True Sale, False Securitizations

by Aaron Krowne and Moe Bedard

A story we broke this past Tuesday in regards to the Ohio Federal Court Deutsche Bank ruling has been getting a tremendous amount of attention, and probably rightfully so. It wasn’t long after we posted it here that dozens of bloggers and forums were circulating the news around cyberspace.

Calculated Risk’s Tanta did a total of three blog posts of follow-up (here is one, and another), largely intended to rebut our points, and Gretchen Morgenson did a great New York Times piece yesterday, bringing much more visibility to the issue. Even Nigel and the Haterz gave us credit where credit is due:

“It may be a Casey fantasy, but it is true in real life. I Am Facing Foreclosure broke a story that was respected enough and accurate enough to be stolen by the New York Times.”

Well, maybe not stolen… but apparently we were on the right track.

Tanta had numerous issues with our conclusions and apparently those of April Charney (who is actually an attorney on these sorts of cases, mind you). We wanted to reply to some of the those objections here. We don’t believe the issue is settled, and our lawyers aren’t budging.

But first, we want to establish that even Tanta seems to agree with us on one critical point: foreclosures are going to be more expensive for investors in mortgage-backed securities than they might have hoped. Perhaps much more expensive. While Deutsche Bank may have a chance to “get its ducks in a row” yet, since the foreclosures were not dismissed with prejudice, that ain’t exactly nothing.

Tanta might not see this as a big deal or game-changer, but we suspect investors will.

That point aside, there is something more profound going on here. Tanta’s core criticism (as we understand it) is that finding the assignments was simply a matter of due diligence that Deutsche Bank was attempting to shirk out of sloth. Not being legal gurus ourselves, we went back to April Charney for further comment and clarification. She had this to say:

“First of all, it is not a fair assumption that “nobody could find the original assignments.” The “original” assignments from the originating lender to the trust don’t exist to be found until after the foreclosure actions are filed and the loans are already supposedly in default. It would be very interesting to see where these nonperforming loans have been booked until now. This is an epidemic across the country.

As to the real ramification of the Ohio decision, aside from slowing the foreclosure trains, is that the fact that there were no “original” assignments rendering the sales of the mortgages to the trusts, in violation of the true sale obligations imposed by securities law. ”

That, again, does not seem like nothing to us.

April also passed us this link for a primer on the true sale issue. She further directed us to this article By Tim Reason (love the name) regarding true sale in securitizations, which is from 2003.

What we gleaned is that the “true sale” issue (specifically as it comes to securitization) has never been settled. One would think from the Reason article that securitizations would have fallen out of favor after the tech stock collapse, where they were used for various sorts of accounting legerdemain and producing synthetic AAA-ratings (including, famously, in the Enron case). Instead, the problems were swept under the rug and everyone got back on the merry-go-round a second time for the housing bubble. Reason’s article contains this ominous quote on that subject:

Kenneth Kettering, associate professor at New York Law School, argues that the securitization industry owes its very existence to the willingness of rating agencies to rate ABS securities based on “extravagantly hedged” true-sale opinions. “No competent lawyer ever gave a simple flat opinion that the asset transfers involved in a securitization transaction constitute a ‘true sale.’ Indeed, given the absence of controlling case law, a lawyer could not responsibly do so,” he wrote in a letter to Congress. “These all-but-liability-proof legal opinions underline the fact that the parties to a securitization transaction are knowingly assuming a serious legal risk.”

Somehow we suspect that nobody explained this state of affairs to your local pension fund, the Chinese, the Europeans, the Canadians, and other sundry parties exposed to questionable securitized MBS pools. But hey, what’s a few trillion between friends? (We’re all friends, right?)

So this time around, securitization was scaled-up to a greater extent than ever before, despite the fact that the fundamental issues of ownership were not settled. Echoing (and reinforcing) the pay-to-play ratings complex that emerged at the same time, the securitization complex chugged merrily along, while profits were high and defaults were low.

But now these fundamental issues are getting their day in court again, and if this Deutsche Bank ruling is indicative, it isn’t going well for the investor class. Will there be another muddle-through, like last time?

The conflagration seems unlikely to blow out quite so easily this time around. Previously, true sale challenges could be counted on to be rare and occur only in the occasional large-scale corporate bankruptcy—i.e., when a creditor or the bankrupt company itself wanted to “raid” the assets of a securitization to satisfy obligations. Now, the challenges are threatening to proliferate right along with the exploding number of foreclosure cases across the country.

We followed up with California mortgage attorney Nathan Fransen about this landmark case and its implications:

“California is a non-judicial foreclosure state. This means the banks do not file a complaint in court to foreclose on the property. They simply execute a Trustee Sale. This requires them to provide notices in strict accordance to the applicable laws. The sale is a private action that effectively terminates ownership rights by the borrower.

Typically the sale is followed up by an unlawful detainer proceeding to evict the former owners. The way in which the logic of this court could be used is by filing a complaint and Preliminary Injunction in a court in the county where the property is located. The injunction would stay any foreclosure proceedings by the trustee. A declaratory judgment could also be obtained that would declare the rights of the trustee invalid and thus prevent them from taking future actions against the homeowner.

There are other claims worth exploring that are derivatives of all this. For example, perhaps a claim for slander of title since the trustee did not have the rights to initiate the foreclosure process. Claims under California Business and Professions Code Section 17200 (UDAP statute) may also be available. The leverage that a consumer attorney could use from this type of an action may very well make the difference between a homeowner staying in their home, or packing their bags.”

So quoth the lawyers. Hence we take it that, far from a trivial matter of paperwork, Boyko’s decision is serious business – a tangible ray of hope for distressed homeowners, and a huge headache for securitized mortgage investors (we’re not even sure it’d be proper to use the term “holders” or “owners” anymore).

(Update, Nov 16: And now, apparently, the decision has been reinforced again, with another ruling.).

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There Are 10 Responses So Far. »

  1. [...] ← Loan Rescission – When Three Days Really Means Three Years True Sale, False Securitizations [...]

  2. [...] Some commentary by a consumer attorney in California has theorized about how to use the Boyko ruling to block the Trustee Sale, but let’s be clear: it’s one thing to theorize about a declatory judgment declaring right of the trustee invalid. It’s another thing entirely to have it happen. [...]

  3. Can any one give me any info on foreclosure on assements by HOA

  4. [...] http://iamfacingforeclosure.com/blog/2007/11/16/true-sale-false-securitizations/ [...]

  5. [...] http://iamfacingforeclosure.com/blog/2007/11/16/true-sale-false-securitizations/ [...]


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