Law Commons^™

Goliath Versus Goliath In High-Stakes Mbs Litigation, David J. Reiss, Bradley T. Borden

David J Reiss

The loan-origination and mortgage-securitization practices between 2000 and 2007 created the housing and mortgage-backed securities bubble that precipitated the 2008 economic crisis and ensuing recession. The mess that the loan-origination and mortgage-securitization practices caused is now playing out in courts around the world. MBS investors are suing banks, MBS sponsors and underwriters for misrepresenting the quality of loans purportedly held in MBS pools and failing to properly transfer loan documents and mortgages to the pools, as required by the MBS pooling and servicing agreements. State and federal prosecutors have also filed claims against banks, underwriters and sponsors for the roles …

Dirt Lawyers And Dirty Remics, David J. Reiss, Bradley T. Borden

David J Reiss

It is appropriate that the day-to-day practice of real estate law did not touch on the intricacies of the securitization of mortgages, let alone the tax laws that apply to mortgage-backed securities. Securitization professionals did not, however, account for the day-to-day practices of real estate lawyers as they relate to the transfer and assignment of mortgage notes and mortgages when structuring mortgage-backed securities. The consequences of this may turn out to be severe for investors, underwriters, and securitization professionals.

One of the consequences of the sale of a negotiable note not done in accordance with the requirements of the holder …

Once A Failed Remic, Never A Remic, David J. Reiss, Bradley T. Borden

David J Reiss

This article analyses how courts may reach results that undercut arguments that REMICs were the owners of the mortgage notes and mortgages for tax purposes. And even if the majority of states rule in favor of REMICs, the few that do not can destroy the REMIC classification of many mortgage-back securities that were structured to be—and promoted to investors as—REMICs. This is because rating agencies require that REMICs be geographically diversified in order to spread the risk of defaults caused by local economic conditions, REMICs hold notes and mortgages from multiple jurisdictions. Most, if not all, REMICs own mortgages notes …

Dirty Remics, Revisited, David J. Reiss, Bradley T. Borden

David J Reiss

We review the differences between two visions for the residential mortgage markets, one driven by the goal of efficiency and the other driven by the goals of efficiency and consumer protection. Both visions advocate for structural reform, but one advocates for industry-led change and the other advocates for input from a wider array of stakeholders. Broader input is not only important to ensure that a broad range of interests are represented but also to ensure the long-term legitimacy of the new system. This is a response to Joshua Stein, Dirt Lawyers Versus Wall Street: A Different View, PROBATE AND PROPERTY …

Dirt Lawyers And Dirty Remics: A Debate, David J. Reiss, Bradley T. Borden, Joshua Stein

David J Reiss

In mid-2013, Professors Bradley T. Borden and David J. Reiss published an article in the American Bar Association’s PROBATE & PROPERTY journal (May/June 2013, at 13), about the disconnect between the securitization process and the mechanics of mortgage assignments. The Borden/Reiss article discussed potential legal and tax issues caused by sloppiness in mortgage assignments.

Joshua Stein responded to the Borden/Reiss article, arguing that the technicalities of mortgage assignments serve no real purpose and should be eliminated. That article appeared in the November/December 2013 issue of the same publication, at 6.

Stein’s response was accompanied by a commentary from Professors Borden …

Beneficial Ownership And The Remic Classification Rules, Bradley T.` Borden, David J. Reiss

David J Reiss

REMICs are securitized pools of mortgages that qualify for special flow-through taxation. To qualify for flow-through tax treatment, the pool must satisfy several requirements. An intended REMIC that fails to satisfy those requirements will likely be taxed as a corporation and payments made to holders of interests in a failed REMIC will likely be nondeductible dividend payments, subjecting the REMIC to significant tax and penalties. Such tax and penalties will cause beneficial interests in the pool to lose value and frustrate investors who relied upon REMIC classification as an incentive to purchase interests. Thus, tax classification is critical to REMICs …

Comment On The Use Of Eminent Domain To Restructure Performing Loans, David J. Reiss

David J Reiss

There has been a lot of fear-mongering by financial industry trade groups over the widespread use of eminent domain to residential mortgages. While there may be legitimate business reasons to oppose its use, its inconsistency with Takings jurisprudence should not be one of them. To date, the federal government’s responses to the current crisis in the housing markets have been at cross purposes, half-hearted and self-defeating. So it is not surprising that local governments are attempting to fashion solutions to the problem with the tools at their disposal. Courts should, and likely will, give these democratically-implemented and constitutionally-sound solutions a …

Dodd-Frank, Securitization, And The Subprime Mortgage Crisis, Stephen P. Hoffman

Stephen P. Hoffman

There are few things more constant in life than the rise and fall of financial markets. When markets crash, however, we are forced to restore them while learning from our mistakes. In the wake of the recent subprime mortgage crisis, Congress has drastically but deservedly overhauled the regulation of financial markets in order to not only prevent such disasters in the future, but to help restore financial stability more quickly if and when they do occur. In this Paper, I provide a background of the events leading up to the most devastating financial crisis since the Great Depression, focusing on …

Innovative Destruction: Structured Finance & Credit Market Reform In The Bubble Era, Aaron J. Unterman

Aaron J. Unterman

The combination of unregulated financial innovation and human greed has, and will continue to have, dire effects on the international economy. The financial crisis which began in the American sub-prime housing market, and spread across the globe, has devastated the structured finance industry and cast doubts on the new era of credit risk transfer, which had come to represent the achievements of financial innovation. This paper explores the role structured finance played in the credit crisis, dissecting the complex instruments which drove the industry and allowed the American sub-prime housing market to infect the international economy. This paper argues that …

Deeply And Persistently Conflicted: Credit Rating Agencies In The Current Regulatory Environment, Timothy E. Lynch

Timothy E. Lynch

Credit rating agencies have a pervasive and potentially devastating influence on the financial well-being of the public. Yet, despite the recent passage of the Credit Rating Agency Reform Act, credit rating agencies enjoy a relative lack of regulatory oversight. One explanation for this lack of oversight has been the appeal of the potentially self-regulating nature of credit rating agencies that claim to rely deeply on their reputational standing within the financial world. There are strong arguments for doubting this reputational concern, including the conflicting self-interest of credit rating agencies whose profits are gained or lost depending on their ability to …

Exporting Risk: Global Implications Of The Securitization Of Us Housing Debt, Aaron J. Unterman

Aaron J. Unterman

The process of securitization has revolutionized the global debt market creating vast investment opportunities while fundamentally altering the dynamics of lending risk. Asset securitization allows risks to be transferred from mortgage lenders to investors through the sale of mortgage-backed securities. This detachment of risk has led to a lack of accountability within the industry and the creation of the infamous US sub prime mortgage market. This piece examines the effect of securitization on the international capital market focusing on the legal and economic implications of the rise and fall of the US housing market. It argues that this failure is …