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Fisking the American Securitization Forum's Congressional Testimony

posted by Adam Levitin

Tom Deutsch, the Executive Director of the American Securitization Forum (ASF) testified before the Senate Banking Committee this past week about chain of title problems in securitization.  I was fascinated to see how much attention the ASF spent in attempting to rebut my testimony from a pair of previous hearings (here and, in a more polished form, here). My first thought was "gosh, ASF's awfully defensive. They sure seem spooked." And on looking at the details of the ASF's rebuttal, my sense is they're on very shaky ground if these are the best arguments they have.  

Below I review some of the ASF's arguments and show why they're just wrong. In particular, note the PSA language that I quote that demolishes the ASF's claim that PSAs do not require an endorsement from every party in the securitization chain:

"the original Mortgage Note bearing all intervening endorsements showing a complete chain of endorsement from the originator to the last endorsee"

If there's any doubt about what that language means (more discussion below), I'd love to hear it in the comments.  There's a very specific method of transfer required in securitization by PSAs and if it wasn't followed, then under New York law, the transfers are void.  And it is sure looking like many deals didn't comply with the PSA terms.

  • Lack of Caselaw Support

ASF takes me to task because the argument I make about PSAs is not supported by caselaw. Duh. Of course it isn't. These issues have never been litigated. The whole point I've been making is that there are a bunch of unresolved legal issues. I'm not the one who decides what the outcome is. I can only offer my semi-learned opinion. But just as my argument lacks caselaw support, so too does that of the ASF. At least I'm not the one who built a $1.2 trillion dollar private label residential mortgage securitization industry hinging on uncertain law.   

  • We're Too Big to Fail

The next piece of the ASF argument is that private label residential mortgage securitization is too big to fail. The ASF implies that its argument has to be right because otherwise the private mortgage securitization industry would collapse. News flash: it already has.  

The creditors of some of the securitization deals of General Growth Properties tried this argument in bankruptcy court when GGP figured out that the "bankruptcy remote" securitizations could be pulled into the Chapter. The creditors claimed that permitting the filing would kill the whole securitization industry. The argument didn't fly, not least because the industry is pretty dead at the moment.  

  • PSAs Require Endorsements by Every Party in the Chain of Title

ASF argues that the language in many PSAs requiring a "complete" or "unbroken" chain of endorsements only means that there must be a chain of endorsements legally sufficient to effectuate the transfer of the note to the trust.

Here's what the ASF claims:

The typical language does not state, nor does it imply, that a “complete” or “unbroken” chain means that all prior owners or holders of the note must appear as part of the chain. Nor does any judicial proceeding consider or uphold this novel opinion. Nor does Professor Levitin provide any third-party support for his interpretation of a typical PSA. 


The typical PSA requirement for a complete or unbroken chain of indorsements to the person signing the indorsement in blank means only that there be no gaps in the chain of indorsements, and that the chain of indorsements be sufficient to effect a transfer to the trust under applicable law.

There are a few problems with this argument. First, if the ASF is correct in its claim that the loans are transferred by sale under Article 9 of the UCC, the legal sufficiency of the endorsements should simply be irrelevant. In making this claim, ASF seems to be conceding that PSAs are the governing law for RMBS transactions.  

Second, it's worth looking at the entire language used in PSAs, not the selectively quoted language referred to by the ASF. For example, consider the PSA for Securities Asset Backed Receivables LLC Trust 2005-FR3, dated July 1, 2005, § 2.01(b), July 1, 2005.  It provides that the depositor will deliver to the trust: 

“the original Mortgage Note bearing all intervening endorsements showing a complete chain of endorsement from the originator to the last endorsee, endorsed ‘Pay to the order of _____________, without recourse’ and signed (which may be by facsimile signature) in the name of the last endorsee by an authorized officer.”

Note the bold language (my emphasis; the italics are original).  There can be no question that this language is calling for every endorsement from the originator to the trust, and cannot be satisfied with a single endorsement in blank. For deals with this language, at least, ASF's testimony is demonstrably wrong.   

