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Mike Konczal at Rortybomb, has a quick rebuff for anyone who thinks the foreclosure scandal is creating a mountain out of a molehill (of mortgage paperwork).
Itâ??s this pooling and servicing agreement for GSAMP Trust 2006-FM1.
GSAMP Trust is a Residential Mortgage Backed Security (RMBS) deal created in 2006 out of subprime fixed- and adjustable-rate mortgages, worth almost $1bn.
The parties involved in the transaction are:
The mortgage originators/lenders Goldman Sachs Mortgage Company â?? Sponsor GS Mortgage Securites Corp â?? Depositor Deutsche Bank National Trust â?? Trustee
The creation of an MBS deal like GSAMP basically goes like this: The originators or mortgage lenders, sell their mortgage notes to the sponsor (Goldman Sachs) to be turned into an MBS bond. Between Goldman and the trustee (Deutsche Bank) stands the depositor, in this case a subsidiary of Goldman.
Mortgage notes feature pretty prominently in the documentation â?? they have to be transferred (or â??assignment of mortgagesâ? have to be made) all the way though the securitisation process. That is, assignments have to be recorded in county records.
The agreement even goes so far as to state that if more than 0.01 per cent of mortgage notes aren't properly transferred â?? with proper documentation â?? the trustee can make the sponsor (Goldman) repurchase the mortgages. Itâ??s a similar clawback clause to the the one(s) that governs loan underwriting standards.
There is, however, an assignment exception:
(a) In accordance with Section 2.02 of the above-captioned Trust Agreement (the â??Trust Agreementâ?), the undersigned, as Trustee, for each Mortgage Loan listed in the Mortgage Loan Schedule (other than any Mortgage Loan listed in the attached schedule of exceptions), certifies that it has received:
(A) the original Mortgage Note, endorsed as provided in the following form: â??Pay to the order of ________, without recourseâ?; and
(B) except with respect to each MERS Designated Mortgage Loan, an executed Assignment of Mortgage (which may be included in a blanket assignment or assignments).
Loans registered on the Mortgage Electronic Registration Systems (MERS) are exempt. Thatâ??s to be expected given that one of the benefits of the MERS system is that it cuts down on these assignments â?? saving money, time and trees by allowing mortgage rights to be traded without having to actually go down to county court houses and record additional assignments every time the note is traded.
But thereâ??s a bit of foreshadowing of things to come, in the GSAMP prospectus:
The recording of mortgages in the name of MERS is a relatively new practice in the mortgage lending industry. Public recording officers and others may have limited, if any, experience with lenders seeking to foreclose mortgages, assignments of which are registered with MERS. Accordingly, delays and additional costs in commencing, prosecuting and completing foreclosure proceedings and conducting foreclosure sales of the mortgaged properties could result. Those delays and the additional costs could in turn delay the distribution of liquidation proceeds to certificateholders and increase the amount of losses on the mortgage loans. In that regard, a Florida court recently ruled that MERS lacked standing to pursue foreclosure proceedings on behalf of the beneficial owners of several mortgage notes who were not named parties to the proceedings.
This is just a sample MBS deal, but you can see where the chain of title may have succumbed. Originate-to-distribute is a chain of distribution â?? which you can see in that first chart. The parties involved expand as the loans are distributed and divided up, meaning there are plenty of places where documentation can break down.
If the mortgage notes werenâ??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 MERSâ?? authority to foreclose is challenged (more on that here).
There are potentially more insidious reasons behind documentation slips. Fixing the chain of title â?? if a break is discovered â?? can be a lengthy and expensive exercise. Fudging over a missing mortgage assignment may be be quicker and cheaper. For a â??real lifeâ?? paperwork story, check out mortgage-blogger Tantaâ??s experience back in 2007 â?? 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 â??a majorityâ? of US foreclosures are made without the right paperwork. And youâ??ll notice the 2006-date on the Florida case cited in the GSAMP prospectus above.
The danger here is that â??show me the noteâ?? becomes widespread. Savvy lawyers start demanding the docs (which of course they are legally entitled to do) â?? 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) weâ??ll add that GSAMP Trust 2006-FM1â??s sister deal â?? FM2 â?? was included as a reference entity in the now-infamous Goldman Sachs offering â?¦ the Abacus CDO.
Weâ??ve stuck the GSAMP Trust 2006-FM1 agreement and prospectus, plus the Ohio University paper, in the Long Room, for anyone wishing to take a closer look.
Related links: Misbehavior and mistake in bankruptcy mortgage claims - Katherine Porter, via SSRN Deal sponsor and credit risk of US ABS and MBS securities - Moodyâ??s
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