Posted on: Thursday, December 16, 2004

AKAMAI MONEY
Resale of home loans beyond borrower's control

By Deborah Adamson
Advertiser Staff Writer

Q: We bought our house in Mililani in 1969 and dutifully made monthly payments for 30 years, after which we received the mortgage papers stamped paid in full. What we didn't know was that we were to be besieged with problems before we could rightfully claim ownership. We found out that our loan was resold several times and one of the lenders was a savings and loan that folded. It didn't send a notice to the state that the loan had been sold. It took us five years to finalize the case. How do you keep your mortgage in Hawai'i to prevent these problems in the future? — Jovita Zimmerman, Salt Lake

A: Unfortunately, there isn't much consumers can do to prevent their loans from being resold, said David Barr, a spokesman for the Federal Deposit Insurance Corp., or FDIC.

There are two aspects of a mortgage loan — the loan itself and servicing of the loan. When a consumer takes out a mortgage loan, the lender can choose to keep the loan and service it, sell the loan or the servicing, or get rid of both.

A lender resells a loan — to another financial institution, quasi-government lenders such as Fannie Mae and Freddie Mac or investors themselves — to take out its capital and lend to someone else. A lender also can sell the servicing part — collecting payments from homeowners, answering questions, tracking interest payments, etc. — if it doesn't want to do the tasks itself.

Reselling loans ensures that the mortgage lending market remains liquid. It also provides investment opportunities for those who want to purchase mortgage-backed securities.

When the servicing portion of the loan changes hands, federal law requires that the homeowner be notified. But that's not the case for loans.

"A person really doesn't know who owns the loan," said Gayle Ishima, incoming president of the Mortgage Bankers Association of Hawaii. "From the lenders' perspective, it's their note."

As for keeping a loan in Hawai'i, choosing a local lender would help but still wouldn't guarantee it, she said.

Bank of Hawaii, the state's largest residential mortgage lender, sells between a third to half of its loans and keeps the rest, said John Gray, general manager of the mortgage banking division. Most of the loans are sold to Fannie Mae. However, the bank keeps 99 percent of its loan servicing.

In the Zimmermans' case, two things caused complications: one of the lenders was a failed savings and loan and the Zimmermans' own Land Court property.

In Hawai'i, and in a handful of other states, there are two systems to record your land through the Bureau of Conveyances: Land Court or traditionally at the bureau.

Land Court uses the Torrens System, which requires that every time a mortgage is sold, the public office must be notified and the change recorded. Torrens was established in 1903, before title companies came into being, to ensure the true ownership of a property.

The traditional system of recording doesn't have this stipulation. A property owner can choose to register using either system but today there's little need for it because of title insurance. About a third of Hawai'i's land is Land Court property, according to the state Bureau of Conveyances.

When you pay off your mortgage, the state gets a signed statement from the lender saying the mortgage has been paid. If your property is recorded traditionally with the bureau, the release of mortgage documents are enough to clear liens on your property. But if you have a Land Court property, all loan transfers also must be reflected in state records.

Since one buyer of the Zimmerman loan was a failed savings and loan, it didn't notify the Land Court when the loan was resold. With such a discrepancy, the title could not be cleared quickly.

The final lender should have helped the Zimmermans speed up the process, but since the loan is repaid they have little incentive to do so, the Bureau said.

How can homeowners avoid this hassle? There isn't much you can do since you have little control over who buys your mortgage loan. But it doesn't hurt to maintain good records to help piece things together, if needed one day, Barr said.

The good news is that in 1997 the mortgage industry created MERS — the Mortgage Electronic Registration System — to computerize paper land records. MERS also can stand in for the lender in the eyes of the Bureau of Conveyances, no matter how many times the loan has been traded, as long as lender is a member of MERS.

Got a personal finance or consumer question? Contact Deborah Adamson at dadamson@honoluluadvertiser.com or 525-8088.