Loan Securitization and Foreclosure Defense
In recent years, loan securitization has become a hot topic among mortgage lending and foreclosure defense. Borrowers often first learn about securitization when reviewing the assignments of their mortgage: many are shocked to learn that their mortgage is being held by a trust, often with a long name with many numbers and dates. (Ex. Deutsche Bank National Trust Company, as Trustee of the IndyMac INDX Mortgage Trust 2007-FLX3, Mortgage Pass-Through Series 2007-FLX3). The borrower, who usually made their loan with a local bank or lender, has no idea what this entity has to do with their loan. The answer is that their loan has been securitized. With the ongoing foreclosure crisis, challenges to the loan securitization process have become a popular foreclosure defense.
In the old days, when you borrowed money from a bank, the bank held onto the loan until it was paid off. The promissory note (the contract you signed to borrow this money) remained in the vault of the local bank, and there was generally no dispute over who owned what. (The Christmas movie, It’s A Wonderful Life, has many scenes showing this traditional role of a lender).
In the last half century, things began to change. Lenders no longer held onto the loan they originated for the life of the loan and instead, began to sell them in the secondary market for loans. The two biggest buyers of these loans were Fannie Mae and Freddie Mac: government-sponsored corporations whose sole purpose was to buy loans from originators, so these lenders had more money to lend again. A change to the federal tax code in the 1980s opened the door for more participants to get involved in securitization. Securization is often blamed as a major reason for the recent financial meltdown; the rush to sell these loans on the secondary market encouraged many banks to freely lend money and ignore underwriting standards.
Understanding securitization is an oxymoron; the process is too complicated for anyone to really understand. The short explanation of securitization is that loans are intended to be transferred among several different entities and finally into a trust, where shares of the loans are sold to investors. This securitization process has strict rules and deadlines. During the ongoing foreclosure crisis, it became apparent that few of these securitizited trusts followed these requirements. I, personally, have never seen a loan that has complied with the applicable securitization requirements.
Can mistakes in the securitization process help with foreclosure defense? The trend in Massachusetts is that these mistakes alone will not beat a foreclosure. Even if a mistake did occur in the securitization process, courts generally say that the borrower has no “skin in the game” for raising it as a defense. Some courts have disagreed, and I expect appeals courts to resolve this issue in the near future. However, loan securitization has, at times, revealed problems in the transfers of promissory notes that can be a defense to foreclosure, pursuant to the foreclosing entity’s requirement to hold the note at the time of foreclosure.
Speak to a foreclosure defense attorney if you have a securitized loan and are in need of assistance.