The recent news coverage has returned many mortgage and MBS-related issues, both real and illusory, to prominence. The initial headlines that stemmed from the announcement of problems with GMAC's foreclosure filings have morphed into questions about the foreclosure process, the extent and potential cost of loan buyouts, and the legal standing of the securitized mortgage market itself. This article addresses some of the issues currently roiling the financial markets.
The Legitimacy of Securitization. Stories in major news outlets (including a front page story in BusinessWeek subtitled "Who Owns Your House? A $1 Trillion Crisis of Faith") have suggested that unknown huge numbers of mortgage loans are floating around in cyberspace. Everything I've encountered suggests that these concerns are grossly exaggerated. First, much speculation has resulted from the unfounded assumption that the deterioration in underwriting standards after 2004 also infected the process of creating the securitization trusts and transferring assets. Moreover, the reports ignore the 30-year history of the securitized mortgage market, along with the fact that the Uniform Commercial Code (UCC) has language governing the transfers of notes into securitization trusts adopted by all 50 states. The best analysis I've seen of the issue was written by the law firm SNR Denton, which concluded that "the recent allegations of possible wholesale failures to convey ownership of mortgage loans to private-label RMBS trusts are baseless and unfounded. All parties to these transactions...clearly intended that the transactions convey ownership of the loans to the trusts, and appropriate steps were taken to effect such conveyances in accordance with well-settled legal principals governing transfers of mortgage loans."