Real Estate Note Investing: Collateral File
Let’s discuss the contents of a typical collateral file, starting with the promissory note. While it’s essential to have the original note in the collateral file if the note is lost, it is possible to create a lost note affidavit or LNA. However, it’s also important to note that not all investors will be completely comfortable with this in place of the original note.
LNA’s are challenged for not containing the proper language. This would typically occur if the borrower hired an attorney and that attorney identified this as a way to block the foreclosure, and this can be particularly problematic in some states like Florida and New York, where the courts may challenge the lender over proving standing or the right to foreclose. It’s a good idea to have an experienced real estate attorney or collateral expert review LNA’s before buying a note with an LNA.
The next piece of the collateral file is the deed of trust or mortgage. It’s generally okay to have a copy of the recorded mortgage as opposed to the original recorded mortgage. You can also order a court-certified copy of the recorded mortgage for less than seventy-five dollars. The issue would be if you had an unrecorded mortgage that’s not picked up on the title, which isn’t very common. Another piece of the collateral file is the title policy., and title insurance is insurance that covers the loss of ownership interest in a property due to legal defects. The most common type of title insurance is a lender’s policy, which is paid for by the borrower but only protects the lender. The original title policy is preferred, but a duplicate copy of the original title policy is generally acceptable for most note investors. When no title policy can be located, a replacement title policy is sometimes required. The cost of the policy varies by state and by the original loan amount but could be as little as a few hundred dollars. In some cases, it’s thousands, and that would be more for a higher value property in specific states. In the event, a loan has been modified, and there should also be an original loan modification in the collateral file. A modification is a legal document that changes the original terms of the loan type as a result of the borrower’s inability to repay the loan. Loan modifications typically involve one of the following, a change of the interest rate on the loan, an extension of the length of the term of the loan, or a change of type of loan. For example, maybe it was an adjustable-rate mortgage modified to a fixed-rate mortgage. It can also be any combination of the above. A loan modification should be executed by all borrowers on the original note as well as by the lender or servicer issuing the modification. Should be notarized as well. So the mod can be recorded in the county assuming that’s an option.
Another key component of the collateral file is the assignment of mortgage or assignment of deed of trust. An assignment is a recordable document which indicates that a mortgage has been transferred from one lender to another. The document is referred to as an assignment of mortgage in a mortgage state and an assignment of deed of trust in a deed of trust state. Assignments are notarized and recorded in the county where the subject property has located an allonge, also referred to as an endorsement of the note, is typically a separate piece of paper from the note providing space for an endorsement of the note. An allonge chain can be considered complete if the original note has an endorsement to blank, meaning it’s left blank for the next lender to fill in. The signature sometimes continues to be left blank even as the note is sold multiple times through the history of a loan. However, once the blank is filled in by a lender with there entity’s name a new allonge will then be required if selling the note. The note allonge would read pay to the order of, and then the new lender’s name would be filled in, and it would be signed by the current lender.
It’s essential to understand the necessary components of the collateral file. Know when an original document is needed and when a copy is acceptable. And finally, make sure any defects or closing exceptions are cured by the seller before purchasing a loan.
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