A gap in the assignment chain on a performing note, with a seller offering a holdback: fund, wait, or walk

Take a single performing first note: UPB 118,500, coupon 7.25%, P&I 926, 39 payments on time with no lates in the servicer ledger, BPO 197,000, escrowed for taxes and insurance and both current. Price 82, so 97,170. The borrower and collateral look clean on paper. Collateral review turns up two problems. There's an intervening assignment executed years earlier and never recorded, so the recorded chain skips a holder. And one of the endorsements sits on an allonge available only as a scan, with the seller unable to locate the wet original and discussing a lost note affidavit to cover that link. A seller responding fast and reasonably to a defect like this is often more worth watching, not less. A common offer in this spot is a holdback, say 10,000 out of the purchase price for 90 days while a vendor chases the recorded assignment and the original allonge, released to the buyer if it cures, released to the seller if it doesn't with no claim on the buyer's side. The hard part to price is the downside case. If the borrower keeps paying for years, none of this ever matters. If the borrower defaults down the road and foreclosure becomes necessary, the buyer is the party who has to prove standing, and how much of a problem a recording gap and a copied allonge actually are depends heavily on the state and the judge, more so in a judicial state. Three options in a spot like this: fund with the holdback as offered, refuse to fund until the corrective assignment is recorded and in hand (often a 60 to 90 day wait, with the seller free to go elsewhere in the meantime), or walk and eat the diligence costs already spent. Whether 10,000 on a 97,000 outlay is a real number or just a comfortable-sounding one is worth working through carefully before deciding.

carlos_nunez AA4APRO 12

Answer

sonia_alvarez CB4APRO 17

The holdback is the wrong instrument for this risk, and you can see it in the release condition. He gets the 10,000 back if he fails to cure. So the structure pays him for curing and costs him nothing for failing to cure, while you carry the defect either way. Flip it and it starts to make sense: holdback released to him on delivery of the recorded corrective assignment and the original allonge, and if he cannot deliver in 90 days the money is yours as a price reduction, plus he signs a cooperation covenant that survives closing and obligates him to execute whatever documents are needed later at his cost. On sizing, do not pick 10,000 because it is round. Price the cure. Get a quote from a local foreclosure attorney for what it costs to clean a chain gap and enforce on a copied allonge in that state, because both the availability of a lost instrument route and how courts treat recording gaps vary by state, and that is a question for the attorney rather than a rule anyone can carry across markets. In most states a corrective assignment is cheap and a contested standing fight is expensive. If the attorney says a defended case adds 6 to 9 months and 15,000, then 10,000 is short and you now know by how much. The other move is to separate the two defects. An unrecorded assignment is usually curable with paper from a party who still exists. A missing original allonge depends on whether the endorser is still around to re-execute. Ask who that party is. If they are dissolved, no holdback fixes it and the price has to reflect a permanently imperfect file. Also, 82 was a price for a clean file. It is not a price for this one.

sonia_alvarez CB4APRO 17

4 replies

wendy_park48 CU1BPRO 17

Ask a very specific question: is the missing original an allonge, or is the note itself missing? Those get talked about interchangeably and they are not the same problem. A lost note affidavit covering an endorsement link is a different animal from one covering the instrument, and how much weight either carries turns on the state's version of the enforcement rules and on the particular court, so get that read from counsel there. What to have in writing from the seller before deciding anything: the name of the entity on that missing endorsement, whether it still exists as a filed entity, and whether the seller has ever enforced a loan out of this same pool with the same defect. A seller who bought a big tape usually has twenty loans with the identical gap. If he has already cured one, the cost and the timeline are known and he can simply tell you. Tender's flip on the release condition is the whole point. As written you are paying him a bonus for doing what he already promised.

wendy_park48 CU1BPRO 17

aaron_fitz10 PU1APRO 13

The note does carry the debt and the mortgage follows it, so that instinct is sound. Recording still matters because foreclosure runs through the public land records, and a gap in the recorded chain hands borrower's counsel an argument no matter how clean the endorsements are.

aaron_fitz10 PU1APRO 13

ehernandez74 PC3BPRO 12

Kestrel, the general idea is that the note carries the obligation and the security instrument follows it, but the party foreclosing has to show a clean record chain to the court and to a title company, and states differ enough on that point that the practical answer is local. Quarry, the answer here is walk. The risk itself is manageable. The problem is that the position is weak. He knows you have spent 1,150 and he knows you are eight days out, and the 90-day threat is doing all the work. Loans with clean files exist. At 82 you would be paying for a file you will be explaining for the next nine years, and every time you go to sell it the next buyer's reviewer finds exactly what yours found, and the haircut arrives then instead of now. If you do go forward, tender's version or nothing, and the cure wants to be done before funding rather than after. Sixty days of waiting costs the yield on 97,000 for two months, which is maybe 1,400. That is cheap compared to what you are arguing about.

ehernandez74 PC3BPRO 12

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