A Mortgage Loan

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Comment on the transfer of mortgage loan to mortgage-backed securities (RMBS) trust

An enormous amount of comments have been made in recent weeks about possible shortcomings in enforcement actions initiated by credit intermediaries. Such questions are very factual and it may take some getting to know what impact they can have on a particular loan. However, this general discussion has led to more basic questions which call into question both the applicability of the mortgage loan transfer mechanism to securitisation trust and the classification of the securitisation trust as a property mortgage management company ('REMIC') at the creation of these trust.

i) in order to comply with the legal process relating to enforcement, certain measures may need to be taken to record title to a mortgage loan by the securitisation trustee, and ii) since not all of these measures were taken at the securitisation date, the securitisation trustee may not own the mortgage loan.

The justification is incorrect since some of the measures that may be necessary under national legislation to initiate enforcement proceedings are not necessary to confer title to the mortgage loan. It is the aim of this paper to disprove these issues regarding the effectiveness of mortgage credit remittances to securitisation trust entities.

Put in simple terms, the industrial standards used for centuries for the purpose of mortgage loan transfers to securitisers correspond to the well-agreed legal framework for the legal aspects of mortgage loan transfers and are therefore efficient in the process of mortgage loan transfers. Mortgages may be regarded as a set of privileges, comprising (i) a borrower's commitment to pay back debts backed by a promissory notes, and (ii) a pledge of land security which secures that commitment to pay back the mortgage backed by a mortgage or fiduciary instrument.

The transfer of Securities is subject to Governing Governmental Contract Law, Incorporating the Uniform Commercial Code (UCC). The transfer of a mortgage or fiduciary agreement is generally subject to state legislation on immovable properties. Whilst these acts do not contradict each other, they have the effect that the transfer of mortgage loan is juridically complicated.

No uniform statutory form exists for the transmission of mortgage credits, such as the vehicle possession document. Furthermore, owning a mortgage loan does not mean that the landlord has registered an assignation of the mortgage loan in the deeds. Mortgage lending has been transferred between the Originator and consecutive buyers or into a securitisation for years.

Mortgage loan transfer practice to privatelabel securitisation trust is in line with mortgage loan transfer practice to Fannie and Freddie. Moreover, these are the same as those for the sale of mortgage credit ('total credit sales') in pre- or non-securitisation operations as those between the Originator and consecutive buyers in these total credit sells.

The main purpose of these standardised transfers is to achieve three objectives: 1 ) to demonstrate the intention of the notifying par ties to effect a mortgage loan sales and to consider all possible arrangements for this sales; 2) to demonstrate the title conveyance by the delivery of the tangible banknotes with annotations in accordance with the UCC rules which protect the buyer from being exposed to negative third person rights to the mortgage loan; and 3) to allow the buyer to become the collateral taker if this is necessary for enforcement or other purpose.

The general customs and practices in the selling of mortgage credits comprise three essential stages from a documentation point of view: Traditionally, in a privately labeled public sector mortgage loan (RMBS) operation, the corresponding contract is usually a poolsing and service contract that transfers the mortgage loan from the investor to the custodian on securitisation trust's name.

A further appropriate instrument could be a segregated mortgage sales contract in which the mortgage loan is transferred from the donor to the investor immediately before the transfer from the investor to the Trust, with assurances and guarantees transferred to the custodian. Those documentation shall contain a clear grant terminology which shall convey to the Trustor, on account of the Securitisation Trust, property in all "rights, titles and interests of the Vendor in and to the Mortgage Loans".

A timetable or attachment to these papers clearly identify each loan that has been auctioned under the contract. Supply of the grade. Delivering the mortgage bill physically to the buyer or his representative and a direct transfer from the vendor are also important elements in the process of selling mortgage credits for several different purposes.

Firstly, because mortgage securities are usually "instruments" under the UCC, holding the mortgage paper by the buyer in a current sales transaction is usually enough to determine that the buyer's property interests are greater than those of any other individual in the mortgage loan. Secondly, the grade may be assigned as an'instrument' and the buyer will be recognised as the bearer under the UCC rules once he has physically delivered the grade to the buyer with a notice (which may be blank).

However, the issue of whether a Pfandbrief is a tradable document is de facto unique and the normal means of transmission are such that they are effective whether or not it is a tradable document. Third, since there is usually only one tangible mark per mortgage, supply by the vendor to the buyer actually stops the vendor from making a false, incorrect or deceptive sell or mortgage to more than one party.

Fourthly, the Pfandbrief's ownership may be required for the Pfandbrief's execution in the case of delay, even through execution. Notices can be sent to the buyer with a blank indorsement. Usually a mortgage bill for a mortgage loan that has been resold has printed an indorsement with the effect of "Pay to the order of _____________________, without recourse", endorsed by the author or a later buyer.

The effect of such an endossement is that a future assignment of the mark presumably necessitates only an actual supply (i.e. without further endorsement). So if there are consecutive buyers for a notice, the bare confirmation by a previous owner is a satisfactory confirmation for the purpose of the recent buyer.

This is why a multiple mortgage letter usually has only one indorsement, which is left empty. It is important that for all uses for which a mortgage loan endorsement may be required or desired in relation to a mortgage loan sales, a plain endorsement suffices and is as valid as a endorsement when the name is completed.

