Document Type

Article

Publication Date

5-2013

Keywords

Mortgage-backed securities, Real Estate Mortgage Investment Conduit, REMIC

Disciplines

Banking and Finance Law | Securities Law

Abstract

It is appropriate that the day-to-day practice of real estate law did not touch on the intricacies of the securitization of mortgages, let alone the tax laws that apply to mortgage-backed securities. Securitization professionals did not, however, account for the day-to-day practices of real estate lawyers as they relate to the transfer and assignment of mortgage notes and mortgages when structuring mortgage-backed securities. The consequences of this may turn out to be severe for investors, underwriters, and securitization professionals.

One of the consequences of the sale of a negotiable note not done in accordance with the requirements of the holder in due course doctrine is that the purchaser of the note may not be free of the personal defenses that the note maker (borrower) would have had against the original lender. Another consequence of the sale of a note that is not done properly is that the beneficial owner (as opposed to the legal owner) may not be able to collect on the debt if the borrower is in default. And a third – and until recently hidden -- consequence of an improper sale of a note to a secondary market participant is that the purchaser may fail to comply with requirements necessary to obtain favorable tax treatment as a Real Estate Mortgage Investment Conduit, a REMIC.

Comments

This article predates Prof. Reiss's affiliation with Cornell Law School.

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