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john gault's Blog

GNMA's Mandate to MBS Issuers to Repurchase and Holder v Holder in Due Course
by john gault | 2013/10/18 |

Are the actions of third parties manipulating homeowners' rights to affirmative defenses? Issuers are contractually obligated to purchase loans in order to modify or foreclose.

john gault's Blog ::

The function of GNMA is to guarantee / insure FHA and VA loans for the
benefit of the lender. With the advent of securitization, it appears GNMA
has made a new contract with the issuers of mortgage backed securities
which impacts the insurance / guarantee, and the duties of the issuer. In short,
the issuer is to make and keep the investors whole.
The issuers may then benefit from GNMA's guarantee or insurance.

From GNMA:

"In the Ginnie Mae program, Issuers are financially responsible for their
securities, even if the underlying mortgage collateral becomes delinquent."

jg: The issuer of securities accepts liability ("financially responsible") for payment
to the investors on the securities it issued. Accordingly, among other things, the
securities issuer has contractually agreed to be primarily liable to the securities
holders by this third party agreement - at least if anyone is to see the benefit of
GNMA's insurance.   
 
"While the GSEs are responsible for the financial losses related to the loans
in their investment portfolios and MBS, the Ginnie Mae Issuer must make
principal and interest pass-through payments to investors for delinquent loans,
as well as provide the funds to re-purchase loans to foreclose on a home or
modify a loan."

jg: The issuer must 1) continue payments to the investors on the securities and
2) repurchase the loan to a) foreclose or b) modify. This says to me that
trusts should never be the foreclosing party on FHA or VA loans, not if the
contract between the issuer and GNMA is being honored, as it must be for anyone
to realize the benefit of GNMA's coverage.    

"Ginnie Mae Issuers are responsible for any unreimbursed costs associated with
either violating insurers' servicing guidelines or for inadequate insurance
coverage. This requirement provides a strong incentive for private institutions
to make better quality mortgage loans."

jg:  It's not exactly clear what GNMA won't cover, though something which may be
reasonably inferred is a loan which was not underwritten to FHA or VA guidelilnes.*    

"It is important to note that Ginnie Mae does not have a financial obligation
to MBS investors unless the Issuer becomes insolvent."

jg: Why is that, pray tell? GNMA has historically made its guarantee available to the
owners of the loans. A copy of certain documents from the loan file along with the funds
for the insurance are sent to FHA or VA, which then issues a mortgage insurance
certificate (FHA) or one of guarantee (VA) to the lender, its successors, or assigns. If
not for the contract between the issuers and GNMA, the guarantee or insurance would
directly benefit the current lender (he who has paid for and received a properly
negotiated note and assignment of the collateral instrument). But now GNMA's guarantee
only goes directly to that lender if the securities issuer becomes insolvent. How is it
that GNMA was able to inject a contract which moved its decades-long guarantee from loan
owners to a third party, and just as importantly, why do this? There may be a simple
logistics explanation or it may be that GNMA tried to remove itself from the "who owns
this loan" issue by paying the issuer only after the issuer's "repurchase".     

