FILED: NEW YORK COUNTY CLERK 08/27/2012

NYSCEF DOC. NO. 64

INDEX NO. 652678/2011 RECEIVED NYSCEF: 08/27/2012

Exhibit I

Congressional Oversight Panel

November 16, 2010

NOVEMBER * OVERSIGHT REPORT REPORT

Examining the Consequences of Mortgage * Irregularities for Financial Stability and Foreclosure Mitigation

*Submitted under Section 125(b)(1) of Title 1 of the Emergency Economic

Stabilization Act of 2008, Pub. L. No. 110-343

documents, and of the servicer, who plays an administrative role, collecting and disbursing mortgage and related payments on behalf of the investors in the MBS. As described above, in order to convey good title into the trust and provide the trust with both good title to the collateral and the income from the mortgages, each transfer in this process required particular steps.38 Most PSAs are governed by New York law and create trusts governed by New York law.39 New York trust law requires strict compliance with the trust documents; any transaction by the trust that is in contravention of the trust documents is void, meaning that the transfer cannot actually take place as a matter of law.40 Therefore, if the transfer for the notes and mortgages did not comply with the PSA, the transfer would be void, and the assets would not have been transferred to the trust. Moreover, in many cases the assets could not now be transferred to the trust.41 PSAs generally require that the loans transferred to the trust not be in default, which would prevent the transfer of any non-performing loans to the trust now.42 Furthermore, PSAs frequently have timeliness requirements regarding the transfer in order to ensure that the trusts qualify for favored tax treatment.43 Various commentators have begun to ask whether the poor recordkeeping and error-filled work exhibited in foreclosure proceedings, described above, is likely to have marked earlier stages of the process as well. If so, the effect could be that rights were not properly transferred during the securitization process such that title to the mortgage and the note might rest with another party in the process other than the trust.44 iv. MERS In addition to the concerns with the securitization process described above, a method adopted by the mortgage securitization industry to track transfers of mortgage servicing rights has come under question. A mortgage does not need to be recorded to be enforceable as between the mortgagor and the mortgagee or subsequent transferee, but unless a mortgage is recorded, it does not provide the mortgagee or its subsequent transferee with priority over subsequent mortgagees or lien holders.45
38 39 40 41 42

See Section D.1.a.ii, supra. FBR Foreclosure Mania Conference Call, supra note 3. N.Y. Est. Powers & Trusts Law 7-2.4; FBR Foreclosure Mania Conference Call, supra note 3. FBR Foreclosure Mania Conference Call, supra note 3.

Amended Complaint at Exhibit 5, page 13, Deutsche Bank National Trust Company v. Federal Deposit Insurance Corporation, No. 09-CV-1656 (D.D.C. Sept. 8, 2010) (hereinafter Deutsche Bank v. Federal Deposit Insurance Corporation).
43 44 45

See FBR Foreclosure Mania Conference Call, supra note 3. See, e.g., FBR Foreclosure Mania Conference Call, supra note 3. Restatement (Third) of Prop. (Mortgages) 5.4 cmt. B (1997).

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the notes and mortgages were not properly transferred, then the party that can enforce the rights attached to the note and the mortgage right to receive payment and right to foreclose, among others may not be readily identifiable. If a trust does not have proper ownership to the notes and the mortgage, it is unclear what assets are actually in the trust, if any.76 Sponsors, Servicers, and Trustees Failure to follow representations and warranties found in PSAs can lead to the removal of servicers or trustees and trigger indemnification rights between the parties.77 Failure to record mortgages can result in the trust losing its first-lien priority on the property. Failure to transfer mortgages and notes properly to the trust can affect the holdings of the trust. If transfers were not done correctly in the first place and cannot be corrected, there is a profound implication for mortgage securitizations: it would mean that the improperly transferred loans are not trust assets and MBS are in fact not backed by some or all of the mortgages that are supposed to be backing them. This would mean that the trusts would have litigation claims against the securitization sponsors for refunds of the value given by the trusts to the sponsors (or depositors) as part of the securitization transaction.78 If successful, in the most extreme scenario this would mean that MBS trusts (and thus MBS investors) could receive complete recoveries on all improperly transferred mortgages, thereby shifting the losses to the securitization sponsors.79

The competing claims about MERS can also factor into these issues. If MERS is held not to be a valid recording system, then mortgages recorded in the name of MERS may not have first priority. Similarly, if MERS does not have standing to foreclose, it could cast into question foreclosures done by MERS. It should be noted that while no claims have been made yet based on an alleged breach of representations and warranties related to the transfer of title, claims have been made based on allegations of poor underwriting and loan pool quality. See Buckingham Research Group, Conference Takeaways on Mortgage Repurchase Risk, at 2 (Nov. 4, 2010) (hereinafter Buckingham Research Group Conference Takeaways). However, there is a possibility that there will be put-back demands for breaches of representations and warranties relating to mortgage transfers. Because the REMIC status and avoidance of double taxation (trust level and investor level) is so critical to the economics of securitization deals, the PSAs that govern the securitization trusts are replete with instructions to servicers and trustees to protect the REMIC status, including provisions requiring that the transfers of the mortgage loans occur within a limited time after the trusts creation. See, e.g., Agreement Among Deutsche Alt-A Securities, Inc., Depositor, Wells Fargo Bank, National Association, Master Servicer and Securities Administrator, and HSBC Bank USA, National Association, Trustee, Pooling and Servicing Agreement (Sept. 1, 2006) (online at www.secinfo.com/d13f21.v1B7.d.htm#1stPage). If a significant number of loan transfers failed to comply with governing PSAs, it would mean that sizeable losses on mortgages would rest on a handful of large banks, rather than being spread among MBS investors. Sometimes the securitization sponsor is indemnified by the originator for any losses the sponsor incurs as a result of the breach of representations and warranties. See Id. at section 10.03. This indemnification is only valuable, however, to the extent that the originator has sufficient assets to cover the indemnification. Many originators are thinly capitalized and others have ceased operating or filed for bankruptcy. Therefore, in many cases, any put-back liability is likely to rest on the securitization sponsors. Although these put-back rights sometimes entitle the trust only to the value of the loan less any payments already received, plus interest, the value the trust would receive is still greater than the current value of many of these loans. As a number of originators and sponsors were acquired by other major financial institutions during 2008-2009, put-back liability has become even more focused on a relatively small number of systemically important financial institutions. Financial Crisis Inquiry Commission,
79 78 77

76

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