WHOLE LOAN BOOK ENTRY: A BLUEPRINT FOR THE FUTURE

Mortgage Banking; Oct93, Vol. 54 Issue 1, p169, 2p Fannie Mae and Freddie Mac joined together with the Mortgage Bankers Association of America (MBA) through MBA's Inter-Agency Technology Task Force (IAT) to explore whether or not paper mortgage assignments could be eliminated for new loans. The premise behind the idea is to replace the transfer of paper with an electronic exchange of information using a standardized electronic format (electronic data interchange or EDI). How would this new system work? A loan originator would register a closed loan with the whole-loan book-entry clearinghouse (Clearinghouse) via a personal computer, modem and a translation software package costing about $1,300. The mortgage also would be recorded in the public land records. The note would be endorsed in blank to the Clearinghouse and placed with a document custodian, generally for the life of the loan. An assignment of the mortgage to the Clearinghouse also would be recorded in the public land records and registered with the Clearinghouse. All subsequent transfers of interest in the loan would be registered only in the Clearinghouse's records. Based on entries of information in the Clearinghouse, the custodian, at any given time, would hold the loan on behalf of the originator, the warehouse lender or the mortgage investor. The original mortgage servicer also would be identified as would any subsequent servicers. Only those parties with an interest in particular loans would he able to access the system for those loans. For example, Freddie Mac and Fannie Mae would not have access to data regarding each other's loans. The whole-loan book-entry system is intended to operate within the existing legal framework governing rights in mortgages. An interest in a mortgage loan is generally determined by possession of the note by the real party in interest or its agent. The proposed system would essentially eliminate the need for loans to change hands custodians) when whole-loans or mortgage servicing rights are sold. Instead of endorsing notes and executing and recording mortgage assignments, a party would notify the Clearinghouse, which would update its records. The given entry would determine on whose behalf the custodian is holding a particular loan. Custodians would certify loans individually rather than on a pool-level basis as they do now. The IAT intends to proceed slowly and carefully in structuring the Clearinghouse. During the summer, several focus groups were held for various participants involved in residential finance transactions---mortgage bankers, warehouse lenders, closing agents, document custodians and county recorders. The information derived from these meetings and subsequent follow-up sessions form the basis of the white paper that will he distributed at the MBA annual convention in October. The white paper presents the whole-loan book-entry concept in detail, provides certain cost data, outlines a general game plan for implementing the whole-loan book-entry concept and suggests some ideas for possible future applications of the Clearinghouse. The IAT hopes that the white paper will generate debate. It sees the white paper as a device both for eliciting support for the concept and for identifying issues that need to be addressed or refined. Based on the responses of focus group participants, the whole-loan book-entry concept

initially appears to make sense. The chief benefits appear to be cost reduction, greater efficiency and fraud prevention. However, any industrywide change in doing business, and particularly technological change, requires a thorough understanding of what will be changed, how the change will be implemented and what benefits will be derived so that a meaningful consensus can form. Toward this end, the IAT welcomes comment on the white paper. Comments may be sent to MBA. The white paper relies on data obtained from the IAT's survey of industry focus group participants, the Fannie Mae economics department report, "Mortgage Finance Markets, Revenue Estimates" and the SMR Research Corporation report "Giants of the Mortgage Industry" (1992). According to these sources, an estimated 11.1 million transfers of servicing rights occurred in 1992. The costs associated with preparing and recording the mortgage assignments for those transactions amounted to more than $112 million. Added to these costs were the costs for transferring loan documents from one document custodian to another as a result of changes in servicers. For 1992, the aggregate cost of transferring loan documents is estimated to have been $79 million. Inefficiencies in the lienrelease process are also costly. Mail costs alone for this function are estimated to have been $18 million in 1992. Although the concept is still in its formative stages, preliminary plans call for the Clearinghouse to have a structure similar to that of the Depository Trust Corporation (DTC) and the Participants Trust Corporation (PTC), which operate book-entry systems for the securities industry. Under the DTC/PTC approach, the Clearinghouse would be operated by an independent corporate entity owned by its users. There could be several classes of participants based upon their roles in transactions involving the Clearinghouse and the benefits that the various participants would want to derive from participation. Suppliers of information, for example, may not want to be members at all, whereas mortgage investors probably would want to purchase stock to ensure full voting rights. It is intended that the Clearinghouse be open to all investors in mortgages, not just to the members of the IAT--Fannie Mae, Freddie Mac and GNMA. Private conduits and other investors in mortgages would be welcome. Although the details have obviously not been worked out yet, the IAT envisions that the Clearinghouse initially will receive for each loan the borrower's name, the property address, the original mortgage amount, the warehouse lender (if any) and the originator's name. Upon registration, the loan will be given a permanent and unique identification number. Information about the status of the loan as current, delinquent and in foreclosure will be updated as the information is received. When the loan is liquidated, a release procedure will make sure that the satisfaction of the loan is handled properly under state law. As mortgagee of record, the Clearinghouse will receive the legal notices that must be served on first lien holders under state law. The Clearinghouse will update its records, notify the servicer of the action by E-mail and forward the legal notices by overnight mail. The whole-loan book-entry system will provide a mechanism for establishing and tracking transfers of interests in mortgages, including mortgage servicing rights. By instituting the

system, participants in real estate finance transactions will allow the mortgage component of modern secondary mortgage market transactions to enter the 20th century. The long-term potential of a book-entry system for the mortgage finance industry is enormous. It is reasonable to assume that once the system has been established, the system could be expanded to include other services such as settlement and funding functions between participants, improved industry reporting capability and even electronic closings that would use paperless notes and security instruments. The system also could be extended to commercial and multifamily loans. All we need to do is take the first byte. ~~~~~~~~ By Phyllis K. Slesinger Senior Director