THURSDAY, JANUARY 6, 2011Pending Massachusetts Supreme Court Ruling May Invalidate Securitization Mortgage Transfers (Naked Capitalism)

THURSDAY, JANUARY 6, 2011

Pending Massachusetts Supreme Court Ruling May Invalidate Securitization Mortgage Transfers (Naked Capitalism)

Bloomberg has a bombshell today, that a case before the Massachusetts Supreme Court may invalidate certain types of mortgage transfers, a central process in mortgage securitizations. A ruling for the plaintiffs would render some past foreclosures invalid, raising the possibility that the borrowers could sue for damages. It would also have far reaching implications, since it would also be a significant setback to the argument made by the American Securitization Forum and the major securitization law firms who have issued opinion letters in support of securitization industry procedures.

One procedure under question is so-called “endorsement in blank”. Recall that what we call a mortgage consists of two parts: the promissory note (the borrower IOU) and the lien (confusingly called the mortgage or in some states, a deed of trust). The note is a negotiable instrument, which means, just like a check, it is payable only to the party in whose name it is made out, or it can be endorsed in blank (think of when you sign the back of a check but don’t deposit it, in theory anyone can then make it payable to themselves).

The securitization agreements called for the notes to go through a specific number of parties, usually at least two between the originator and its final home, a trust. They required the note have a specific chain of endorsements (as in in theory each party could still endorse in blank, meaning not sign it over specifically to the next required party, as long as each party in the chain did sign it in blank and it bore evidence of indeed having passed through all the required parties). It appears Massachusetts may have problems with the endorsement in blank process, which was allegedly pervasive (indirect evidence comes from the ASF’s efforts to defend the practice).

From Bloomberg:

Massachusetts’s highest court is poised to rule on whether foreclosures in the state should be undone because securitization-industry practices violate real- estate law governing how mortgages may be transferred.

The fight between homeowners and banks before the Supreme Judicial Court in Boston turns on whether a mortgage can be transferred without naming the recipient, a common securitization practice. Also at issue is whether the right to a mortgage follows the promissory note it secures when the note is sold, as the industry argues…

“This is the first time the securitization paradigm is squarely before a high court,” said Marie McDonnell, a mortgage-fraud analyst in Orleans, Massachusetts, who wrote a friend-of-the-court brief in favor of borrowers. The state court, under its practices, is likely to rule by next month…

If loans weren’t transferred properly, the banks that sponsored such trusts may have to repurchase them, Adam J. Levitin, an associate professor at Georgetown University Law Center in Washington, said in prepared testimony in the U.S. House of Representatives in November.

If the problem is widespread enough, it may cost the banks trillions of dollars and make them insolvent, Levitin said.

There is “a surprising lack of consensus” as to “what method of transferring notes and mortgages is actually supposed to be used in securitization and whether that method is legally sufficient,” he said.

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