Beginning Oct. 1, sellers would be required to deliver a loan closing checklist of required documents. Consequences could range up to being forced to repurchase the loan. The recommendations were made by a joint task force of the MBA as well as the Commercial Mortgage Securities Administration.
"It puts into place a lot of things that should've been there before," says Daniel J. Hartnett, a partner with Chicago-based McDermott, Will & Emery. "It should make mortgage-backed securities better investments."
The task force spent eight months on its report and recommendations after investors, rating agencies, attorneys and lenders began noticing problems with missing loan documents. "In general, the trend was headed to a marked increase in litigation," says Pamela J. Dent, vice president of Moody's Investor Service.
In the worst cases, absence of required documents can stall foreclosure proceedings, or jeopardize collateral entirely. Dent noted one hotel loan where the owner had borrowed against furniture, fixtures and equipment twice. Hartnett added ground leases that existed before the sale have been terminated, eliminating collateral.
"Delays cost money," Dent says. "Delays cause the severity of losses to substantially increase."
Hartnett says the task force focused on deciding what documents were actually necessary, and in some cases, what form. "This will save a lot of angst and a lot of cutting down of trees," he adds.
Mary Ann Ashmore, first vice president of LaSalle Bank's asset-backed securities trust services group and task force coordinator, says lack of communication was the biggest problem her group found in dealing with the larger issue of missing documents and incomplete mortgage files. "Now everybody will have the same information instead of each of us being creative in thinking how the attorneys set up the loan," Ashmore says.
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