The American Securitization Forum (ASF) issued a White Paper clarifying the legal principles and processes underpinning the assignment and transfer of home mortgages and the creation of MBS.
The study noted that many of the principles that underlie the transfer of mortgage notes and mortgages are centuries old and are validated by extensive case law.
However, because of the worst housing crisis since the Great Depression, some have questioned if these traditional principles can be reconciled with modern securitization systems, according to a release from the ASF issued this morning.
The study, according to the release, makes it evident that this can be done. Common law and the Uniform Commercial Code (UCC) still validate the legality and enforceability of proper ownership rights in securitizations.
“As our study highlights, the principles and processes involved in securitization result in valid and enforceable transfer of ownership of mortgage notes and underlying mortgages,” said Tom Deutsch, ASF executive director. “Further, the transfer and legal effectiveness of such ownership is not diminished by the fact that the right to foreclose maybe subject to additional conditions and requirements of a par-ticular mortgage.”
Two documents are key to RMBS deals, according to the study. They are the “mortgage note” where a borrower promises to repay the loan plus interest and the “mortgage” which is held as security. Most mortgage notes are considered negotiable and can be sold and transferred multiple times under UCC provisions, adopted by all 50 states and the District of Columbia.
The law of negotiable items, the study said, has been developed over hundreds of years to facilitate commerce by making these instruments, such as negotiable mortgage notes, as liquid and transferable as possible.
Under the UCC, the assignment and transfer of ownership of a mortgage note is most commonly effected 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.
This is why through this mechanism, the securitization process offers a valid transfer of mortgage notes to trustees. Additionally, the UCC permits a person without possession to enforce a mortgage note where the note has been lost, stolen or destroyed. Courts have consistently upheld this right nationwide, the study said.
When ownership of a mortgage note is transferred in according to common securitization processes, the ownership of the mortgage is automatically transferred as well. This is pursuant to the general common law rule that, “the mortgage follows the note.”
This rule dates back centuries and has been codified in the UCC. This essentially means, which various courts have affirmed, that the assignment of a mortgage to a trustee does not need to be recorded in real property records for it to be a valid and binding transfer.
“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 deals, the mortgage originator names Mortgage Electronic Registration Systems (MERS), as its nominee and record keeper. MERS, the study said, becomes the mortgagee of record. However, the use of MERS has been challenged because it does not have the authority to foreclose on a mortgage. Generally, however, courts in a number of jurisdictions have found the assignment and transfer of mortgages to MERS does not negatively impact the ability to foreclose on a mortgage.
There are several minority decisions that, in some form, have taken issue with MERS, the study said. However, it is notable that not one of these decisions has invalidated a mortgage where MERS is the nominee. Neither has any of these decisions challenged MERS’ ability to act as a central system to track changes in the ownership and servicing of mortgage loans.