Filter Results CategoriesCart
Highlight Updates

1.3.3.4.1 In general

Securitization is the process of packaging loans as securities and selling the rights to the future income stream to investors.36 These rights are pooled in a variety of different ways so that the income stream from a single loan may be divided up and sold as part of two or more different securities. The borrowers’ monthly payments on the loan cover both the return to the investors and the profits to the lender. The pools of loans are rated by the various bond-rating agencies.37 The structure of these transactions attempts to minimize the risk of loss to the investors through insurance and recourse agreements between the trustee and originator.

The securitization of conventional mortgage loans has been around for years. The Government National Mortgage Association (Ginnie Mae), a quasi-governmental agency, guarantees pools of loans insured by the Federal Housing Administration (FHA) and the Veteran Administration (VA) for investment purposes. Fannie Mae and Freddie Mac also securitize loans that they purchase through the secondary mortgage market. Typically the loans in these pools must comply with Fannie Mae or Freddie Mac guidelines. Private financial institutions may also securitize loans in what are called “private-label securitizations.” The structure of private label securitizations tends to be more diverse than the standardized structures used by Ginnie Mae, Fannie Mae, and Freddie Mac.

For several reasons an understanding of securitization has become essential to the effective representation of mortgage borrowers. First, because securitization results in a transfer of ownership of the underlying loan (usually to a trust), the concept of “real party in interest” is rendered more complex.38 With a securitized loan the entity pursuing foreclosure may not be the entity that actually holds the loan.

Second, because it is often the case that wrongdoing lenders go out of business or become insolvent, the existence of a consumer remedy may depend on evaluating liability theories against other participants in the securitization transaction. Perhaps more importantly, in defending against foreclosure, the borrower will want to raise defenses that she could raise against the originating lender.39 Whether the borrower can raise these defenses and claims against subsequent note holders in a securitization transaction requires thorough analysis, since one of the very purposes of securitization is to insulate participants from legal responsibility for the liability-producing activity of the originating lender.40

Third, securitizations generate extensive transactional documentation and extensive ongoing reporting. Reading this paperwork with an understanding of the securitization process can provide important sources of information about the companies involved and about the underlying loans.

Securitization is discussed in more detail in NCLC’s, Mortgage Lending § 1.5 (2d ed. 2014), updated at www.nclc.org/library.

Footnotes

  • 36 {36} See Kurt Eggert, Held Up in Due Course: Predatory Lending, Securitization, and the Holder in Due Course Doctrine, 35 Creighton L. Rev. 507 (Apr. 2002); Christopher L. Peterson, Predatory Structured Finance, 28 Cardozo L. Rev. 2185 (2007). For more technical sources, see Frank Fabozzi, The Handbook of Mortgage-Backed Securities (2005); Talcott J. Franklin and Thomas F. Nelson, Mortgage and Asset Backed Securities Litigation Handbook (2010).

  • 37 {37} The rating companies could be Moody’s, Standard and Poors or Duff & Phelps Credit Rating Company. See National Consumer Law Center, Mortgage Lending § 1.5.4 (2d ed. 2014), updated at www.nclc.org/library.

  • 38 {38} See § 7.4.6, infra.

  • 39 {39} See § 9.16, infra (assignee liability).

  • 40 {40} See Kurt Eggert, Held Up in Due Course: Predatory Lending, Securitization, and the Holder in Due Course Doctrine, 35 Creighton L. Rev. 507 (Apr. 2002); Lynn M. LoPucki, The Death of Liability, 106 Yale L.J. 1 23–30 (1996) (“Asset securitization is both a substitute for borrowing and a powerful new strategy for judgment proofing”); Christopher L. Peterson, Predatory Structured Finance, 28 Cardozo L. Rev. 2185 (2007); Steven L. Schwarcz, The Alchemy of Asset Securitization, 1 Stan. J.L. Bus. & Fin. 133 (1994).