Gap in the assignment chain on a note I'm eight days from funding, seller offering a 10k holdback

Single performing first. 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. Everything about the borrower and the collateral I like.

Collateral review came back with two problems. There's an intervening assignment that was executed in 2019 and never recorded, so the recorded chain skips a holder. And one of the endorsements sits on an allonge that I only have as a scan, the seller can't locate the wet original and is talking about a lost note affidavit covering that link.

Seller's response was fast and reasonable, which makes me more suspicious rather than less. He's offering to hold back 10,000 from the purchase price for 90 days while his vendor chases the recorded assignment and the original allonge, released to me if he cures, released to him if he doesn't and I have no claim.

What I can't price is the downside case. If the borrower keeps paying for the next nine years this never matters. If the borrower defaults in year three and I need to foreclose, I'm 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. This is a judicial state.

Three options in front of me. Fund with the holdback as offered. Refuse to fund until the corrective assignment is recorded and in my hands, which he says is 60 to 90 days and he'll go elsewhere. Or walk and eat the 1,150 I've already spent on review and BPO.

I keep going back and forth on whether 10,000 on a 97,000 outlay is a real number or a comfortable-sounding one.

Answer

1sonia_alvarez Get yoursPRO6

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 not curing, 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 can't 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, don't pick 10,000 because it's 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 you can carry across markets. In the states I've dealt with, a corrective assignment is cheap and a contested standing fight is not. 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 thing I'd do is separate the two defects. The unrecorded assignment is usually curable with paper from a party who still exists. The missing original allonge depends on whether the endorser is still around to re-execute. Ask who that party is. If they're 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 isn't a price for this one.

4 replies

1wendy_park48CapitalPRO7

Ask a very specific question: is the missing original an allonge, or is the note itself missing? Those get talked about interchangeably and they aren't 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 I'd want in writing from the seller before I decided 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. Sellers who bought a big tape usually have twenty loans with the identical gap. If he's already cured one, the cost and timeline are known and he can just tell you.

tender's flip on the release condition is the whole point. As written you're paying him a bonus for doing what he already promised.

1aaron_fitz10 Get yoursPRO6

Dumb question, why does the assignment need to be recorded at all if you have the note endorsed to you? I thought the note was the thing that carried the debt and the mortgage just followed it.

1ehernandez74PO2BPRO5

kestrel, the general idea is that the note carries the obligation and the security instrument follows it, but the person 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, my answer is walk. Not because the risk is unmanageable, because your position is weak. He knows you've spent 1,150 and he knows you're eight days out, and the 90-day threat is doing the work. Loans with clean files exist. You'd be paying 82 for a file you'll 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 you take the haircut then instead of now.

If you do go forward, tender's version or nothing. And I'd want the cure done before funding rather than after. Sixty days of waiting costs you the yield on 97,000 for two months, which is maybe 1,400. That's cheap compared to what you're arguing about.