The pooling and servicing agreement (PSA) is a contract that should govern the terms under which trillions of dollars worth of equity in the land of the United States of America was flung around the world. These contracts should govern how disputes over ownership and interest in the land that was the United States of America should be resolved. Pretty simple stuff, right? I mean if I’m a millionaire big shot New York Lawyer working for big shot billionaire Wall Street Investors and banks, then I’d do my job as a lawyer to make sure the contract was right and that all the i’s were dotted and the t’s were crossed right?
But that’s not at all what’s happened. In our scraggly street level offices, far below the big fancy marble encased towers of American law and finance, simple dirt lawyers defending homeowners started actually reading these contracts. We ask lots of questions about just what all those fancy words in their big shot contracts mean. Invariably, the big shot lawyers and the foreclosure mills tell us, “Don’t you worry about all them words you scraggly, simple dirt lawyer. Those words aren’t important to you.”
But increasingly judges recognize that the words really do mean something. Take note of the following statements from the recent Ibanez Ruling:
I concur fully in the opinion of the court, and write separately only to underscore that what is surprising about these cases is not the statement of principles articulated by the court regarding title law and the law of foreclosure in Massachusetts, but rather the utter carelessness with which the plaintiff banks documented the titles to their assets.
The Ibanez decision underscores the fact that it is important for all of us to know and understand how the pooling and servicing agreements directly impact what is occurring in the courtroom. And for assistance with understanding the PSA and how to find it, more commentary from Michael Olenick at Legalprise:
Overview of PSA’s
Securitized loans are built into securities, which happen
to look and function virtually identically to bonds but are
categorized and called securities because of some legal restrictions
on bonds that nobody seems to know about.
The securities start with one or more investment banks, called the
Underwriter (should be called the Undertaker), that seems to disappear
right after cashing in lots of fees. They create a prospectus that
has different parts of the security that they are proposing. Each of
these parts is called a tranche. There are anywhere from a half-dozen
to a couple dozen tranches. Each one is considered riskier.
Each tranche is actually a separate sub-security, that can and is
traded differently, but governed by the same PSA, listed in the
Prospectus. Similar tranches from multiple loans were often bundled
together into something called a Collateralized Debt Obligation, or
CDO. So besides the MBS there might also be one or more CDO’s made up
of, say, one middle tranche of each MBS. Each tranche is considered
riskier, usually based a combination of the credit-scores of the
people in the tranche and the type of loans (ex: full/partial/no doc,
traditional/interest-only/neg am, first or secondary lien, etc…).
CDO’s were eligible for a type of “insurance” in case their price went
down called a Credit Default Swap, or CDS (also known as “synthetic
CDO’s”). There was actually no need to own the CDO to buy the
insurance and many companies purchased the insurance, that paid out
handsomely. [That’s what the AIG bailout was for, because they didn’t
keep adequate reserves to pay out the insurance policies.]
Later, investors could also purchase securities made up of multiple
CDO’s, much the same way that CDO’s were made up of tranches of
multiple MBS’s. These were called “CDO’s squared.” Not surprisingly,
there were also a few “CDO’s cubed,” CDO’s of CDO’s squared. CDO’s
were virtually all written offshore so little is known about who owns
them, except that they were premised on the idea that since there was
collateralized mortgage debt at their base they could not collapse.
Their purpose was to spread the various of risks of mortgages which,
back then, meant prepayment of high interest debt and default.
Investors were actually way more obsessed with prepayment because they
thought the whole country could not default; to make sure of that
MBS’s and all their gobbly gook were spread around the country; you
can see where in the prospectus. They were almost more concerned with
geographic dispersion than credit dispersion.
After that it’s the the servicers/trustee/document custodian scheme
we’re all familiar with. OK .. with that too-strange-to-make-up explanation means let’s dive
into how to find one’s loan:
1. Find the security name: it will be a year (usually the year of
origination), a dash, two letters, then a number. It will be
somewhere in one of your filings. For this we’ll use a random First
Franklin loan, 2005-FF1. [Note; they would just sequentially number
them, so the first security First Franklin floated in 2005 would be
FF1, then FF2, etc…]
1. Go to the SEC’s new search engine:
https://www.sec.gov/edgar/searchedgar/companysearch.html
2. Click the first link, Company or fund name…
3. Choose the radio button marked “contains” and type in the ticker;
that is 2005-FF1
4. There will be multiple filings but one of them will be marked
424B5. Click that, it’s the prospectus.
If you really want to have fun, and want to know what happened after
2008 when these all disappeared, type the ticer (again, 2005-FF1) into
the full text link from the first search page. There you’ll see lots
and lots of filings as pieces and parts of the security are blasted
everywhere. To track yours you have to find which tranche you ended
up in. Sometimes it’s in the filing but, if not, you can usually
figure it out from the prospectus if you know basic origination info
(credit-score, type of loan, where the house is, etc…); some even
list loan amounts.
One warning on those secondary filings, servicers and trusts both
break them out as assets. How one loan can be reported as an asset in
two places is a mystery, but considering this doesn’t even cover the
CDO’s and CDS’s dual reporting doesn’t seem to strange. You’ll see
your loan keep wandering through the financial system, with one
exception (next paragraph), right up to the present day. You can even
see how much the investment banks thinks that its worth over time
since they report out both original amount and fair market value.
The exception — when your loan really does disappear — is when it
was eaten up by the Federal Reserve’s Toxic Loan Asset Facility, TALF.
But you can look that up to and see how the government purchased your
loan for full-price, when investors on the open market were only
willing to pay a few cents on the dollar. If your loan went to TALF
you can find it in the spreadsheet here:
https://www.federalreserve.gov/newsevents/reform_talf.htm Your loan
will be in the top spreadsheet and the genuine lender in the bottom.
Michael Olenick
Legalprise, Inc.
305 Puritan Rd.
W. Palm Beach, FL 33405
olenick@legalprise.com
Office: 561-847-3443
Mobile: 561-699-5056