NY Times – Some Sand in the Gears of Securitizing

Some Sand in the Gears of Securitizing

Was the great securitization machine that made hundreds of billions of dollars in mortgage loans based on a legal foundation of sand?

That possibility, raised by two law school professors, has begun to scare many jittery investors, causing bank stocks to plummet, although they recovered a little Monday.

If they are correct, the best outcome for lenders would be a prolonged delay in completing foreclosures, raising costs still further and paralyzing an already depressed housing market.

The worst outcome would be a conclusion that errors by financial institutions had decoupled the payment promises made by borrowers from the mortgages they signed. In that case, the mortgages would be invalid. Homes could be sold without paying off lenders. There also could be heavy tax consequences for lenders, both in terms of federal income taxes and in payment of back fees for mortgage registrations to local governments across the country.

The arguments involve MERS, the Mortgage Electronic Registration Systems, which was created to smooth the securitization process and, in the process, to allow lenders to avoid paying registration fees to counties each time the mortgage changed hands.

Several state supreme courts have chipped away at MERS. But none has gone nearly as far as the professors, Christopher L. Peterson of the University of Utah and Adam Levitin of Georgetown, say is possible.

Nonetheless, some investors are growing worried. Bank stocks fell sharply last week, even while most shares were rising. JPMorgan Chase, which is a part owner of MERS, said it had not used the service since 2008. At least one title insurance company has gotten a bank to agree to indemnify it if the securitization process causes problems for titles. Without title insurance, the real estate market would grind to a halt.

And earlier this month a federal judge in Oregon issued an injunction blocking Bank of America from foreclosing on a borrower’s home. United States District Court Judge Garr M. King said that under Oregon law, the borrower was likely to prevail on the argument that the use of MERS had invalidated the mortgage.

Last week the American Securitization Forum, a trade group representing companies involved in the securitization industry, said it believed the securitization process was legal, and that its lawyers were preparing a refutation of arguments to the contrary.

There is no question that MERS has been a success in terms of gaining market share. About 60 percent of mortgages in this country show up in local records as being owned by the service. In fact, none are owned by MERS. It was created to act as an agent for others, whether banks or securitization trusts, which own the actual mortgages.

Mr. Peterson, in a paper with the dry title of “Two Faces: Demystifying the Mortgage Electronic Registration System’s Land Title Theory,” argues that MERS cannot have it both ways, and that it faces problems if it is deemed to be only one of them.

If it is an agent, he wrote, “it is extremely unclear that it has the right to list itself as a mortgagee,” as it does. State real estate laws, he said, “do not have provisions authorizing financial institutions to use the name of a shell company,” in large part because “the point of these statutes is to provide a transparent, reliable record of actual — as opposed to nominal — land ownership.”

If it is a mortgagee, Mr. Peterson added, it has the right to record mortgages in its own name, as it did. But since it does not own the actual loan, doing that could be seen as violating a long line of precedents that bar separating a mortgage from the underlying note in which the borrower promises to pay. He quotes from an 1879 Supreme Court decision holding that “the assignment of the note carries the mortgage with it, while an assignment of the latter alone is a nullity.”

If an assignment of the mortgage alone is a nullity, then the mortgage can no longer be enforced. The borrower would still owe the money, but no foreclosure would be possible and the borrower could sell the home without paying off the mortgage. The lender could sue the borrower, but collecting money from distressed former homeowners might be very difficult in many cases.

It was such an argument that persuaded the judge in Oregon to block a foreclosure being pushed by Bank of America on behalf of a subprime mortgage securitization put together by Goldman Sachs in 2006. That securitization, known as GSAMP Trust 2006-HE5, is a troubled one in which investors have already suffered substantial losses. The senior security of the trust, which was rated AAA at issuance, has not suffered losses so far. But Moody’s now rates it at Caa1, a very low junk bond category.

The problems with MERS began to come to light when “vice presidents” of the firm began to submit affidavits in foreclosures, saying the original note had been lost. In some cases those notes were signed by people who signed thousands of such affidavits, and have now admitted they did not actually review the files, as the affidavits said they had.

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2 Responses to “NY Times – Some Sand in the Gears of Securitizing”
  1. Jose says:

    Dear Lou,

    the thugs are now more sophisticated, now they wear ties, some work in DC and pass laws that water down or eliminate our rights, some work in our states selling themselves to the best suitor, and the worst of them all are those who hide behind a desk and for 30 solver coins, use their signatures as felonious knives that cut into the heart of our families, communities and states. The worse part of that is that our governement officials are complicit in the crime, they are looking the other way. if I steal a loaf of bread, I will go to jail as any john Doe, if these patricians commit fraud the pay their ticket, our governement is happy to accept and cash the check and we are all in the same hole.

    i was actually surprised they prosecuted Mr. Maddoff, his ponzi was not any different from what these thugs have done to our families and communities.

    Today we had a gentlemen that Indymac Onewest denied his loan modification, the gentlemen has 1o years with his home. He refinanced to paid for medical expenses. He is a brick layer hardly speaks English, is a US citizen for those who would think something else.

    His home goes for a trustee sale this coming Friday, his 14 year old daughter told him to day she did not want to go to school anymore, since she wanted to work to help him pay for the family home. The client is not in default, but OneWest claims he has not paid in two years. The bank statements of the client say otherwise, but in Virginia, the trustee works for the bank. failing their duty by taking sides.

    The gentlemen is so emotionally devastated that this proud man cried all during the interview and all he wanted was justice, he felt abused, he was lied to, the people from OneWest laugh at him, called him at one and three in the morning to collect on a loan that does not belong to them.

    The hatred and hurt that these banksters are generating in the heart of America is huge.

    we demand justice, where are our regulators, where are the people we are paying with our tax dollars?
    Where is justice? where are the judges that will give people like this gentleman justice, fairness, when are we finally going to accept that the banksters are destroying America and not the other way around, how many bubbles, how many peaks and valleys do we have to put up with, how much fraud is too much?

    HOW much does the American people have to resist before justice is served.

    The crisis goes on, and our spineless congress and senate are cashing the checks of Wall Street election campaigns this November

  2. lou durante says:

    Keep up the good work. I know of a well known bank in NY that used to employ thugs to chase out existing tenants so they could sell the building vacant. This was in the 70’s. Have things not changed!!!!!!

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