We've talked a lot about the robosigning scandalwith respect to borrowers' rights and the possibility that foreclosure documents were signed improperly.
A bigger issue emerging is what those robosigners, perhaps unbeknown to them, were covering up—big flaws in mortgage securitization that could open the floodgates to investor lawsuits against trusts.
What are trusts?
In the mortgage process, after mortgage securities are "bundled" and sold to investors, they are then assigned to trusts, which manage the assets of the beneficiaries, i.e. the investors. There are only a few trusts out there, primarily Deustche Bank , Wells Fargo , Bank of New York Mellon and US Bank . They are responsible for holding on to all the documentation of these loans—the mortgage, title, note, etc. subject to mortgage pooling and servicing agreements.
The trouble is a lot of the paperwork was not properly transferred, and if not, "the 'true sale' of mortgages to the trusts that issued mortgage backed-securities would be in question," says Josh Rosner of Graham Fisher.
"The problem is the MERS system is keeping track of the deed of trust without recording the interest on the deed," says Janet Tavakoli, of Tavakoli Structured Finance. "You can't seal a deal with a handshake; we've got to have a signed document. It has to be on paper. That's what all states require."