The predominant and almost universal practise in privatelabel transactions with RMBSs was for the confirmed bonds to be handed over in physical form to the cover pool monitor or to a depositary bank as the cover pool monitor's representative on completion of the securitisation. One of the usual methods is the request that the cover pool monitor or depositary submits an original certificate on conclusion and then a definitive certificate in a certain number of working days in order to certify the service of each Pfandbrief.

In particular, these processes shall entail a special check by the fiduciary or depositary as to whether he has actually obtained the actual marks for each loan specified in the mortgage credit plan. Those methods make it very unlikely that there has been a common omission to supply the undiscovered mortgage letters.

cession of the mortgage. Finally, the important last stage in the transfer of title to a mortgage loan is to make available to the buyer a describable transfer of the mortgage. As a rule, the allocation is empty, so that the name of the recipient can be completed later before entry. Since the mortgage "follows the note", it safeguards the borrower's liability, and since it is not necessary between the vendor and the buyer to keep a register of the transfer on behalf of the buyer in order to transfer to the buyer the mortgage-right.

In order, however, to be able to enforce their mortgage right against the debtor in the event of delay, the laws of certain States may require the buyer to become the collateral taker. The supply of an assignation of a mortgage in bare, describable forms is designed to allow the buyer to become the collateral taker by making the assignation in his name and presenting it for registration.

Since any record of an assignation of mortgages is associated with a registration charge and other costs, it is not uncommon for these transfers not to be recorded until the date required in the context of a levy of execution on a particular loan that has fallen into default. It was customary for a privatelabel RMBS deal to include a plain, describable copy of a mortgage transfer originally endorsed.

Many securitisations that regulate documentation have not in many cases demanded that the assignment of mortgages in favour of the trusts be registered as a generality. Proof that the fiduciary or depositary has received the mortgage assignment was requested according to the same procedure as for mortgage letters.

Our wisdom is that we are not unaware of any significant deviation from the general practices of supplying mortgage bonds to the escrow agent or its depositary. Some programmes allowed the banknotes to be delivered within a certain amount of space after issue, except for the general check-in procedure for the banknotes and the presentation by the nominee or depositary of an acknowledgement of reception with buy-back necessary for any failure to deliver as described above.

However, in some cases it is known at the securitisation date that the vendor will not be able to provide the underlying asset because it was previously damaged or stolen. A sworn statement made by the vendor would then be served on the escrow agent confirming that the vendor (i) had possessed the loan, (ii) was in the possession of the originals and (iii) had enclosed with the sworn statement a genuine and full copy of the originals and that the originals had been either damaged or stolen.

Securitisation, which regulates documentation according to its conditions, would nevertheless transfer title to this mortgage loan to the fiduciary, although the absence of the originals in some states may impose further conditions on the creditor in relation to enforcement (e.g. booking of a loan).

In the case of mortgage credits where the mortgage was kept through the mortgage securitisation system at the moment of the securitisation, instead of assigning the mortgage, the vendor would assign his economic interest in the mortgage to the custodian through the mortgage securitisation system. Where the debtor must be designated as the collateral taker in order to conclude enforcement, relatively straightforward measures can be taken to achieve this in legal systems where enforcement is possible if necessary (although there may be delays).

Because of the above, these standardised processes are adequate to effectively convey title to the mortgage loan to the securitisation trust, which is the clear and unequivocal intention of all those involved in the transaction (including investors) at this stage. In particular, the use of a direct charge on the Pfandbrief is fully compatible with a disposal.

It is not necessary to keep a record of a mortgage cession to the securitisation trustee in order to prove that the mortgage loan is owned by the trustee, and the supply of a cession of the mortgage in an empty, describable format is enough to allow the trustee to become a registered mortgage creditor if necessary.

It may be necessary, for example, to record an cession of the mortgage to the securitisation trustee. No new or extra property right would be transferred to the securitisation trust as a result of such extra moves and the adequacy of the above described transfers to transferring title to the securitisation trust would not be affected at the issue date.

Specifically, the above described standardised transfers are used in connection with operations between demanding banks and institution holders who have a clear joint intention to sell the operations. Surely, as trading activities, the measures taken are enough to ensure the legal assignment of the property and to safeguard the buyer's right, but they do not entail any extra measures that are not necessary to assign the property, which would require extra effort in terms of terms of timing or cost.

On the other hand, the enforcement procedure is counterproductive and, in this respect, it is reasonable that additional demands could be made beyond those necessary for the transfer of title to the loan itself. Certain observers have added to the terrible fears that REMIC would loose its qualifications because it did not own the mortgage loan.

It is the basic assumption for this line of reasoning that the measures to transfer title to the loan were not effective at issue and that any consequential action to allegedly'cure' such a defect (such as recording an cession of mortgages ) would result in the mortgage loan being transferred to REMIC at the end of the 90 days after the issue date on which transfer to Remic is allowed, leading to a forbidden transfer duty.

In answer to this point, the mortgage loan was transferred lawfully to the securitisation trustee at the date of issue, who meets the Internal Revenue Code and related Treasury Regulations for EMIC qualifying. According to the fundamental principals of fiscal legislation, where the material controls the shape, there is no doubt that REMIC was the holder of the mortgage credit for fiscal purpose at the moment of issue.

It is our belief that the recent claims of possible wholesaler omissions in the transfer of mortgage loan property to own-branded RMBS trust are unsubstantiated and unsubstantiated. Clearly, all participants in these operations, i. e. borrowers, reinsurers, underwriters, custodians and depositors, have sought that the operations transfer title to the loan to the custodians and appropriate measures have been taken to carry out this transfer in accordance with well-agreed mortgage transfer laws.