Since beginning MFI-Miami, I’ve seen a lot of mortgage servicers attempting to foreclose on homeowners without being able to prove they are the proper custodian of the note or mortgage. I have one client right now who is beginning litigation against American Home Mortgage Servicing, Inc. partially because they can’t provide proof of the transferring from Option One Mortgage Corporation or from the original lender. I have another client whose foreclosure was cancelled (with MFI’s help) by Bear Stearns because they could not prove the transfer even happened between them and Quicken Loans. I could go on and on by listing other clients I’ve had. However, the point is that because Wall Street firms trade mortgage portfolios like Baseball cards, no one can identify the legal custodian of your note and mortgage is.

Here is basically how it works. You closed your loan with a lender. They sell it to an undisclosed mortgage aggregator for an undisclosed amount (usually around 1% of the face value of the mortgage), a 2.5% fee plus the points and fees from closing. The manager of this pool of loans then sells your loan to other aggregators, who also buy, sell, or trade these securitization pools like baseball cards. The managers of these pools then hire a servicing company to collect your payments. In some cases, a large lender or a bank like Countrywide or Bank of America may buy it and service it themselves. With all this trading, the servicing company you make your payment to may not necessarily be the legal custodian of your mortgage.

This gives you, as the homeowner, the upper hand in a foreclosure because only the legal custodian of the note or their authorized agent can foreclose on a homeowner. Through this maze of trades and counter trades, the mortgage and the note are moved upstream but in no case are all of the transfers of ownership recorded in the local property records. Although a fund manager could offer a plethora of reasons as to why, the real reason is, fund managers want to save a few dollars by avoiding taxes and filing fees that would apply to each recording. The people who buy and sell these pools also neglect an essential and basic element of property law. You can’t sell, transfer, or modify what you don’t own. Both the deed and the mortgage are considered an interest in real property and those interests must be recorded to be valid and legitimate. The real owner of the note is the only one who has the power to enforce the terms of the note and mortgage but the question is who is it?

One way you can protect yourself in a modification or short sale is to deal with the entity that actually holds the interest. Unfortunately, this information is almost impossible to find because of all the trading between funds. This is the problem with the securitization process because the legitimate holder of your note can try to make a claim against you after you sign the modification agreement or short sale with your current servicer.

The other way you can protect yourself is to demand indemnification from the servicing agent you are negotiating the short sale or modification with. This option is not only the best and easiest way to protect yourself but it is also the only fair way to do it. In most modification agreements, the servicer offering the loan modification has an indemnification agreement that holds them harmless for any fraud, deception and misrepresentation that may have occurred when executing the original loan. They also have a clause that forces you to acknowledge they are now the legal custodian of the note and mortgage. Mortgage Servicers are shielding themselves from liability. You should too!

So, how do you get indemnification from the servicer offering to accept the short sale or loan modification? You demand that a new title policy be issued that does not state exceptions to the securitization process. In order to be sure that the title insurance company doesn’t deny you coverage because for lacking full coverage, you must disclose to the title agent in writing that the possibility exists that others may have an interest in the property or the mortgage.

If the agent refuses to issue the policy without an exception, it probably means they were the ones who did the closing and were fully aware of the securitization process and failed to disclose this information to you. Depriving you of the knowledge of who the real lender is and to whom a rescission letter or Qualified Written Request should be sent could arguably extend your three day right of rescission indefinitely.

With all of the headlines about government bailouts, bank takeovers, stock market declines, etc ad nauseum, this seems to be a question on the minds of consumers. Everywhere I go, I am asked by people in my community about the availability of mortgage money. Most are readers of my column in the local paper, but all have a slight distrust for the media and the validity of the information being provided to them on the evening news. In the light of all of this, those questions are good ones to ask. And since FHA loans make up a large percentage of the mortgage business, at least in my corner of the world, I will focus on that program in this column.

FHA is not the old Farmers Home Administration. It is run under the auspices of HUD, not USDA. It has been around since the 1930s and it was the first program that offered lenders protection in the form of mortgage insurance when a smaller down payment than the normal 20% was being made by the homebuyer. FHA has lender guidelines that are published and there are Direct Endorsement [DE] underwriters who are given authority to approve the loans as opposed to sending files directly to HUD for approval.

HUD may have guidelines, but lenders may have more restrictive self-imposed guidelines by their own choice. Some of the guidelines that relate to credit score, property type and alternate credit are being focused upon by lenders today. HUD does not have FICO credit score requirements, for example. But lenders may decide to impose them. And many have decided that only automated approvals will allow them to move forward with a loan application if the credit score is below a certain threshold.

FHA [Federal Housing Administration] does allow for manufactured housing, too. There are certain requirements for manufacture dates and foundation specifications. Those loans tend to be grouped together for sale on the secondary market and may be priced differently. At present, the secondary market does not seem to have much of an appetite for loans secured by manufacture housing. And, consequently, a number of lenders are not presently offering the product.

Related to the FICO scores are the absence of scores and borrowers who use alternate credit references such as utility bills, rent, documented savings histories, etc., to compensate for the lack of traditional credit. Some of these homebuyers are very good credit risks and have demonstrated responsibility without the use of traditional credit. This is an area that some lenders are not willing to take a risk on at the moment.

But, the good news is that FHA loans ARE being done. Loans ARE being funded. And even if down payment requirements are increasing slightly, the low rate of mortgage insurance makes FHA one of the best programs available. It is not a subprime program. And it is not only for people who have had credit issues. There are no income restrictions, either. If you are shopping for a home, you should consider the FHA program. You can contact HUD for a list of approved lenders or you can ask your trusted real estate professional about the program. If you are working with a knowledgeable agent, he or she will not only know about the FHA program, but which loan officers are proficient in FHA lending. And that is a very important piece of knowledge to have in these times of uncertainty.

Paul Chandler, Certified Mortgage Professional, is the Newport Branch Manager for Universal Mortgage Corporation. He graduated from the University of Maine’s business school in 1979 and has been in the financial services industry ever since. Since 1991, he has exclusively been involved in mortgage lending, moving to the Newport area in 1993. His column, “Mortgage Matters” is a regular feature in the Newport Daily Express. He also authors a blog at http://www.misterva.typepad.com. He also has been a contributor to Mortgage Originator Magazine. If you have a mortgage related question, please call 802-334-1999.