At any rate, the insurance is now paid to the issuer, whom to get the benefit of that
Insurance must repurchase the loan to modify or foreclose and THEN GNMA's insurance or
guarantee will kick in TO THE ISSUER. But to get the benefit of GNMA's guarantee, the
third party has agreed to a number of things, including to forego holder in due course
status. It's likely this isn't popular, but this doesn't change the fact the issuer has
agreed to it.   
 However, it appears that without repurchasing as is contractually required, the issuer
(or someone) instead uses the (alleged) credit bid of a trust to garner the collateral by
showing the trust as the foreclosing party. Whether or not the issuer then passes the
gnma guarantee / insurance monies to the investors is unknown, at least to most of us.  
The investors were to have been made whole by the issuer's payments and ultimate
repurchase before then and aren't being. If they were, the trust wouldn't be the named
party trying to foreclose, no longer having any skin in the game. Could party A
repurchase a loan from party B and then assign its credit bid to party B?  Maybe so, just
not these particular parties, most particularly if party B is a passive REMIC regulated
by NY trust law. Nor would a wrongfully induced illusion that a claimant is a holder in
due course be anything but illegitimate.       
If issuers are not honoring their contractual obligation with GNMA by not repurchasing
the defaulted loans, are the investors ultimately benefitting from this m.o.?  Are they
receiving the benefit of the GSE guarantee / insurance? It's hard to say, but if the
plethora of investor suits against the other players is any indication, it doesn't appear
so.  
 If the issuer avoids the repurchase obligation, the issuer is managing to avoid the fact
that if he repurchased because of a default, which is the only known reason an issuer
is obligated to repurchase, he never obtains holder in due course status (having taken
the note with notice of its dishonor). Instead, as it is, the borrower is intended to
find himself up against an alleged holder in due course (a trust) and is without the
benefit of affirmative defenses available against a holder who is not a holder in due
course.
But, because "MERS" (read servicer-employee), without known exception, only executes an
assignment after a default in payment by the note maker, it's fair and reasonable to
presume that any loan which is the subject of a "MERS" assignment is 1) in default and
therefore 2) that the new owner of the note, the trust, is not a holder in due course,
either.
Even if argument is made that the assignment of the collateral instrument had been assigned with no recordation,  there's no mistaking the new assignment of the note to the trust (either
in keeping belatedly with an existing contractual agreement and or pursuant to an Article
of the UCC other than Article III).  In my opinion, and most highly relevant to this whole
mess, is that such an assignment is itself prima facie evidence the loan was not
transferred to the trust in the first place.  

In one foreclosure case where a claimant was squarely confronted about "MERS" authority
to assign the note, PHH v Anderson, PHH agreed that MERS had no authority to assign the
note, but averred the assignment of the note in that instrument was merely "superfluous".
I'd have to disagree. The recordation of an instrument carries an obligation to contain
only facts and an instrument is recorded, significantly, to provide notice of, and
reliance on, those facts. If the assignment of the note is "superflous", meaning it's not
what it says and is not to be relied on, it shouldn't be contained in a recorded
instrument. It seems the party who has executed such an assignment wants it both ways: it
wants to make a record for its own purposes "over there", and yet that same party says
it's not to be factually relied on by the one party it affects most: the homeowner.

 But importantly, why would a trust, or anyone (clearly the issuer doesn't want to),accept a transfer of a loan in default, even if it weren't subject to strict compliance with cut-off dates imposed by trust law - "Here - take this turkey!" ??? And an issuer would be 'rather reluctant' to pay a trust for a loan which it knows can't be transferred to a trust post cut-off date, which may help explain why issuers aren't complying with their agreements with GNMA.

The impact on an intervening agreement or any agreement among others which impacts a note maker, such as that of GNMA with the Issuers, is an important issue, one about which I hope scholarly minds are or will soon be devoting some energy.

Homeowners haven't by and large made an issue of holder v hidc, but in my opinion,
when they get around to it, they'll find there is no holder in due course on these
notes. The issuer by contractual agreement has abandoned that potential status
and the trust, when and if lawfully accepting a tardy assignment of a loan now in default, cannot claim the status. As to the validity of a late assignment to a trust and the note maker's challenge to such a late assignment, those issues are being litigated in the hotly contested Glaski v Bank of America et al.  
*It's my understanding that GNMA will only respond to claims made by GNMA approved
servicers. FHA has been known to tell an unapproved servicer, who should
be making the claim on these particular loans for, if anyone, the issuer who should have
repurchased the loans, to go home, essentially, for lack of that approval. When loans
are removed from a pool for any reason, the servicing may be moved to a "default
servicer",  and apparently some of these default servicers are not GNMA approved.

For a look at FNMA's guarantee, see my blog of 03/26/11 here at SourceofTitle.  










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