Real Estate Mortgage Investment Conduits, or Remics, are complex mortgage-backed securities that were pitched to investors as providing favorable tax treatment on the income generated by the underlying loans. Instead, they have generated large losses for big investors during the economic crisis. But gaps and defects in the complex paper trail have provided a potential legal basis for investors to seek to recover their losses from the issuers, according to a recent New York Times article by Gretchen Morgenson entitled “One Mess That Can’t Be Papered Over.”
In October, institutional investors in mortgage securities issued by Countrywide, including the Federal Reserve Bank of New York, sent a letter to Bank of America (which acquired Countrywide in 2008) demanding that the bank buy back billions of dollars of mortgages that Countrywide pooled and issued the securities on. The investors contend that Countrywide was at fault for failing to properly compile required documentation related to the mortgage loans.
The New York Fed and other institutional investors claim they have a right of recovery against Bank of America because the securitization of the loans is governed by strict rules that were not followed by the issuer, according to the article.
Problems include the common practice of transferring a promissory note underlying a property to a trust without identifying it, known as an assignment in blank.
“The danger here is that the note would not be considered a qualified mortgage, an obligation which is principally secured by an interest in real property and which is transferred to the Remic on the start-up day,” one commentator was quoted as saying, adding that, if, within three months, substantially all the assets of the entity do not consist of qualified mortgages and permitted investments, “the entity would not constitute,” he said.
If a loan originator failed to provide documentation that a “true sale” occurred when mortgages were transferred into trusts ? which should be provided within 90 days after a trust is closed ? then a true sale may not have legally occurred, and such a defect could not be cured by revising the paperwork, according to the article.
The implication under those circumstances is: the loans were not legally transferred into the trust and therefore the trusts lack collateral for investors to claim.
It was not unusual for banks destroy the original note underlying a property when it was converted to an electronic file, in order to “avoid confusion.” But most securitizations state that a complete loan file must contain the original note, and an electronic image does not appear satisfy that requirement. These are examples of the types of issues that will have to be resolved by courts in the next several years.
Page Perry is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 40 occasions. Page Perry’s attorneys are actively involved in counseling institutional and individual investors regarding their investment problems. For further information, please contact us.