Mortgage Transfers Are Valid, Group Argues as Foreclosure Hearings Begin
A trade group for companies that help package loans and leases into securities rejected claims that mortgage-bond trusts can’t prove ownership of debt they hold as Congress began hearings on the foreclosure crisis.
The standard practices of the industry result “if followed, in a valid and enforceable transfer of mortgage notes and the underlying mortgages,” Tom Deutsch, executive director of the New York-based American Securitization Forum, said in a study released today. Lawmakers in Washington ordered hearings on mortgage practices after loan servicers including Ally Financial Inc. and JPMorgan Chase & Co. halted foreclosure proceedings following revelations of so-called robo-signing.
The trade group focused on whether industry practices resulted in securitization trusts taking ownership of loans, though not whether all the paperwork needed for foreclosures is in order. Without taking ownership of mortgages within a set period after their creation, often 90 days, the trusts may be unable to later assemble the documents needed for foreclosures because of contractual requirements or tax rules.
“The law is somewhat unsettled on what actually must be done via a securitization to complete the transfers correctly,” visiting Harvard Law professor Katherine Porter told a Congressional Oversight Panel Oct. 27. Porter has said “there is disagreement on whether the transfer of the notes needed to have occurred individually,” or potentially with a specific endorsement to the new holder or a physical transfer.
The panel to which she testified, which investigates the Troubled Asset Relief Program created in 2008, said in a report today that regulators should conduct new stress tests on banks because legal challenges to foreclosures and uncertainties in the housing market could threaten the financial system.
“If document irregularities prove to be pervasive and, more importantly, throw into question ownership of not only foreclosed properties but also pooled mortgages, the result could be significant harm to the financial stability,” the panel said.
The oversight panel’s report said that if the procedures called for in so-called pooling and servicing agreements, or PSA, weren’t followed, New York law related to the formation of trusts would consider the transfer of debt “void.”
The securitization industry, which is claiming the existence of the PSA in itself shows that the loans were transferred, is ignoring the language in the agreement, said Shelby, North Carolina, bankruptcy litigator O. Max Gardner III.
The PSA is “the bible” for securitization, and the industry is ignoring the process it outlines for transferring loans, he said.
“The PSA has specific detailed rules for delivery, transfer, and possession of the note, and the white paper completely ignores those” rules, Gardner said. “The powers, the duties, and rights of the trustee are created, governed and limited by the PSA. The trustee can’t do anything that is not provided for by the PSA.”
The securitization industry paper didn’t discuss whether sellers of mortgages into trusts would need to repurchase the debt because of missing documentation required under their contracts.
“The transfer and legal effectiveness of such ownership is not diminished by the fact that the right to foreclose may be subject to additional conditions and requirements,” according to the group’s paper, which was endorsed by 13 law firms including Cadwalader, Wickersham & Taft LLP, Mayer Brown LLP and SNR Denton US LLP.
Possession is Enough
Possession of mortgage notes is enough to prove ownership, the group said, arguing that segments of the Uniform Commercial Code allow for valid transfers even when mortgage notes are “lost, stolen, or destroyed.” The UCC also allows for the creation of an interest in such an instrument without it being physically handed over when there is a “signed a written or electronic security agreement that describes the mortgage note,” the group argued in its study.
The Congressional hearings that began today may address these contentions. Barbara Desoer of Bank of America Corp., is among at least seven banking officials who are set to testify before lawmakers today and Nov. 18.
Additionally, both House and Senate panels are scheduled to hear testimony from R.K. Arnold, chief executive officer of Mortgage Electronic Registration Systems, or MERS, an electronic registration system for mortgage transfers.
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