Now, it is important to note that not every PSA has such language.  Some merely require delivery to the trustee of:

"the original Mortgage Note, endorsed in blank or with respect to any lost Mortgage Note, an original Lost Note Affidavit, together with a copy of the related Mortgage Note"

The incidence of various PSA language is unknown, but certainly there are a good number of PSAs where there has to be a complete chain of endorsements. It's really hard to say what is a "typical" PSA, but I can tell you that the language in the Fremont deal shows up in a lot of other deals and that there's a strong implication from that usage that it is also what is called for when PSAs merely require a "complete" or "unbroken" chain of endorsements, without spelling out that it must go from originator to trust. 

  • There's a Good Evidentiary Reason PSAs Require A Chain of Endorsements

One of the points that I made in my testimony was that there is a good business reason for requiring a complete, unbroken chain of endorsements from originator to trust:  it is the evidence that documents the transfers in the securitization that are necessary to show that the assets are bankruptcy remote. ASF argues that there is no need for the complete chain of endorsements as evidence because there are mortgage purchase and sale agreements at every step of the deal prior to the PSA which provide good evidence of the transfers. 

There are two problems with this claim. First, in many deals there are only mortgage loan purchase and sale agreements (MLPSAs) going from originator up to the securitization sponsor/seller. The PSA is often the document that covers the transfer from the sponsor/seller to the depositor and from the depositor to the trust. Absent endorsement, there is only a recital showing that the depositor--a wholly owned subsidiary of the sponsor/seller was ever involved in the deal. The presence of the depositor is something demanded by the rating agencies, but absent endorsement, the depositor starts to look completely fictional. 

Second, a MLPSA is not conclusive evidence of a sale. MLPSAs rely on Article 9 of the UCC for a legal basis for transferring promissory notes and mortgages. Article 9 requires that the seller have rights in the property being sold for the transfer to be effective. The MLPSA itself provides no evidence that the seller had rights in the mortgages and notes being sold. This is particularly important given the occurrence of warehouse fraud, wherein the same mortgage might be sold multiple times by the same seller.

The mere representation of such rights in the MLPSA is not probative of the seller actually having rights. It merely makes the seller liable for a misstatement, if prosecuted successfully. Ultimately, the evidence needed here would be an affidavit from every party in the chain of title stating that it had good title at the time it transferred the loans. And that sort of affidavit will be hard to get from any party that's gone bankruptcy or ceased operating. The wonderful thing about negotiation as a a method of transfer is that it has evidentiary value baked in. The instrument is the obligation reified, so there is no question about whether it has been previously sold to someone else. 

It's worth noting that PSA language pre-2001 (when Article 9 was revised to cover the sale of promissory notes and mortgages) is the same as PSA language post-2001. In other words, everyone contemplated doing deals the same way, irrespective of revised Article 9 because negotiation retained an evidentiary value that revised Article 9 could not supply. 

  • Can a NY Trust even Accept Paper in Blank?

Another trust law issue not even addressed by the ASF is whether a trustee of a NY trust can accept and hold bearer paper. It's not clear that it can. The problem with bearer paper is that there is nothing that indicates that the paper is the property of a particular trust. If a trustee, say Bank of New York Mellon, is trustee for thousands of trusts, there is nothing that indicates which trust the bearer paper belongs to. If files from different trusts were to get mixed up, there'd be no way to know which trust owned the bearer paper. There's a reason that trustees keep cash in bank accounts under individual trusts' names and don't commingle assets of multiple trusts or hold cash themselves in trusts names. This presents a potential problem for both the notes and the mortgages if one believes that endorsement in blank of a mortgage has any meaning.  

  • Doesn't address Kemp v. Countrywide

I found it remarkable that the ASF testimony did not address Kemp v. Countrywide.  But what could ASF really say? The whole point with Kemp v. Countrywide is that it has nothing to do with the propriety of the legal structure of securitization. It's all about whether that structure was followed--it's an execution issue, and there's no reason that ASF would have any special insight into that. ASF's concern has always been the legal issues in the front-end deal design, not what happened with backroom paperwork. 

To summarize: the securitization industry has a lot to be worried about if the ASF's Senate Banking testimony contains the best arguments they can marshall about chain of title problems.


All of the defecincies pointed out here by securitization "players" ( of the GSE Business Model) breach the warranties and representations of the GSE Guidelines.

