As readers may recall, the American Securitization Forum came out, in what it no doubt thought was guns-a-blazing style, to attack critics of securitization abuses. In particular, the ASF was taking aim at theories of the sort advanced on this blog, and later in Congressional hearings and in a Congressional Oversight Panel report, that the notes (meaning the promissory note, meaning the borrower IOU) in many cases, if not pervasively, had not been endorsed and conveyed as required by the pooling and servicing agreements, which are the contracts that govern mortgage securitizations. In other words, the industry had committed in contracts to investors to take some very particular steps to assure that the securitization complied with a host of legal requirements to assure that the investors got the benefits of the cashflows from the mortgages, and then proceeded to welsh on their deal.
Normally, this would not be such a big deal. Contracts are often breached; the usual remedy is to get a a waiver, which sometimes might involve a payment of some sort. But securitizations are particularly inflexible agreements. From the abstract of a 2010 paper by Anna Gelpern and Adam Levitin:
Modification-proof contracts boost commitment and can help overcome information problems. But when such rigid contracts are ubiquitous, they can function as social suicide pacts, compelling enforcement despite significant externalities. At the heart of the current financial crisis is a contract designed to be hyperrigid: the pooling and servicing agreement (“PSA”), which governs residential mortgage securitization. The PSA combines formal, structural, and functional barriers to its own modification with restrictions on the modification of underlying mortgage loans. Such layered rigidities fuel foreclosures, with spillover effects for homeowners, communities, financial institutions, financial markets, and the macroeconomy.
So given that the PSAs can’t be renegotiated, the securitization industry needs to find a way to argue that everything is hunky dory, despite the ever rising volume of lower court cases in which banks have had trouble foreclosing because borrower’s counsel challenges them to show that they are holders of the note (meaning not merely that they have possession, but that the securitization trust they represent is the owner). The big salvo was the ASF’s white paper, published last November, whose argument has been repeated and elaborated a tad. In effect, the white paper ignores the specific requirements of the PSA, and instead argues that “industry practices”, meaning the widespread disregard for contractual commitments, were OK. (We’ve taken apart the paper in previous posts, see here, here, and here)
As the white paper claimed:
Check out the rest here…