American Securitization Forum
Testimony before the:
Committee on Financial Services
United States House of Representatives
The Future of Housing Finance—
A Review of Proposals to Address Market Structure and Transition
September 29, 2010
The Future of Housing Finance
September 29, 2010
Chairman Frank, Ranking Member Bachus and distinguished Members of the Committee, my name is Tom Deutsch and as the Executive Director of the American Securitization Forum (the “ASF”)1, I very much appreciate the opportunity to testify here on behalf of the 330 ASF member institutions who originate, structure and invest in the preponderance of residential mortgage-backed securities (“RMBS”) created in the United States, including those backed entirely by private capital as well as those guaranteed by public entities such as Fannie Mae, Freddie Mac and Ginnie Mae (for the purposes of this testimony, collectively, the “Government-Sponsored Enterprises” or “GSEs”).
In this testimony, I seek to address these key issues to the future of US housing finance:
1. Importance of the Process of Securitization to Mortgage Lending
2. Transitional Concerns Related to the GSEs
3. Future Structure of Any Government Role in the Secondary Mortgage Market
4. Return of a Private Secondary Mortgage Market
5. Industry Improvements to the Securitization Market Infrastructure
6. Covered Bonds Legislation
By Jody Shenn and Prashant Gopal – Nov 16, 2010 11:14 AM ET
A trade group for companies that help package loans and leases into securities rejected claims that mortgage-bond trusts can’t prove ownership of debt they hold as Congress began hearings on the foreclosure crisis.
The standard practices of the industry result “if followed, in a valid and enforceable transfer of mortgage notes and the underlying mortgages,” Tom Deutsch, executive director of the New York-based American Securitization Forum, said in a study released today. Lawmakers in Washington ordered hearings on mortgage practices after loan servicers including Ally Financial Inc. and JPMorgan Chase & Co. halted foreclosure proceedings following revelations of so-called robo-signing.
The trade group focused on whether industry practices resulted in securitization trusts taking ownership of loans, though not whether all the paperwork needed for foreclosures is in order. Without taking ownership of mortgages within a set period after their creation, often 90 days, the trusts may be unable to later assemble the documents needed for foreclosures because of contractual requirements or tax rules.
“The law is somewhat unsettled on what actually must be done via a securitization to complete the transfers correctly,” visiting Harvard Law professor Katherine Porter told a Congressional Oversight Panel Oct. 27. Porter has said “there is disagreement on whether the transfer of the notes needed to have occurred individually,” or potentially with a specific endorsement to the new holder or a physical transfer.
“Rather, the ASF’s concern is the ad hoc body of federal and state law that currently subjects innocent secondary market assignees to liability.”
Shifting the burden for predatory practices from cheated subprime borrowers to passive investors and other subprime borrowers simply shifts the burden of predatory practices among innocent parties
The primary market actors directly responsible for harmful predatory practices already are subject to extensive, if sometimes ineffective, government regulation.
American Securitization Forum
It is important to remember that, although the holder-in-due-course doctrine constitutes an important protection for innocent assignees, it does not afford an absolute protection to all assignees. In order to benefit from holder-in-due-course status, an assignee must take the loan in good faith and cannot have actual or implied knowledge of a variety of loan defects, including that the loan was originated through fraudulent means. Courts will also deny holder-in-due-course status to an assignee that has such a close connection with the originator that the originator effectively is an agent of the assignee35 or where knowledge of the originator’s wrongdoing can be imputed to the assignee on some other basis, such as joint-venture or aiding-and-abetting theories.36 In addition, assignees that engage in wrongful conduct themselves in connection with mortgage loans are subject to potentially serious liability under a variety of federal and state legislation.37
The ASF does not contest the scope of liability under these laws for secondary market assignees that are culpable. Rather, the ASF’s concern is the ad hoc body of federal and state law that currently subjects innocent secondary market assignees to liability. This body of law lacks coherence and is often internally inconsistent, in part because the perception that assignees must be held responsible for the sins of loan originators becomes more politically salient during periods of turmoil in the housing market. At such times, there is a tendency for lawmakers to turn to the secondary market as the deep pockets available to compensate for the failure of regulatory authorities to effectively oversee and punish those loan originators that engage in illegal conduct.