Adam Levitin | ABSTRACT | The Paper Chase: Securitization, Foreclosure, and the Uncertainty of Mortgage Title

From: Charles Cox [mailto:charles@bayliving.com]
Sent: Monday, November 18, 2013 3:32 PM
To: Charles Cox
Subject: Adam Levitin | ABSTRACT | The Paper Chase: Securitization, Foreclosure, and the Uncertainty of Mortgage Title

THE PAPER CHASE:

SECURITIZATION, FORECLOSURE, AND THE

UNCERTAINTY OF MORTGAGE TITLE

ADAM J. LEVITIN†

ABSTRACT

The mortgage foreclosure crisis raises legal questions as important as its economic impact. Questions that were straightforward and uncontroversial a generation ago today threaten the stability of a $13 trillion mortgage market: Who has standing to foreclose? If a foreclosure was done improperly, what is the effect? And what is the proper legal method for transferring mortgages? These questions implicate the clarity of title for property nationwide and pose a too big-to-fail problem for the courts.

The legal confusion stems from the existence of competing systems for establishing title to mortgages and transferring those rights. Historically, mortgage title was established and transferred through the “public demonstration” regimes of UCC Article 3 and land recordation systems. This arrangement worked satisfactorily when mortgages were rarely transferred. Mortgage finance, however, shifted to securitization, which involves repeated bulk transfers of mortgages.

To facilitate securitization, deal architects developed alternative “contracting” regimes for mortgage title: UCC Article 9 and MERS, a private mortgage registry. These new regimes reduced the cost of securitization by dispensing with demonstrative formalities, but at the expense of reduced clarity of title, which raised the costs of mortgage enforcement. This trade-off benefited the securitization industry at the expense of securitization investors because it became apparent only subsequently with the rise in mortgage foreclosures. The harm, however, has not been limited to securitization investors. Clouded

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