The wee problem is the documents that created these trusts, the pooling and servicing agreement, stipulated specific dates as to when all the mortgages had to be conveyed to the trusts (and conveyed means not just paid for, but endorsed through a chain of title and in the possession of the trustee or its custodian). The big reason for the fixation on getting everything done by a certain date was that the 1986 Tax Reform Act created REMICs (real estate mortgage investment conduits) and these trusts were intended to qualify as REMICs. The various cutoff dates were set up in order to conform with the REMIC requirements. But whoops, it appears that those carefully crafted procedures stop being followed in the 2000s by a lot of the industry participants.
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Your humble blogger is in no position to speculate how this curious set of circumstances came about, but we have a good news, bad news situation, and hope readers can help remedy the bad news part.
The good news part is the California Court of Appeal endorsed what we’ve called the New York trust theory in mortgage securitizations in a recent decision called Glaski v. Bank of America (ruling below). One of the big issues in mortgage securitizations has turned out to be whether the party seeking to foreclose on a delinquent borrower has the legal authority (“standing”) to do so. Advocates of the New York trust theory (the overwhelming majority of subprime mortgage securitizations elected New York law to govern the trust) argue that New York trust law is particularly unforgiving, that both statute and case law require that a trustee act only as specifically stipulated in the trust documents. Any other action is void, meaning it has no legal effect.
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