11/16/2010 Securitization Industry Set to Defend Pr…

Dow Jones Reprints: This copy is for your personal, non-commercial use only. To order presentation-ready copies for
distribution to your colleagues, clients or customers, use the Order Reprints tool at the bottom of any article or visit
w w w .djreprints.com
See a sample reprint in PDF format. Order a reprint of this article now

MARKETS NOVEMBER 15, 2010

Securitization Sector Set to Defend Practices

By NICK TIMIRAOS

Mortgage-bond issuers and investors moved to quell questions about whether

banks properly assigned loans made during the securitization boom, arguing
that such transfers are valid even if the loan's owner isn't identified in certain
records.

EXPERIENCE WSJ PROFESSIONAL The American Securitization

Forum, a trade group for the
Editors' Deep Dive: Financial Regulation
Watch
securitization industry, is set to
release on Tuesday a 28-page
DOW JONES CAPITAL MARKETS REPORT
Credit Unions Seek Help With Breaches defense of widely used practices
LOS ANGELES TIMES for bundling mortgages into
Finance Law a Lobby Target securities. The securitization
DOW JONES BUSINESS NEWS
process and foreclosure-
Tarullo Warns Banks Against Dividends
documentation practices are
Access thousands of business sources not likely to face criticism from
available on the free web. Learn More lawmakers at a Senate Banking
Committee hearing Tuesday.

A separate report from the Congressional Oversight Panel, also being released
Tuesday, raises questions about whether improper document transfers could
create additional liabilities for the biggest U.S. banks. The consequences could
be "severe," the report said, "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 securitization-industry defense doesn't address the problem of "robo-

signing," in which employees falsely asserted that they had personally reviewed
the details of foreclosure cases.

Still, the report is aimed at countering claims made by critics that the rush to
feed demand for securities led banks to cut corners in assigning and tracking
ownership of mortgages, just as they did, critics claim, when buying and making
mortgage loans.

Tom Deutsch, the executive director of the American Securitization Forum, said
the group decided to issue the report after "novel theories" challenged whether
mortgages were properly sold as securities.

…wsj.com/…/SB10001424052748703670… 1/4
11/16/2010 Securitization Industry Set to Defend Pr…
Some critics contend that loans weren't properly transferred at each stage in the
securitization process. That could have consequences for the authority of
mortgage trusts to foreclose and for the tax-free status of certain investments.

One particular practice called into question recently is the use of "blank
assignments." Because notes were transferred at several steps throughout the
securitization process, banks often endorsed those loans in blank, without
specifying the owner.

According to the American Securitization Forum, under real-estate law known

as the Uniform Commercial Code, loans are assigned to the owner, even if the
endorsement is blank, simply through the transfer of the loan itself.

Some analysts argue that logic isn't necessarily relevant because individual
pooling-and-servicing agreements that govern respective securitizations
supersede real-estate law and might have set down more specific steps that
needed to be followed.

"What constitutes a correct transfer is a gray area. We need more direction from
courts and legislatures on this subject," Katherine Porter, a law professor at the
University of Iowa, told a congressional panel last month.

Mr. Deutsch said he is unaware of any legal challenges of loan transfers. "Nearly
all of the [pooling-and-servicing agreements] that we have reviewed do allow for
transfers in blank," he said.

Separately, lawyers in several states have challenged the electronic lien-registry

system known as the Mortgage Electronic Registration System, or MERS, which
was devised by banks in 1997 to facilitate the securitization of loans.

To avoid rerecording a loan in county records every time a loan changes hands,
banks designated MERS as either the lien-holder or its nominee. Lawyers have
challenged MERS's standing to foreclose because it doesn't actually own the
loans, while others contend that companies that relied on MERS became sloppy
in tracking their paperwork.

The American Securitization Forum cited case law in dozens of states to press its
case that a third party such as MERS can foreclose on behalf of the servicer. To
avoid legal challenges, some investors and servicers have begun moving loans
loan out of MERS's name before foreclosing.

In testimony prepared for Tuesday's hearing, Adam Levitin, a professor of law at

Georgetown University, will warn that "evidence is mounting" that such flaws
are "not limited to one-off cases, but that there may be pervasive defects
throughout the foreclosure and securitization processes." At worse, such "highly
technical" but "extremely serious" problems represent a "systemic risk of
liabilities in the trillions of dollars, greatly exceeding the capital of the U.S.'s
greatest financial institutions," he said.

Also at the hearing, Bank of America Corp. executive Barbara Desoer is expected
to acknowledge some weaknesses were found in the Charlotte, N.C., bank's
internal review of foreclosure practices.

"We have not found a perfect process," Ms. Desoer said in written testimony
submitted to the committee. "There are areas where we clearly must improve,
and we are committed to making needed changes." She reiterated that the bank
…wsj.com/…/SB10001424052748703670… 2/4
11/16/2010 Securitization Industry Set to Defend Pr…
has found no evidence of wrongful foreclosures.

Ms. Desoer also wrote that "many investors limit Bank of America's discretion to
take certain actions," a reference to the different agendas by investors who own
loans serviced by the bank. Some investors want Bank of America to modify
loans, while others push for foreclosure.

David Lowman, the top home-loan executive at J.P. Morgan Chase & Co., said in
written testimony that the bank is "committed to addressing" any foreclosure
problems "as thoroughly and quickly as possible."

Also testifying at Tuesday's hearing is Iowa Attorney General Tom Miller, who
leads the nationwide investigation into the foreclosure problems that erupted in
September. The attorneys general are scrutinizing whether home-loan servicers
violated state laws against deceptive practices by submitting affidavits and
foreclosure documents without confirming the paperwork's accuracy.

Mr. Miller is expected to tell lawmakers that many loan servicers lacked
adequate systems to deal with the simultaneous crush of foreclosures and loan
modifications, according to a person familiar with his testimony. Mr. Miller also
is expected to say that, while state attorneys general are investigating the
paperwork, their bigger concern is the loan-modification system. A spokesman
for Mr. Miller said he had no immediate comment..

—Dan Fitzpatrick, Alan Zibel and Vanessa O'Connell contributed to this article.

Write to Nick Timiraos at nick.timiraos@wsj.com

Copyright 2010 Dow Jones & Company, Inc. All Rights Reserved
This copy is for your personal, non-commercial use only. Distribution and use of this material are
governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple
copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit
www.djreprints.com

…wsj.com/…/SB10001424052748703670… 3/4
11/16/2010 Securitization Industry Set to Defend Pr…
www.djreprints.com

…wsj.com/…/SB10001424052748703670… 4/4