MERS Posts Yet Another Court Victory

The New Hampshire State Supreme Court handed down the latest in a string of victories for Mortgage Electronic Registration Systems (“MERS”), continuing a trend which has bolstered the legitimacy of the MERS framework, as the primary tool for the recording of residential mortgage files in the United States.

The latest court decision in favor of MERS came this week from the same court which upheld a July 2015 decision that the language in a mortgage granted to MERS as the mortgagee as nominee for the lender and the lenders successors and assigns, evidences an agency relationship between the note holder and the assignee of a MERS mortgage.

In the case of Castagnaro v. The Bank of New York Mellon, the borrower filed a wrongful foreclosure action, claiming that BNY Mellon lacked the authority to foreclosure non-judicially under New Hampshire state law without also proving that it was the holder of the borrower’s note.  The Supreme Court referred the First Circuit Court to its opinion in Bergeron v. N.Y. Community Bank, issued in July 2015, which involved answering similar questions on the law pertaining to foreclosure.  Both cases involved mortgages creating an agency relationship between MERS and the noteholder and granted expressly to MERS (or whomever MERS assigns) “the power of sale and the right to foreclose and sell the mortgaged property,” according to an announcement made by MERSCORP Holdings, Inc.

MERS has won a number of court decisions over the past year, in cases that challenged its right to act as mortgagee.  Last fall, MERS won similar decisions in Montana, Georgia, New York, Texas and Kentucky.  This has had the affect of further solidifying the credibility of this industry authorized platform for enhancing the efficiency of what was historically viewed as a very cumbersome process.

Chalk this up as another victory for rationality!

STC Comments due to Basel Committee by February 5th

With some degree of fanfare, last summer EU regulators introduced proposed rules for Simple, Transparent and Comparable  (STC”) securitisations.  One theme was to create a platform for more favorable capital treatment for STC compliant securitisation programs.  If you have taken the time to read through these rules or guidelines, you might conclude that they are anything but simple.  Nevertheless, given the seemingly bottomless quagmire that EU regulators seemed to be in at the time (they have for years struggled to find a way to re-open the EU structured finance markets), this news seemed like a breath of fresh air.  For the first time in several years, issuers, bankers and investors began to feel like there was real hope for a much stronger revival in issuance levels.

However, if you speed ahead to November of 2015, the Basel Committee on Banking Supervision (“BCBS”) weighed in on the conversation with their views on how the proposed STC rules would impact capital requirements for both originators and investors.  These views came in the form of a “Consultative Document” which begins to shed light on the potential benefits (lower capital ratios) for securitisations which comply with the STC rules.  Comments are due to the BCBS by February 5th.

Based on our read through the Consultative Document, we are not sure if the BCBS makes the picture any clearer, as it relates to establishing a clear understanding of the real benefits associated with putting the hard work into ensuring a securitisation is issued as STC compliant and remains that way.   We will leave that interpretation to others with better insight but you could be left wondering if the benefits of the capital reductions could be overtaken by the costs of compliance with STC rules.

We are wondering if others may be coming to the same conclusion.


2016: The Year of Risk Retention

As the markets lift off for the new year, we suspect that 2016 might wind up becoming best known as the year when the dust and clouds surrounding risk retention for a securitization structures, all began to clear.

Over the years, there has been no shortage of prognostications for exactly how the “skin-in-the-game” rules, coming on the back of the structured credit market’s collapse (now more than eight years ago), would ultimately affect the long term prospects for a healthy and vibrant global structured finance marketplace.

Much attention has been focused on three major topics; the general impact of proposed new rules for the euro-securitization market, the global CLO market and the US residential mortgage-backed market.  Some have predicted complete disaster for one or all of these markets.  Others have loudly applauded these changes (although it is hard to understand how anyone can see clearly ahead yet to the long term impact).

For many years, we have been on the record with our view that it would be unproductive to paint all structures and all markets with the same brush and it would appear that many others feel the same way, as witnessed by the good progress being made across the industry to focus on the benefits or additional value to be derived from risk retention, on an asset class-by-asset class or market-by-market basis.  Particularly over the past two years, there has been lots of good work done by lots of smart people from both within the industry and within the various legislative and regulatory bodies that have worked hard over the past several years to get up to speed on the workings of these complex, yet systematically vital, instruments.

As we turn the corner into the first months of 2016 and these rules either start to come on line or as we get closer to key implementation dates, we should be able to see exactly how the risk retention rules for CLOs and US RMBS hold up, for good or for worse.  The impact on the euro market will probably continue to lag behind, consistent with the general lack of regulatory clarity and the resulting weakness in the that market’s recovery.  Nevertheless, there seems to be enough momentum among European regulators to suggest that we should also see some tangible finality to their approach to risk retention sometime soon.  We only hope that they too will acknowledge the need to drill down into individual asset classes and structural types, to match the progress we have already witnessed in other markets.

In any event, we suspect that by the time we get to end of 2016, we will all know much more about how risk retention helps or hurts the global structured finance markets.