Recent Bankruptcy Court Ruling Provides Evidence Supporting View That Many Mortgage Securitizations Are Invalid

Georgetown University Associate Professor of Law (and witness testifying in November 6, 2010 Congressional hearings on "Problems In Mortgage Servicing From Modification To Foreclosure") Adam J. Levitin writes in Credit Slips:

• Last week the US Bankruptcy Court for the District of New Jersey issued an opinion in a case captioned Kemp v. Countrywide Home Loans, Inc. This case looks like the first piece of evidence in what might turn out to be the Securitization Fail or, in homage to Michael Lewis, The Big Fail.

• Briefly, Countrywide as servicer filed a proof of claim for a mortgage in a bankruptcy case on behalf of Bank of New York as trustee for a securitization trust. The bankruptcy court denied the claim because there was no evidence that Bank of New York ever owned the mortgage. The mortgage note had never been negotiated or delivered to Bank of New York, despite the requirement to do so in the Pooling and Servicing Agreement (PSA) that governed the securitization of the loan. That meant that Bank of New York as trustee had no interest in the loan, so the proof of claim filed on its behalf was disallowed.

• This opinion could turn out to be incredibly important. It provides a critical evidence for the argument that many securitization transactions simply failed to be effective because non-compliance with the terms of the transaction: failure to properly transfer the mortgage meant that the mortgages were never actually securitized. The rest of this post explains the chain of title issue in mortgage securitizations and how Kemp fits into the issue.

For more, see The Big Fail.

Go here for Professor Levitin's written testimony during the recent Congressional hearings.

Go here for the transcript of lender attorney's failed attempt at giving the judge a satisfactory explanation for the bank's screw-up in the Kemp case.