There are only two ways to go...either we're making our way out of this mess or things are going to get much worse and it's all either a purposeful ponzi scheme or a mess that spun wildly out of control. Whether purposeful or accidental we are smack dab in the middle of a crisis of epic proportions. Take a look at some transcripts and orders I posted today at www.mattweidnerlaw.com...there were judges that were asking these questions long ago....WHY DID WE IGNORE THEM?


It's been great seeing you at the hearings and telling it the way it is...Great article! Like most that I find on creditslips.org.

Matt,if you ask me it has been purposeful..Notice the banks have been paid off, the men in control--crooked attorneys, trustees, and judges are the one's still with the jobs!

Fannie Mae recently was given a valid option to try and fix some of this...Here's what we got they LOVE THE NEW PRODUCT!!!!

But even if you give FANNIE MAE a 100% value treasury today's value(paid for already) to loan against like most bankers do Fannie can't loan against a treasury!

Go figure give them a way to really make guaranteed returns and give homeowners almost a free house is to much for the thieves...It would eliminate the need for the liar attorneys that would rather steal with judges the homes of the American people!!!

The strength of your rebuttal was admired by: La Smith @


Yves is a smart lady, even if she was misnamed at birth. Eve is feminine, Yves is masculine.

She has been pushing the issue for months. The issue is technical, but in law, technicalities are there for a reason, particularly when there are disparities in size as with a lender and a borrower.

The sub-prime and other lending that were meant to, and did, revive the credit boom in America went on to fuel a smaller one in Europe. That was because a lot of those who bought up the securitized mortgages were German etc banks. Thus, the idea that the securities are worthless, may cause problems?!

The banks that sold them are liable for all of the loss unless the investor can be held somehow, to be negligent. The American taxpayer may refuse to pay the massive amounts, making the European banks as bust as the American ones! This is actually a good thing! Except for those who owned bank shares, of course. Pension funds will also suffer.

The old banks would have to be recapitalized. If plainly bust, they cannot be recapitalized. Their depositors will be paid off, but probably no one else. All that debt destroyed means that the depression will be much shorter in time.

The Irish of course, have to waste massive amounts of capital before it will be clear that it is wasted money.

I have posted to this effect on irisheconomy.ie but to no avail. No reply was ever received. If the persons to whom we owe money are bankrupt, they will not be in a position to sue for the full amount of the debt. The weak never prosper.

This may be a silver lining for many US borrowers!

Why do you refer to PSA's as "governing law". PSA's are contracts, not laws.

Nice post and great job at the Committee Hearings. It might just be me, but doesn't Mr. Deutsch sound alot like a spoiled kid who just broke his favorite toy (RMBS) and is shrieking at mommy to fix it or replace it...NOW?!? The courts are still attacking the Borrower position by saying: "you are not a party to these securitization contracts".. my answer to the courts: Read the definition of "Noteholder" in the Promissory Note, e.g.; "the noteholder is the lender, its' successors and assigns, and any holder entitled to receive payments"! Is the Borrowers' signature in place in this contract? Then, in equity, the true principals to the transaction are the investors and the Borrowers...period. What is your opinion as to the application of the step transaction doctrine as it would apply to these transactions? When enough Borrowers and Investors are brought into the same room, the horse will be out of the barn, down the road, and running like hell(straight to court).


In a PSA it is stated that: "On or prior to the Closing Date, the Depositor shall deliver to the
Trustee Assignments of Mortgages (except in the case of MERS Loans), in blank, for each applicable Mortgage Loan."


So my question is: if the assignment of a mortage is made in blank, does this imply that Mr. Deutsch is right in his testimony when he says
"The typical language does not state, nor does it imply, that a “complete” or “unbroken” chain means that all prior owners or holders of the note must appear as part of the chain." ?

Mr. Levitin:

Maybe I am misunderstanding your arguments, but
isn't it a jump in logic to suggest that if the Depositor fails to comply with the strict terms of a PSA that the Trustee does not have legal title to the notes or mortgages, or that the mortgage/note is unenforceable?

A related question: What standing does the mortgagor have to try to challenge the trustee's title to the mortgage based on the depositors failure to adhere to the strict terms of the PSA? Is the failure simply relevant evidence that the trustee may not hold legal title or does the failure vest some sort of third-party legal right in the mortgagor.

