Wednesday, November 17, 2010

Technical Defenses Are Growing For Securitized Loans

Mortgage-bond issuers and investors moved to quell questions about whether banks properly assigned loans made during the securitization boom, arguing that such transfers are valid even if the loan's owner isn't identified in certain records.

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The American Securitization Forum, a trade group for the securitization industry, is set to release on Tuesday a 28-page defense of widely used practices for bundling mortgages into securities. The securitization process and foreclosure-documentation practices are likely to face criticism from lawmakers at a Senate Banking Committee hearing Tuesday.
A separate report from the Congressional Oversight Panel, also being released Tuesday, raises questions about whether improper document transfers could create additional liabilities for the biggest U.S. banks. The consequences could be "severe," the report said, "if documentation problems prove to be pervasive and, more importantly, throw into doubt the ownership of not only foreclosed properties but also pooled mortgages."
The securitization-industry defense doesn't address the problem of "robo-signing," in which employees falsely asserted that they had personally reviewed the details of foreclosure cases.
Still, the report is aimed at countering claims made by critics that the rush to feed demand for securities led banks to cut corners in assigning and tracking ownership of mortgages, just as they did, critics claim, when buying and making mortgage loans.
Tom Deutsch, the executive director of the American Securitization Forum, said the group decided to issue the report after "novel theories" challenged whether mortgages were properly sold as securities.
Some critics contend that loans weren't properly transferred at each stage in the securitization process. That could have consequences for the authority of mortgage trusts to foreclose and for the tax-free status of certain investments.
One particular practice called into question recently is the use of "blank assignments." Because notes were transferred at several steps throughout the securitization process, banks often endorsed those loans in blank, without specifying the owner.
According to the American Securitization Forum, under real-estate law known as the Uniform Commercial Code, loans are assigned to the owner, even if the endorsement is blank, simply through the transfer of the loan itself.
Some analysts argue that logic isn't necessarily relevant because individual pooling-and-servicing agreements that govern respective securitizations supersede real-estate law and might have set down more specific steps that needed to be followed.
"What constitutes a correct transfer is a gray area. We need more direction from courts and legislatures on this subject," Katherine Porter, a law professor at the University of Iowa, told a congressional panel last month.
Mr. Deutsch said he is unaware of any legal challenges of loan transfers. "Nearly all of the [pooling-and-servicing agreements] that we have reviewed do allow for transfers in blank," he said.
Separately, lawyers in several states have challenged the electronic lien-registry system known as the Mortgage Electronic Registration System, or MERS, which was devised by banks in 1997 to facilitate the securitization of loans.
To avoid rerecording a loan in county records every time a loan changes hands, banks designated MERS as either the lien-holder or its nominee. Lawyers have challenged MERS's standing to foreclose because it doesn't actually own the loans, while others contend that companies that relied on MERS became sloppy in tracking their paperwork.
The American Securitization Forum cited case law in dozens of states to press its case that a third party such as MERS can foreclose on behalf of the servicer. To avoid legal challenges, some investors and servicers have begun moving loans loan out of MERS's name before foreclosing.
In testimony prepared for Tuesday's hearing, Adam Levitin, a professor of law at Georgetown University, will warn that "evidence is mounting" that such flaws are "not limited to one-off cases, but that there may be pervasive defects throughout the foreclosure and securitization processes." At worse, such "highly technical" but "extremely serious" problems represent a "systemic risk of liabilities in the trillions of dollars, greatly exceeding the capital of the U.S.'s greatest financial institutions," he said.
Also at the hearing, Bank of America Corp. executive Barbara Desoer is expected to acknowledge some weaknesses were found in the Charlotte, N.C., bank's internal review of foreclosure practices.
"We have not found a perfect process," Ms. Desoer said in written testimony submitted to the committee. "There are areas where we clearly must improve, and we are committed to making needed changes." She reiterated that the bank has found no evidence of wrongful foreclosures.
Ms. Desoer also wrote that "many investors limit Bank of America's discretion to take certain actions," a reference to the different agendas by investors who own loans serviced by the bank. Some investors want Bank of America to modify loans, while others push for foreclosure.
David Lowman, the top home-loan executive at J.P. Morgan Chase & Co., said in written testimony that the bank is "committed to addressing" any foreclosure problems "as thoroughly and quickly as possible."
Also testifying at Tuesday's hearing is Iowa Attorney General Tom Miller, who leads the nationwide investigation into the foreclosure problems that erupted in September. The attorneys general are scrutinizing whether home-loan servicers violated state laws against deceptive practices by submitting affidavits and foreclosure documents without confirming the paperwork's accuracy.
Mr. Miller is expected to tell lawmakers that many loan servicers lacked adequate systems to deal with the simultaneous crush of foreclosures and loan modifications, according to a person familiar with his testimony. Mr. Miller also is expected to say that, while state attorneys general are investigating the paperwork, their bigger concern is the loan-modification system. A spokesman for Mr. Miller said he had no immediate comment..
—Dan Fitzpatrick, Alan Zibel and Vanessa O'Connell contributed to this article.
Write to Nick Timiraos at

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