How The Mortgage-Backed Securitization Process is Hurting the Banking Industry’s Ability to Foreclose and Proving the Best Offense for a Foreclosure Defense
By Roy D. Oppenheim and Jacqueline Trask
The Stetson Law Review is published three times a year at Stetson University’s College of Law, St. Petersburg, Florida 33707. Each issue is presented in a symposium format to address contemporary legal topics.
From 2003 to 2007, Florida saw the largest real estate boom in its history. Real estate sold at astonishing prices as people were sold a bill of goods known as the “American Dream.” But for many, that American Dream turned out to be the American Nightmare. From sub-prime mortgage lending and predatory practices by mortgage brokers, lenders and improper securiti- zation of mortgages, this era of economic boom led to the largest crash in the history of the real estate market, a crash from which Florida has yet to recover, and to which we have not yet seen the end. The full extent of the damage inflicted by these practices has not yet been felt, but millions of homeowners nationwide have suffered from financial crisis, foreclosure and bankruptcy. And what is worse yet is that the systemic fraud and illegal conduct of the banks has continued to pervasively infect court systems throughout the nation; further, the Florida court system has suffered from extreme abuse at the hands of the banks that have high jacked it and effec- tively turned it into a private collection agency for the banking industry.
THE SECURITIZATION CRISIS
Mortgage Securitization is perhaps one of the least understood areas of the real estate industry, and for good reason. With phrases such as mortgage bundling, securitized trusts, and tax-exempt structures known as Real Estate Mortgage Investment Conduits (“REMICS”), there are many terms em- ployed to describe massive collections of bundled mortgages which were broken up and sold off in pieces. While this method of bundling mortgages was once looked at as perhaps the best thing to ever happen to the mortgage industry, allowing large scale investors such as pensions and retirement funds to own interests in mortgages in a way that was deemed “safe,” the Securitization process has become a nightmare for the American homeowner fighting foreclosure. In fact, the Securitization process has made it impossible in many, if not all cases where a mortgage is held in a securitized trust, to determine who actually owns a mortgage and note, a fact which until recently has done little to slow down the foreclosure rocket-docket.
However, there is a great deal which should be understood about securitized trusts which can aid in the foreclosure defense and provide the judiciary with further insight, especially when it comes to the constitutional and judicial requirement of standing, which derives from “case and controversy” requirements in Article III of the U.S. Constitution.6 This article will review the creation of subprime mortgage lending and securitized trusts, the nature of standing in foreclosure actions, the process of Securitization of mortgages and the problems the foregoing have created for foreclosing lenders who lack the proper documentation and chain of title to properly foreclose.
SETTING THE STAGE: A BRIEF HISTORY OF SUB-PRIME MORTGAGE LENDING AND THE BEGINNING OF THE SECURITIZATION CRISIS
Sub-prime lending is “a fancy financial term for high-interest loans to people who would otherwise be considered too risky for a conventional loan.” These risky loans included enticingly low rates, often for the first few years of the loan with an adjustable rate after that initial honeymoon period. With shortsightedness, borrowers often were lured with these attractive rates, only to be shocked by “exploding adjustable rates” that they couldn’t possibly afford on their low salaries, and especially couldn’t afford once many homeowners in lower and middle class families became unemployed.
Bait and Switch: The Rise of Sub-Prime Lending
Although the subprime mortgage lending practices developed gradually over time, the start of the industry was paved by three major events. In the 1980s several key pieces of legislation were passed by Congress. These various Acts created deregulation of the mortgage industry in an effort to encourage homeownership by the American public. First, The Depository Institutions Deregulation and Money Control Act of 1980 (DIDMCA) was passed allowing the subprime mortgage industry to flourish by charging rates that had previous been illegal practices. Further, although the current Congress has been quick to point out that the predatory lending practice by banks are responsible for the current housing slump, they have failed to place some of the blame in their own lap for the legislation that contributed to the problem. Patricia McCoy, a Professor of Law at the University of Connecticut pointed out in a CNN Money article published towards the beginning of the crisis in 2008 that “neither the expansion of the subprime market nor the proliferation of exotic interest-only or option-ARM mortgages would have been possible without federal laws passed in the 1980s.” In 1982 the restrictions on mortgage lending were further decreased in what McCoy notes was the worst of the federal laws passed during the 1980s; The Alternative Mortgage Transaction Parity Act (AMPTA) was passed, making adjustable rate mortgages (ARMs) and balloon payments legal for the first time. Finally, the Tax Reform Act (TRA) of 1986 encouraged more homeownership by making the deduction more prevalent, “increasing the demand for mortgage debt.”