Environmental superliens and the problem of mortgage-backed securitization

Washington and Lee Law Review, Winter 2002 by Nash, Jonathan Remy

B. Securitizations and the Advent of the Secondary Mortgage Market

that is, to collect loan payments the obligation as they become due - so that the borrower may not even be aware that the rights to the mortgage obligation into which he or She entered have been sold.41 In reality, however, the originator serves only as a collector of funds and forwards the monies collected to the purchaser of those rights.

Securitization promoters, or "conduits,"42 purchase mortgages in the secondary market. They bundle together large numbers of mortgages that they have purchased and create "securities" based upon the underlying mortgages. They then sell those packaged securities to investors.43

1. Residential Mortgage Lending

Two quasi-governmental corporations - the Federal National Mortgage Association (FNMA or Fannie Mae)47 and the FHLMC48 - and one government agency - the Government National Mortgage Association (GNMA or Ginnie Mae)49 - have played a major role in establishing and maintaining the secondary market for residential mortgages. The federal government established these entities in order to "provide liquidity in the market for residential mortgage loans and to increase the flow of capital to housing."50 Fannie Mae and Freddie Mac act as conduits for residential mortgage-backed securities.51 In addition, Fannie Mae, Freddie Mac, and Ginnie Mae all provide payment guarantees for certain residential mortgage-backed securities.52

gages. Securitization ameliorates both of these problems. The emergence of a vibrant secondary real estate mortgage market, as well as a market for real estate securitization products, dramatically increased the flow of information relating to securitized products and the real estate mortgages that undergird them.54 Also, investing in securitization products allows investors to diversify their holdings and to avoid the risk of investing in individual mortgages.

Second, the rise of securitization has led to increased nationalization of the real estate capital markets. Prior to the advent of real estate mortgage securitization, real estate mortgage investing was overwhelmingly local in character. A combination of law and circumstance produced this effect. First, federal law traditionally precluded most banking institutions from engaging in interstate banking.55 Second, the mortgage loans tended to originate locally. As such, an investor in Chicago was unlikely to be familiar with the conditions of the real estate market in Miami or with the laws governing mortgage lending in Florida, and time constraints often precluded an investor from making an intelligent decision as to whether to invest in a mortgage originating there.

gave rise to great pressure on real estate practitioners and legislators to begin to eliminate some of the differences in local real estate practice and law that once might have made investors reticent about investing in real estate mortgages in regions of the country with which they were unfamiliar.57 This nationalization of the real estate capital markets allowed capital available for real estate investment to flow from richer to poorer areas of the country.58