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Mortgage securitization industry defends itself

By Jia Lynn Yang

The industry responsible for bundling mortgages and selling them to investors has stepped forward to defend itself from charges that it's been improperly transferring loan documents.

The American Securitization Forum, a trade group, issued a paper Tuesday touting the legality of Wall Street's methods for quickly transferring the ownership of mortgages as loans were pooled into securities, a market that boomed as housing prices rose.

Questions have been raised over whether banks cut corners in their rush to create securities and failed to establish a clear chain of ownership -- throwing into doubt the banks' right to foreclose now on some delinquent borrowers.

As the paper notes, two documents are critical to a residential mortgage transaction. One is the note, which indicates the borrower will repay the loan plus interest. The other is the mortgage document, or deed of trust.

Consumer advocates have cited numerous cases where banks could not locate these documents, which they say are necessary for proceeding with a foreclosure. Lawyers are also scrutinizing an electronic system developed by banks in the late 1990s because they didn't want to be slowed down by traditional ink-and-paper methods for transferring the ownership of loans.

But the ASE, in its paper, said that a uniform commercial code adopted by all 50 states and the District of Columbia allows a person to enforce a mortgage note even when it's been lost.

"As our study highlights, the principles and processes involved in securitization result in valid and enforceable transfer of ownership of mortgage notes and underlying mortgages," said Tom Deutsch, executive director of the ASE, in a statement.

The ASE also asserts in its report that the ownership of a mortgage automatically follows the ownership of a note, a rule it says "dates back centuries and has been codified in the [uniform code of conduct]."

"In essence this means, and numerous courts have affirmed, that the assignment of a mortgage to a trustee does not need to be recorded in real property records in order for it to be a valid and binding transfer," said the ASE.

The trade group's defense comes as Congress and regulators increase their scrutiny of the foreclosure mess. Also on Tuesday, a congressional oversight panel issued a report raising serious concerns about paperwork sloppiness by the banks.

"If documentation problems prove to be pervasive and, more importantly, throw into doubt the ownership of not only foreclosed properties but also pooled mortgages, the consequences could be severe," warned the report. "Clear and uncontested property rights are the foundation of the housing market. If these rights fall into question, that foundation could collapse."

By Jia Lynn Yang  | November 16, 2010; 2:06 PM ET
Categories:  Housing  
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Comments

How does someone find out if their home was one that was foreclosed on illegally? My sister lives in Texas and had a devil of a time with promises and broken word and agreements with Bank of America.

Posted by: Anonymous | November 17, 2010 9:14 AM | Report abuse

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