Distressed loan investors in particular need to keep an eye on potential legal developments arising from recent foreclosure concerns because they could affect their rights one way or another.
Investor coalitions formed earlier this year in an effort to amass enough voting rights to have a say in loan workouts hope “foreclosure crisis”-related developments will help them. But it could go either way.
The recent foreclosure concerns could lend some credence to investor groups’ common argument that loan workouts are not necessarily being done in investors’ interests.
“The theoretical role of the trustee in terms of rising to their fiduciary duty just is not happening and investors just don’t have a place to turn to enforce their rights under the pooling and servicing agreements,” Chris Katopis, executive director of the Association of Mortgage Investors, told this ASR sister publication National Mortgage News (NMN).
Trustees said privately that their reaction to this has been that this is not their role, but that of the servicer. But Katopis asserted, “The law gives them a legal responsibility of fiduciary duty and they’re basically ignoring that and saying, 'We’re just clerks.’”
But other implications of the foreclosure crisis may not look so good for investors unless perhaps in some cases if they are junior bondholders who could benefit from drawn-out foreclosures.
Certainly high-profile challenges to securitized bondholders’ ownership rights are a concern. In the wake of increased attention to documentation and foreclosure issues there have been legal questions raised as to whether there could be problems with investors exercising rights to securitized collateral.
As the Securities Industry and Financial Markets Association (SIFMA) noted in a recent report on the issue, there are two main challenges to ownership in securitizations that have been made recently, generally in the context of contested foreclosures: Whether the party filing the foreclosure documents has sufficient authority to bring the foreclosure action on the basis of lost, incorrect or incomplete paperwork that has to be taken care of before the foreclosure is finalized, and whether the standard conveyance process used for the sale of the loans is insufficient to transfer ownership.
Tom Deutsch, executive director of the American Securitization Forum, told NMN that when it comes to the question of “does the trust have legal authority and legal ownership of the notes?” he believes the answer is yes. “Both from a contract law standpoint as well as a security law standpoint under the Uniform Commercial Code” he feels ownership of securitized product is well established. He called discussions about whether ownership is enforceable “loose talk.”
It is unlikely there are grounds for widespread concerns in this area, Deutsch said. While there is “anecdotal evidence of a missing note here or there”— the preponderance of notes do not have concerns, he said.
“Most securitization documents require the trustee or a document custodian to review the submitted mortgage loan documents and notify the loan seller if all required loan documents are not received,” according to the SIFMA report.