THE SECURITIZATION YEARS: 2004-2007

Most U.S. mortgage debt is owned by residential mortgage-backed securitized trusts. According to the Federal Reserve, there were about 54.7 million loans in the U.S. residential mortgage market in 2008, for a total mortgage debt of $10 trillion. Most of these loans were made from 2004 – 2007 when Americans were borrowing and refinancing at breakneck speeds. Most of these loans were sold to residential mortgage-backed trusts. These trusts were formed by both government-sponsored entities (“GSEs”), primarily Fannie Mae and Freddie Mac, and by securities companies. The trusts formed by securities companies are often called “private label” trusts.

The following chart shows the approximate number of private label trusts formed from 2004-2007, the peak years.

Residential Mortgage Trusts 2004-2007

The number of trusts formed each year by Fannie Mae and Freddie Mac and the total value of the mortgages in these trusts at inception has not been released, but most authorities believe that the number exceeds the number of private label trusts. Using these numbers, over half of the total U.S. 2008 mortgage debt was securitized from 2004 to 2007.

Until 2008, most Americans had not heard of RMBS trusts or mortgage securitization. Mortgage companies did not notify homeowner/mortgagors when their loans were sold to trusts and the loan “servicers” (primarily, payment collectors) usually remained the same even after the trusts acquired the loans. The trust servicers normally did not record mortgage assignments until after a loan defaulted. Understanding of mortgage securitization slowly developed as the foreclosure crisis emerged in 2008 and 2009.

THE LOAN DOCUMENTS AT THE HEART OF SECURITIZATION

The Securities and Exchange Commission defines mortgage-backed securities as debt obligations that represent claims to the cash flows from pools of mortgage loans, most commonly on residential properties. These pools commonly contain one thousand to five thousand mortgage loans on single-family homes, from many states. Most of these loans were originated in the 12 months preceding the formation of the trusts. Most trusts include loans from several different originators – the mortgage companies or banks that lend the money to the homeowner/purchasers who sign the promissory notes. The mortgage companies sell the loans to the securities companies who in turn sell the loans to the trusts.

The actual notes and mortgages signed by the borrowers are the assets of every trust. The most fundamental duty of the trustees is to guard the assets. The trustees were the entities responsible for ensuring that the actual loan documents, the properly endorsed notes and assigned mortgages, were delivered to the trust.

The following provisions, from the Prospectus of Soundview Home Loan Trust 2006-OPT2, are typical of the provisions regarding conveyance of the loans to the trust:

Transfer of the Mortgage Loans

On the Closing Date, the Depositor will transfer to the Trust all of its right, title and interest in and to each Mortgage Loan, the related mortgage note, Mortgage, assignment of mortgage in recordable form in blank or to the Trustee and other related documents received from the Originator pursuant to the Master Agreement….

The Pooling Agreement will require that, within the time period specified therein, the Depositor will deliver or cause to be delivered to the Trustee (or a custodian on behalf of the Trustee) the mortgage notes endorsed to the Trustee on behalf of the Certificateholders and the Related Documents. In lieu of delivery of original Mortgages or mortgage notes, if such original is not available or lost, the Depositor may deliver or cause to be delivered true and correct copies thereof, or, with respect to a lost mortgage note, a lost note affidavit executed by the Originator. The assignments of Mortgage will not be recorded by or on behalf of the Depositor in the appropriate offices for real property records unless required by the Rating Agencies as provided in the Pooling Agreement; provided, however, upon the occurrence of certain events set forth in the Pooling Agreement, each such assignment of Mortgage shall be recorded as set forth in the Pooling Agreement.

On or prior to the Closing Date, the Trustee (or the Custodian on behalf of the Trustee) will review the Mortgage Loans and the Related Documents pursuant to the Pooling Agreement and if any Mortgage Loan or Related Document is found not to conform to the Custodian’s review criteria set forth in the Pooling Agreement and if any material defect is not cured within 90 days following notification thereof to the Originator by the Trustee, the Trustee will enforce the Originator’s obligations under the Mortgage Loan Purchase Agreement…

The trusts formed from 2004 – 2007 were rated by the major ratings companies. and were most often purchased by pension funds, insurance companies, hedge funds and large institutional investors. In 2008 and 2009, these investments were very frequently downgraded by the ratings companies, as foreclosure rates rose and the projected “income stream” from mortgage payments to the trusts declined far beyond expectations and most predictions.