The way I see it: The depositors failure to comply with the strict terms of a PSA may be a breach of contract enforceable by the trustee, or one piece of a line of evidence throwing title into doubt, but alone it doesn't affect the trustees legal title or right to enforce the mortgage. What am I missing?

PSAs become the governing law for transactions under them per the securities codes and regs.

The language Professor Levitin quotes refers to notes; the language you quote refers to the mortgages.

The trustee can only enforce what was deposited, and the deposits have to meet specific conditions to be valid. If the depositor did not properly hold or own the note and/or did not properly deposit it, the trustee has nothing to enforce. That's definitely something the debtor should be able to raise.

Mr. Levitin,

If your arguments are correct, then why are the Investors and their attorneys not using the same arguments to force the lenders to buy back the loans?

It would certainly be an easier argument to make than using the Reps and Warranties. R & W is much harder to prove, requiring examination of each loan in depth. Assignments would be much easier.

Do the Investors law firms know something that you don't know?

BTW, this is the same question that Ms Smith at Naked Capitalism deleted from me on the website, and then blocked me from posting any longer.

@Patrick Pulatie:

Mr. Levitin is not only correct, but the language of the PSAs is not really open to misinterpretation. "Complete chain" does not really allow for ASF's suggestion that an A->D transfer is possible.

The first class actions by bondholders have in fact already been filed, but there are practical problems for the bondholders because the whole point of these securitizations was to allow lenders and sponsors to fund total loan volume that was many, many times their own total assets. And while the bondholders are beneficiaries of the trusts, they can't touch the underlying real estate.

The answer to your probable next question is that investors bought into the RMBS investments based largely upon two things: the reputations of the sponsors (e.g., Goldman Sachs and Morgan Stanley), and credit enhancement schemes that could not survive the massive number of simultaneous defaults that actual occurred.

I am surprised that not a single commenter challenged Mr. Levitin's interpretation of the relevant PSA language. Mr. Levitin, I am afraid you are wrong, and to the point that not a single judge (or at least not a single appellate judge) would agree with you.

The PSA requires “the original Mortgage Note (bearing all intervening endorsements showing a complete chain of endorsement from the originator to the last endorsee,) endorsed ‘Pay to the order of _____________, without recourse’ and signed (which may be by facsimile signature) in the name of the last endorsee by an authorized officer.”

If you temporarily skip the language in parentheses, it becomes apparent that the PSA only requires an unbroken chain of endorsements, which may be satisfied by (1) a chain of endorsements some of which are special and the last of which is in blank, or (2) only the original note endorsed in blank. If there was never a special endorsement on the note, then there would simply be no intervening endorsements (as the note is transferable by transfer of possession alone), and the initial and only blank endorsement would in fact constitute "all intervening endorsements showing a complete chain of endorsement from the originator to the last endorsee."

In other words, a “complete chain” of “all intervening endorsements” may be shown either by a series of special endorsements, a single blank endorsement, or a chain that includes a combination of special and blank endorsements. The PSA does not require a special endorsement. It only requires that there be no gap in the chain of endorsements. A single blank endorsement at the outset contains no gaps, and therefore satisfies the PSA.

My name is Richard Kahn. I am a securitization auditor. My firm is FPG-USA.com. I speak regularly with Max Gardner and others in this arena. In fact I was recently in Las Vegas where Max was hosting a Securitization Seminar to attorneys, educating them to pertinent issues.

My firm performs audits on the borrower side. In reality, the note and mortgages submitted in the predominant number of cases we examine do not have ANY endorsement on the Note and NO assignments on the mortgages. The lender's are pretending these are portfolio style loans. THAT is how many servicing lenders are trying to foreclose.

While the learned commentators suggest, and perhaps rightly so, that the banks inherit the mortgages back to their balance sheets, the pertinent language of most PSAs include a REPURCHASE clause. This is a "put" style responsibility of the Trustee and results in the parties buying back the defaulted mortgages at the price they were sold to the Trust.

My first book Winning Against Foreclosure presents the concept this was a premeditated plan. I was National Real Estate Product Manager of Merrill Lynch working under Donald Regan, then CEO and subsequent U.S. Treasury Secretary under President Reagan.

My new book coming out in about 2 months is more concentrated on securitization issues. I believe Prof. L is right on the money and applaud his concise and precise understanding of the problem(s).

Richard Kahn http://www.fpg-usa.com

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