Tuesday, January 11, 2011

MA SJC Ruling - An Interesting Question

I've been brainstorming all I can about the implications associated with Friday's ruling out of MA.  First and foremost there is no positive for the banks.  None, whatsoever.  There are scenarios where you can say the damage is minimal but as for positives, can't find any.   But I did come up with an interesting question.

There are two implications to the ruling.

1 - Foreclosures will slow, prior foreclosures possibly unwound, loads of litigation and lawsuits.  I'm not a securitization attorney, nor an attorney period.  Let's just assume somehow this does get resolved albeit in a long and messy (and expensive) fashion.

2 - PSA (Pooling And Servicing Agreements) have been clearly violated.  Securities were not conveyed to the trust.  The investor bought nothing or best case an unsecured liability.  Private label MBS (those not sold through a GSE guarantee) are the next big shoe to fall from a securitization standpoint.  Investors are arguing that either PSA or Reps and Warranties were violated and they want to put back "return" the defaulted mortgage they bought.   The ruling out of MA has strengthened their argument.

Now the question that surfaced in my mind today.  MA has said future foreclosures must show a chain of endorsement showing who rightfully owns the mortgage and note.  Simple fix right? Just go through your records and find out who sold the mortgage to who starting with the originator.   Problem though is whoever "sold" the note and mortgage to the trust is now on the hook for a put back from the investor who is going to claim either a PSA or Reps and Warranties violation.   Who in their right mind wants to claim something that will result in an immediate liability?

This is far from playing out.  There are lots of scenarios, some you can argue a restructuring of the TBTF banks, others it will be years of litigation and lawsuits.  As with anything the truth is somewhere in the middle.


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