Banks and their affiliated companies played many roles in mortgage securitization during the peak years including sponsor, depositor, underwriter, master servicer, document custodian and trustee. Most banks served in each of these various capacities for different trusts.

Securities fraud class action litigation was one of major aftermaths of securitization. Investors and regulators gradually recognized that the representations made about the quality of the loans in the trusts were often false. In a few of the dozens of cases filed after 2010, including Oklahoma Police Pension and Retirement System v. U.S. Bank, N.A. Case No. 1:11-cv-08066-JGK, Southern District of New York, filed November 9, 2011, these lawsuits included allegations that the loans and mortgages were not properly transferred to the trusts. Other lawsuits that allege that the loans and mortgages were not properly transferred to the trusts include: Policemen’s Annuity and Benefit Fund of the City of Chicago v. Bank of America, N.A., Case No. 12CV2865, Southern District of New York, filed April 11, 2012; John Hancock Life Insurance Company (U.S.A.) v. Ally Financial, Inc., Case No. 012-cv-01841-SRN-JJG, District of Minnesota, filed July 27, 2012; HSH Nordbank AG v. Barclays Bank PLC, Index No. 652678/2011, Supreme Court of NY, County of NY; Phoenix Light SF Limited, et al. v. JP Morgan Chase & Co. et al., Index No. 652921/2013, Supreme Court of NY, County of NY; and Phoenix Light SF Limited, et al. v. Credit Suisse AG, Index No. 653123/2013, Supreme Court of NY, County of NY.

THE TRUSTEES

The $25 billion National Mortgage Settlement included three of the banks, JP Morgan Chase, Citibank and Wells Fargo, which most often served as trustees of mortgage-backed trusts created in 2004 – 2007. Bank of America, also one of the five banks in the settlement, also served as trustee for many trusts, but most often as successor to LaSalle Bank. In December, 2010, U.S. Bank acquired Bank of America’s securitization trust business. The Bank of New York Mellon acquired JP Morgan Chase bank’s securitization trust business in an acquisition that began in 2006 and was completed in 2009.

Of the banks that most frequently serve as trustee, and thus have primary responsibility for the trust documents, four of the top seven, did not participate in the National Mortgage Settlement. These non-settling banks include U.S. Bank and Deutsche Bank, the banks ranking first and second on the trustee list.

The charts below show the participation of the major banks as trustees of the trusts made from 2004 to 2007. The lists of all trusts private label trusts formed in 2004, 2005, 2006, and 2007, with offering amounts and trustees, are available on our website.

ON OUR DATA

1. Totals of initial offering amounts as reported to the Securities & Exchange Commission. Some trusts may have been inadvertently omitted. Not all trusts registered with the SEC. This list includes only private label, non-GSE trusts.

2. Trustees that were succeeded by other financial institutions are represented in the totals under their successors name (e.g. the trustee “U.S. Bank as successor trustee to Bank of America as successor trustee to LaSalle Bank” is represented under “U.S. Bank”).

3. “Deutsche Bank National Trust Company” values include both Deutsche Bank National Trust Company & Deutsche Bank Trust Company Americas.

4. “HSBC Bank USA” values include both HSBC BANK U.S.A., N.A. & HSBC BANK, N.A.

5. “U.S. Bank” became successor trustee to Bank of America in July, 2008. Bank of NY Mellon became successor trustee to JP Morgan Chase Bank in an acquisition announced in 2006 and completed in 2009. Several different banks became successor trustee to Wachovia Bank. JP Morgan Chase became successor trustee to Washington Mutual Bank after Washington Mutual became successor in interest to Long Beach Mortgage, etc.

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Download an xlsx list of trusts, trustees, and values here.