Asset Backed Securities collateralized by student loans (“SLABS”) comprise one of the four (along with home equity loans, auto loans and credit card receivables) core asset classes financed through asset-backed securitizations and are a benchmark subsector for most floating rate indices. Federal Family Education Loan Program (FFELP) loans are the most common form of student loans and are guaranteed by the U.S. Department of Education ("DOE") at rates ranging from 95%-98% (if the student loan is serviced by a servicer designated as an "exceptional performer" by the DOE the reimbursement rate was up to 100%). As a result, performance (other than high cohort default rates in the late 1980s) has historically been very good and investors rate of return has been excellent. The College Cost Reduction and Access Act became effective on October 1, 2007 and significantly changed the economics for FFELP loans; lender special allowance payments were reduced, the exceptional performer designation was revoked, lender insurance rates were reduced, and the lender paid origination fees were doubled.
A second, and faster growing, portion of the student loan market consists of non-FFELP or private student loans. Though borrowing limits on certain types of FFELP loans were slightly increased by the student loan bill referenced above, essentially static borrowing limits for FFELP loans and increasing tuition are driving students to search for alternative lenders. Students utilize private loans to bridge the gap between amounts that can be borrowed through federal programs and the remaining costs of education.
The United States Congress created the Student Loan Marketing Association (Sallie Mae) as a government sponsored enterprise to purchase student loans in the secondary market and to securitize pools of student loans. Since its first issuance in 1995, Sallie Mae is now the major issuer of SLABS and its issues are viewed as the benchmark issues.
We have found that the following report is also true for Student Loans.
Note: Bloomberg reports that a witness subpoenaed from Bank of America has admitted that loan originator Countrywide never transferred the loan documents of the loans it “sold” into security pools.
Linda DeMartini, a team leader in the company’s mortgage- litigation management division, said during a U.S. Bankruptcy Court hearing in Camden last year that it was routine for the lender to keep mortgage promissory notes even after loans were bundled by the thousands into bonds and sold to investors, according to a transcript. Contracts for such securitizations usually require the documents to be transferred to the trustee for mortgage bondholders.
Got it? They “sold” the loans to the bank that was supposed to deposit the loans into a trust and the trust was the basis of the mortgage backed security that was sold. However, they never actually delivered the notes.
The problem is that the Pooling and Servicing Agreements (“PSA”) all have provisions with cut-off dates by which the last note can be deposited. After that, the trust is legally unable to accept the note (except as a swap out for a nonconforming note mistakenly deposited into the trust, but even the swap-out period is finite). If the note was never delivered to the depositor and never deposited in the trust by the cut-off date, by the terms of the trust itself, there is no way to go back and retroactively put the loan into the trust.
But watch the bankster Calvinball:
Giving notes to the trustees after the fact isn’t a solution because the rules governing trusts, enforced by New York trust law, require that assets are in place by a specified closing date, said O. Max Gardner III, a Shelby, North Carolina, bankruptcy litigator. The notes also can’t be transferred to the trust without first being conveyed through a chain of interim entities, he said.
“If they do an end run and directly deliver it to the trust, that would violate all the documents they filed with the SEC under oath as to what they did,” Gardner said.
Industry lawyers said trust law isn’t relevant in this instance. Based on other legal codes, loans have already been transferred into the mortgage-bond trusts, making a clean-up of paperwork permissible, they said.
Refuted Attack Strategies
“Those who seek to attack the integrity of securitizations have taken a number of approaches that have been refuted, so now they’re focusing on New York trust law,” said Karen B. Gelernt, a lawyer in New York at Cadwalader, Wickersham & Taft LLP who works for banks.
The part of the law they cite relates to “actions taken by the trustee after the trust is formed; it’s nonsensical to apply this provision to the creation of the trust,” she said. “There doesn’t appear to be any case law that supports their interpretation.”
The “other legal codes” they are referring to is likely the Uniform Commercial Code (UCC) which says that ”security interest” includes “an interest of a buyer of accounts, chattel paper, a payment intangible, or a promissory note,” [h/t to masaccio for that nugget] which has NOTHING WHATSOEVER TO DO WITH WHETHER OR NOT THE NOTE HAS BEEN DEPOSITED IN CONFORMITY WITH THE TERMS OF THE PSA. . . .
Whether the depositor has some inchoate form of security interest is not the issue; it’s whether the depositor has actually made the deposit into the trust which is done by delivery of the promissory note and mortgage. Failure to deliver either or both would mean that the obligation, and right to foreclose, would not be in the trust.
The issue isn’t what NY trust law says, or the limited rights that a purchaser acquires before the delivery of the thing purchased, it’s whether the purchaser/depositor took possession of the note and mortgage and, in turn, delivered the note and mortgage into the trust before the close of the deposit period.
There is no way to go back and fix that.
One other thing, under the PSAs, the trusts could only accept “conforming loans” which are loans with certain characteristics such as length of repayment period, interest rate, etc. In every instance I know of a loan in default ALWAYS = nonconforming loan. So, if your mortgage was not transferred until after it was in default, it was nonconforming and the trust is not legally capable of accepting it.
Nonetheless, I fully expect the banksters will continue to play Calvinball, and continue to try to change the rules after the fact to screw homeowners, ‘cause that’s how they roll.
See Also: Securitization of Default Student Loans