Securitization process is sound and legally binding, ASF says
The nation’s process of securitizing residential mortgages is sound and legal, the American Securitization Forum said Tuesday, as banks and attorneys general squared off in the Senate Banking Committee hearing over the nation’s foreclosure crisis. The ASF issued a white paper Tuesday on the heels of a report on mortgage irregularities from the Congressional Oversight Panel. The COP has called on the Treasury Department to investigate documentation problems in the industry. It's a threat, the panel said, that could call into question the validity of 33 million mortgages in a worse-case scenario. "In its report, the oversight panel reviews previously reported information and offers a troubling interpretation of the facts and laws surrounding the securitization process," said ASF Executive Director Tom Deutsch. "We are confident that the process in which market participants assign and transfer mortgage notes and mortgages is valid, sound and legally binding." The ASF white paper clarifies legal principles and processes underpinning the assignment and transfer of home mortgages and the creation of mortgage-backed securities. "As the study articulates, many of the principles underlying the transfer of mortgage notes and mortgages are centuries old and validated through extensive case law," the ASF said. "Recently, however, in the midst of the worst housing crisis since the Great Depression, some have questioned whether these traditional principles can be reconciled with modern securitization systems," according to the ASF. "The study makes clear that the answer is an unequivocal yes. Common law, as well as the Uniform Commercial Code, continue to validate the legality and enforceability of proper ownership rights in securitizations." Two documents lie at the heart of most residential mortgage transactions: the "note" in which a borrower promises to repay the loan and the "mortgage," which is held as security. Most mortgage notes are negotiable and may be sold and transferred multiple times under provisions of the Uniform Commercial Code, according to ASF's white paper. The purpose is to make such notes as liquid and transferable as possible. The assignment and transfer of ownership of a mortgage note under the UCC is most commonly done by endorsing the note, which may be a blank endorsement that does not identify a person to whom the note is payable or a special endorsement that does. The process allows for transfer of mortgage notes to trustees. The UCC also permits enforcement of a mortgage note where the note has been lost, stolen or destroyed. Courts have upheld this right nationwide, the ASF said. When ownership of a mortgage note is transferred under common securitization processes, ownership of the mortgage is also automatically transferred, the association said. The rule that "the mortgage follows the note" dates back centuries and has been codified in the UCC, according to the ASF. The assignment of a mortgage to a trustee does not need to be recorded in real property records to be a valid and binding, the association said. "The longstanding and consistently applied rule in the United States is that 'the mortgage follows the note,'" Deutsch said. “When a mortgage note is transferred in connection with a securitization, ownership of the mortgage automatically follows and is transferred to the mortgage note transferee." In some transactions, the mortgage originator names Mortgage Electronic Registration Systems, or MERS, and MERS becomes the mortgagee of record. When a mortgage loan is originated with or assigned to the electronic registration system, MERS tracks all future mortgage loan and mortgage loan servicing transfers and other assignments of the loan unless and until ownership or servicing is transferred or the loan is assigned to a non-MERS member. The use of MERS has been challenged with allegations that the company does not have the authority to foreclose. Some courts have found the assignment and transfer of mortgages to MERS does not adversely impact the ability to foreclose while others have taken issue with MERS. "It is important to note that not one of these decisions has invalidated a mortgage where MERS is the nominee and not one of these decisions has challenged MERS’ ability to act as a central system to track changes in the ownership and servicing of mortgage loans," the ASF said. ASF said that 13 major law firms reviewed the white paper and believe that the executive summary represents a fair description of the legal principles presented. To download the entire white paper, click here. Write to Kerry Curry.