An except is printed below. It's worth reading the whole piece.
Just a reminder:
The MBS mess from the beginning – the deal docs
- By Tracy Alloway at FT Alphaville (free article -- no sub required)
If the mortgage notes weren’t correctly shifted from the originators to the depositors to the trustees, with the corresponding assignments, the foreclosure process could be held up should anyone actually stop to ask where the mortgage note is, or who holds it. Likewise, if MERS’ authority to foreclose is challenged (more on that here).
There are potentially more insidious reasons behind documentation slips. Fixing the chain of title — if a break is discovered — can be a lengthy and expensive exercise. Fudging over a missing mortgage assignment may be be quicker and cheaper. For a ‘real life’ paperwork story, check out mortgage-blogger Tanta’s experience back in 2007 — which leads rather nicely to the next point.
Improper documentation has existed for as long as the originate-to-distribute system. Katherine Porter at the Ohio University estimated back in 2007 that “a majority” of US foreclosures are made without the right paperwork. And you’ll notice the 2006-date on the Florida case cited in the GSAMP prospectus above.
The danger here is that ’show me the note’ becomes widespread. Savvy lawyers start demanding the docs (which of course they are legally entitled to do) — foreclosures freeze, lawsuits fly, the RMBS market stagnates, the big banks get hit, and so on.
As a structured finance footnote (because securitisation has a tendency toward irony) we’ll add that GSAMP Trust 2006-FM1’s sister deal — FM2 — was included as a reference entity in the now-infamous Goldman Sachs offering … the Abacus CDO.
New details from the latest lawsuit:
And Felix Salmon has a must-read nightmare scenario:
You thought the foreclosure mess was bad? You’re right about that. But it gets so much worse once you start adding in a whole bunch of parallel messes in the world of mortgage bonds. For instance, as Tracy Alloway says, mortgage-bond documentation generally says that if more than a minuscule proportion of notes in a mortgage pool weren’t properly transferred, then the trustee for the bondholders can force the investment bank who put the deal together to repurchase the mortgages. And it’s looking very much as though none of the notes were properly transferred.
But that’s not even the biggest potential problem facing the investment banks who put these deals together. It also turns out that there’s a pretty strong case that they lied to the investors in many if not most of these deals.
I mentioned this back in September, and I’ve been doing a bit more digging since then. And I’m increasingly convinced that the risk to investment banks isn’t only one of dodgy paperwork; there’s also a serious risk of massive lawsuits from the SEC or other prosecutors, as well as suits from individual mortgage investors.
The key firm here is Clayton Holdings, a company which was hired by various investment banks — Goldman Sachs, Bear Stearns, Citigroup, Merrill Lynch, Lehman Brothers, Morgan Stanley, Deutsche Bank, everyone — to taste-test the mortgage pools they were buying from originators.
And John Carney has good background here:
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