents after they’d been signed. These would all be invalid.

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Why Does Robo-Signing Matter?

The common law statute of frauds requires all contracts related to land transfers to be in writing. Most states interpret this to mean mortgage documents must have genuine signatures to be valid. Mortgages are often transferred, and when they are the mortgage needs to be signed by a knowledgeable party. The signature shows that the signer understands and approves the document. Requiring signatures at each point of transfer protects the parties to the transfer.

A robo-signer's signature means nothing since they don't know why or what they're signing. As a result, in many states, if a transfer document has been robo-signed the transfer is considered invalid. This leaves doubt about which party has the right to foreclose.

Robo-Signing, the Mortgage Crisis, and the Great Recession

In the old days, borrowers would take out a mortgage with their local bank and make payments to that same bank. The borrower would eventually pay off the note or the bank would foreclose. This type of mortgage does still happen, but it's rare. Since there are only two parties to the mortgage — the borrower and the bank — it’s uncommon to see problems with robo-signing. 

These days, most mortgages are securitized. You may still take out a mortgage at your local bank, but it usually won't stay there. Your local bank will be the mortgage originator. It will transfer your mortgage to a "sponsor." The sponsor will transfer the mortgage to a "depositor." The depositor will transfer the mortgage to a trustee. The trustee will group your mortgage with other mortgages in what's called a pool servicing agreement (PSA). The trustee will then issue mortgage-backed securities (MBS) in the pool where your mortgage is grouped. Wall Street banks will sell these MBS to investors who are the ultimate recipients of the money you pay on your mortgage. 

You make your mortgage payments to your loan servicer. They also handle matters like loss mitigation programs. The loan servicing company makes payments to the trustee who distributes money to the investors.  

Consequences of Securitization

Before securitization, mortgage documents were only signed by you and your bank. Since your bank would have a loss if you didn't pay your mortgage the signer always understood what they were signing. Since you would lose your home if you didn't comply with the mortgage documents, you would make every effort to understand the documents. Robo-signing couldn't exist in such a system.

Now, with securitization, the risk of loss is quickly removed from the mortgage originator. The rights and responsibilities of the mortgage are split between many different parties. The signature on the mortgage documents at each transfer is critical to show that they have been reviewed by a competent party.

The Role of Outside Companies and Investors

Your mortgage servicer may be a familiar name like Wells Fargo. The trustee of the PSA where your mortgage is might be a less familiar name like Deutsche Bank. A company like Mortgage Electronic Registration Systems (MERS) may have been retained to keep track of all the transfers of your mortgage. While MERS was tracking everything, other outside contractors were needed to oversee the transfers. These included companies like Lender Processing Services (LPS) and DocX.

As complicated as this all sounds, this is a simplified explanation. The bottom line is: The securitization process is complicated. With all the transfers and splitting apart of rights that go with the securitization process, signatures are very important. The homebuyer and investor never see each other or even know who the other is. Having competent parties sign off on the documents at each step in the process is critical for the system to work.

These documents assign rights and responsibilities to different parties, including the right to foreclose on your home. Robo-signing makes it harder to determine which entities have the legal right to foreclosure. This is why companies like MERS that were meant to simply track transfer began asserting the right to foreclosure.

Securitization, the Housing Bubble, and Foreclosures

Wall Street had plenty of investors wanting to buy the MBS. This created a strong push to create more and more mortgages, which led to lenders giving homebuyers loans who couldn't afford to make the mortgage payments. With this easy money, buyers who couldn't afford these homes purchased them, which inflated housing prices. This is what's known as a housing bubble. 

The system was so fragile that a slight downturn in the economy was enough to send a lot of homes into foreclosure. The realization that banks were holding a lot of worthless loans led to a collapse of the financial system. Without government intervention, many of the largest banks in the country would have failed in a moment comparable to the Great Depression. Even with government intervention, the U.S. saw the worst recession since the Great Depression.

