This article in the Private Equity Law Review indicates that unravelling the 45 Trillion could be interesting.
Judge Christopher A. Boyko’s order dismissing a number of foreclosure actions brought by a CDO trustee throws a hard light on a common practice in real estate loan syndication. Due to the cost of properly assigning the notes and mortgages that get tossed into the CDO trust, the assignments are not actually completed. Instead, documents are signed expressing an “intent” to assign. A spokesman for Deutsche Bank, the CDO trustee, said that skipping the assignment process :
“[Is] typically done as a matter of cost efficiency, since for some extremely high percentage of mortgages there will never be any foreclosure activity, there’s no legal need for the assignments to be recorded until they need to be used.”
Because the assignments were not completed at the time the foreclosure actions were filed, Judge Boyko ruled that the CDO trustee lacked standing to bring the action. A dismissal on these grounds is not based on the merits, and the trustee is free to refile the action once it completes the assignment paperwork.
Assuming, of course, that paperwork exists and can be found. The paperwork underlying a large CDO is massive. The notes and mortgages on which the CDO is based are originated in broker’s and lawyer’s offices around the country, and a book entry is made somewhere reflecting the loan. That book entry is what is placed in the CDO trust, not the note and mortgage itself.
Deutsche Bank tried the compelling argument that “‘Judge, you just don’t understand how things work.’” That didn’t go down well with Judge Boyko, who wrote that this attitude “reveals a condescending mindset and quasi-monopolistic system where financial institutions have traditionally controlled, and still control, the foreclosure process.”
The balance of power in the foreclosure process may tip toward plaintiff’s attorneys if other courts begin demanding proper documentation of syndicated loans.