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How to sell a mortgage

Adam Levitin:

It's axiomatic that a trust's powers are limited to those set forth in the documents that create the trust. In the case of RMBS, that document is the Pooling and Servicing Agreement (PSA). Most PSAs are governed by NY law, which provides that a transaction beyond the authority of the trust documents is void, meaning it is ineffective.

PSAs typically set forth a very specific method of transferring the notes (and mortgages) that goes beyond what is required by Articles 3 or 9. This is perfectly fine under the UCC, which permits parties to deviate from its default rules by agreement (UCC 1-203), which can be inferred from the parties' conduct, including the PSA itself. So what this means is that if a securitization transaction did not meet the requirements of the PSA, it is void, regardless of whether it complied with the transfer requirements of Article 3 or Article 9. The private law of the PSA, not Article 3 or Article 9, is the relevant law governing the final transfer in a securitization transaction.

There is some variation among PSAs, but typically a PSA will have two relevant transfer provisions. First, it will have a recital stating that the notes (and mortgages) are "hereby" transferred to the trust. This language basically tracks the requirements of an Article 9 sale. Second, it will have a provision stating that in connection with that transfer, there will be delivered to the trust the original notes, each containing a complete chain of endorsements that show the ownership history of the loan and a final endorsement in blank. The endorsement requirement invokes an Article 3 transfer, but it imposes requirements (the complete chain of endorsements and the form of the final endorsement) that are not contained in Article 3.

There is a very good business reason for having the full chain of title in the endorsements: it is evidence of the transfers needed to ensure the bankruptcy remoteness of the trusts' assets. Bankruptcy remoteness means that the RMBS investors are assuming only the credit risk on the mortgages, not the credit risk of the originators and/or securitizers of the mortgages, and RMBS are priced based on this expectation.

Via Yves Smith / nakedcapitalism.


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