Since a lot of people had mortgages and couldn't afford the payments , there were a lot of foreclosures during this recession. More followed after many people lost their jobs as economic conditions got worse. With all these foreclosures, attorneys took a closer look at the foreclosure process and discovered robo-signing was happening on a massive scale.

What's the Current Law Regarding Robo-Signing?

Since robo-signing contributed to one of the worst economic recessions in American history, you may think laws were passed to address it. Unfortunately, they haven’t been. There is no federal law prohibiting robo-signing. In fact, Congress passed a bill that would’ve made robo-signing de facto legal nationwide by forcing states to respect notarizations from any other state. So if it were legal in one state, it’d essentially be legal in any state. This bill was vetoed by President Obama before being enacted into law. At the time, the public wasn't aware of how bad the robo-signing problem was. 

Laws & Practices Vary by State

Foreclosure proceedings are based on state law. Some foreclosures must go through a court process. These are called judicial foreclosures. Other states have a nonjudicial foreclosure process, meaning they don’t have to go through the court. Some of these nonjudicial foreclosure states don't require the foreclosing party to prove they have the authority to foreclose.

For example, the Arizona Supreme Court ruled that a beneficiary (foreclosing party) doesn't have to prove its authority before the trustee begins a deed of trust foreclosure. If a foreclosing party doesn't have to prove ownership under a state's law, you can see how it’s easier for robo-signing to continue unchallenged. 

But even if robo-signing is irrelevant, that doesn't make it legal. The federal government and 49 state attorneys general reached a $25 billion settlement with the nation's top five mortgage servicers for mortgage servicing abuses and abusive foreclosure practices. The abuses addressed in the National Mortgage Settlement included robo-signing. The defendants in this settlement were Bank of America, JP Morgan Chase, Citi, Wells Fargo, and GMAC (now Ally Financial).

Robo-signing has been prosecuted under different types of criminal laws in many states. Of course, forgery is a crime everywhere. Yet, not all robo-signing involves forgery. In Michigan, the president of DocX was found guilty of racketeering. A federal district court in Florida found the same executive guilty of forged signatures, false signatures, and fraudulent notarization on over 1 million documents. So robo-signing is illegal, but it's not well-defined nor is there a uniform law across the nation. What we have is a hodgepodge of court interpretations with little new legislation at the state level.

California Civil Code §2924.17(b) is a rare example of a state legislature trying to deter robo-signing. Most states are not as explicit. In these states, robo-signing or something akin to it could still be happening.

If you have a mortgage that was originated before the 2008-2010 robo-signing scandal, there's a good chance there are robo-signed documents in your chain of title. Much effort has gone into fixing these issues. But it's likely some robo-signed documents still exist. If you're facing foreclosure, it's a good idea to contact a foreclosure defense attorney or a local attorney . You may be able to show the entity trying to foreclose on your home doesn't have the legal right to foreclose.

Let’s Summarize…

Robo-signing is a practice that leads to invalid document transfers between different parties to a mortgage. As a result, many foreclosures were brought against homeowners by parties who didn’t have the right to foreclose. The practice went largely unnoticed until the housing bubble and Great Recession drew attention to increased foreclosures. While some financial institutions were fined and some executives even prosecuted, there are no federal — and very few state — laws banning robo-signing. 

Financial institutions in the mortgage industry such as large banks made a great effort to repair all the robo-signed documents. But, due to the sheer number of robo-signed documents, it's unlikely they were all fixed. For this reason, in states where it can work, it's a good idea to make the company foreclosing on your home prove it has the right to foreclose. You may find the company doesn't have the authority to foreclose because of robo-signing or some other reason. If your home is being foreclosed, it’s wise to discuss the issue with a foreclosure defense attorney. You may be able to stop or at least delay the foreclosure.

Lawyer John Coble

John Coble has practiced as both a CPA and an attorney. John's legal specialties were tax law and bankruptcy law. Before starting his own firm, John worked for law offices, accounting firms, and one of America's largest banks. John handled almost 1,500 bankruptcy cases in the eig... read more about Lawyer John Coble

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