ASF director defends securitization PSAs to House committee

Pooling and servicing agreements used when issuing residential mortgage-backed securities meet the requirement for a “complete” or “unbroken” chain of endorsement, American Securitization Forum Executive Director Tom Deutsch said in testimony Wednesday before the House Judiciary Committee. It is Congress’ fifth hearing on recent foreclosure issues and documentation problems in the mortgage industry, and the Judiciary committee’s second in two weeks. When several of the largest banks suspended foreclosures in October over faulty affidavits, consumer advocates, regulators and lawmakers began doubting title owners on loans that had been sold through the secondary market. Deutsch said a typical PSA used in RMBS deals includes a section requiring legal documents for each pooled mortgage be delivered to the trustee or a custodian on the trustee’s behalf. The delivery must bear either an endorsement in blank or an endorsement to the trustee, and a “complete” or “unbroken” chain of endorsements from the originator a named payee to the person signing the endorsement. Deutsch went on to say that typical language in the PSAs does not state or imply that a chain means all prior owners or holders of the note must appear on the chain. “Nor does any judicial proceeding consider or uphold this novel opinion,” Deutsche said. In Nov. 18 testimony before a House Financial Services Subcommittee, Adam Levitin, associate professor of law at Georgetown University, said PSAs require a specific form of transfer, but New York trust law requires more than a recital of that transfer. “The reason for requiring this complete chain of endorsement from originator up through the depositor before a final endorsement to the trust is to provide a clear evidentiary basis for all of the transfers in the chain of title in order to remove any doubts about the bankruptcy remoteness of the assets transferred to the trust,” Levitin said. But Deutsch argues the law only requires “there be no gaps in the chain of endorsements, and that the chain of endorsements be sufficient to effect a transfer to the trust under applicable law.” Still, in his testimony, Levitin points out the need for courts to clarify language in such a vital market. “The chain of title problems are highly technical, but they pose a potential systemic risk to the US economy. If mortgages were not properly transferred in the securitization process, then mortgage-backed securities would in fact not be backed by any mortgages whatsoever,” Levitin said. Write to Jon Prior.