Foreclosure, securitization don’t mix By Rockwell P. Ludden A few years back, folks in the banking industry had an interesting idea: Take thou- sands of mortgage loans, assemble them into a pool, and issue mortgage-backed securities against the revenue stream they generate. The process, known as securi- tization, has proved itself to be one of mind-boggling complexity Briefly, it begins by sub- {ecting each loan in the pool ‘to a sequence of sales, the ast of which is to a spe- cially created single-purpose vehicle, usually a trust with a major bank as its trustee. ‘This is done to completely separate the pool from the assets and liabilities of the originating lender, were it t file for bankruptey or go into receivership. ‘Without complete sepa- ration, the transfer of. ‘ownership might be viewed as asecured loan rather than a true sale, which could allow the originating lender to reclaim the loan by right of redemption and leave the investors high and dry. But that is only the half of it. ‘The next step is to issue securities, typically in the form of certificates, each of which represents a pro rata, claim to the prineipal and interest payments made by the individual borrowers. The certificates are immediately passed on to the investors who have actually funded the process and allowed the loans tobe made. ‘We know this because it is spelled out in the con- ‘tract that created the trust, and governs its operation. Federal law requires that this contract, usually known as a pooling and servicing zreement, be certified and filed with the Securities and Exchange Commission, along. with other related documents. If your loan has been secu- ritized, the chances are that none of this will really matter = not as long as you make your monthly payments on ‘ime, It's when you fall behind and the wheels of foreclosure begin to turn that the mis- chief begins. Because there aremnultiple ind because they ‘ean be scattered all over the it makes far more sense to have the foreclosure carried out by the trust itself — but this solves one prob- em only to leave others in its place. For one, the trust no longer ‘owns your Ioan, For another, the investors typically ‘own their certificates through ‘a book-entry system managed by a Wall Street clearing- ‘house and are represented by its nominee. Absent proof that the trust is specifically authorized to foreclose on their behalf, its ability to do so is far from clear. Remarkably, the industry's No one should have the legal right to take your home merely by winking and nodding their way around a significant flaw in the securitization model and whatever burrs it may leave on the industry's saddle. ‘Such advances, incidentally, are usually: is raises acompelling not, any subsequent fore- closure begi solution to all ofthis is to simply ignore the seeuritiza- tion and instead produce an assignment of the mortgage directly from the originating lender or its nominee to the ‘rust, thus making it appear as if the trust actually owns your mortgage and has the right to foreclose. “Moreover, there is noth- ing in the land office teeords to connect the trust to you or the loan; there is only the mortgage, and that is between you and the originating lender or its nominee. jou're entitled to a free lunch. But it does mean that no one should have the legal right to take your home merely by winking and nodding their way around a Wisallhogwash, the significant flaw in the securi- only discernable purpose of _ tization model and whatever ‘which is to grease the ski urs it may leave on the industry's saddle. en legedly in default and on its way to foreclosure — and despite the fact that the loan has been serviced on behalf of the trust since the trust was created ‘And there is more: Built into every securitization are additional safeguards to pro- investor Rockwell P. Ludden of Yarmouth, a lawyer with the firmof Ludden Kramer Law, ‘PC, may be reached at rpl@ Tuddenkeramerlaw.com.