2011 Spring Symposium Resources: Panel One – Securitization & Governance

Bank Regulation and Mortgage Market Reform

Dwight M. Jaffee, Haas School of Business

Covered bonds and securitization are two alternative financial instruments that achieve the same ultimate goal: to allow capital market investors to fund directly large pools of individual mortgage loans. Covered bonds dominate the European Union mortgage market while securitization dominates the U.S. market. In his paper for the Symposium, Professor Dwight Jaffee will  draw out the distinctive features of the two instruments to help identify why the different instruments have met such different levels of acceptance in the two regions. He will also evaluate whether covered bonds could play a much more important role in the United States as part of the reform of the U.S. mortgage market in the aftermath of the subprime mortgage crisis. The following are some background resources on covered bonds, their use in the EU markets, and the performance of that regions housing finance markets. To view a downloadable and complete abstract for Dwight M. Jaffee, follow this link.

     Dwight M. Jaffee – Bank Regulation and Mortgage Market Reform [Working Paper]
     Dwight M. Jaffee’s PowerPoint Presentation
     European Central Bank: Housing Finance in the Euro Area Survey
     European Covered Bond Fact Book 2010
     European Mortgage Federation: 2007 Out-of-court Settlements in the EU
     European Mortgage Federation: 2007 Study on the Efficiency of the Mortgage Collateral
     European Mortgage Federation: 2007 The Protection of the Mortgage Borrower
     European Mortgage Federation: 2009 Study on the Valuation of Property Lending
     European Mortgage Federation: 2010 Methodological Note and Survey on Non-Performing
     European Mortgage Federation: 2010 Study on the Cost of Housing in Europe
     European Mortgage Federation: Hypostat 2009 A Review of Europe’s Mortgage and Housing Markets

Private-label Residential Mortgage Securitization: Recording Innovations and Bankruptcy Remoteness

Nancy E. Wallace, Haas School of Business

A central tenet of asset securitization in the United States – that assets are bankruptcy remote from their sponsors – may be threatened by important and recent innovations in the transfer and assignment of mortgage loans into the private-label secondary mortgage market. This paper focuses on the economics of private-label residential mortgage securitization in which loan transfers to special purpose vehicles (SPVs) are eligible for sale accounting treatment under Financial Accounting Standards (FAS 140). Sale accounting eligibility requires that (i) there has been a “true sale” of the assets to the SPV and (ii) that on the bankruptcy of the sponsor, the sponsor’s creditors have no recourse to the assets of the SPV and vice versa. We review the transfer methods that are currently in place to assure that the promissary note and the mortgage are, indeed, bankruptcy remote from the originator, sponsor, and depositor and discuss the operation of this chain of title transfer using the traditional recorded assignment and transfer process and the more recently introduced Mortgage Electronic Registration System (MERS). We then review the scholarly and case law theories that seek to establish whether these methods are legally sufficient to achieve bankruptcy remoteness either generically or in practice. We then track the evolution these legal transfer theories as they are articulated in the Pooling and Servicing Agreements of private-label securitization deals from 2005 through 2007. Finally, we summarize how the ambiguity in the current state of electronic-transfer practices may not meet a true standard of bankruptcy remoteness either because of its actual implementation or because of the rapidly evolving case law on the federal and state law standing of these practices. To view a downloadable and complete abstract for Nancy E. Wallace, follow this link

     Nancy Wallace’s PowerPoint Presentation
     The MERS website:  http://www.mersinc.org/
     Congressional Oversight Panel – November 2010 Oversight Report
     US Bankruptcy Court Eastern District of New York – Ferrel L. Agard    
     Adam J. Levitin & Tara Twomey – Mortgage Servicing
     MERS Foreclosure Cases Memo
     Merscorp Inc., et al., Respondents v. Edward P. Romaine & c., et al., Appellants, et al., Defendant

Credit Derivatives, Leverage, and Financial Regulation’s Missing Macroeconomic Dimension

Erik F. Gerding, University of New Mexico School of Law

Both policymakers and scholars have placed considerable blame for the Panic of 2008 – the global financial crisis that reached full strength in that year – on over-the-counter (“OTC”) derivatives. In turn, legislative and policy responses to the crisis, such as the Dodd-Frank Act, have introduced a host of new restrictions on these particular financial instruments. Among other things, the Dodd-Frank Act prohibits future federal government bailouts of certain entities that trade in derivatives, requires the central clearing of many derivatives, and authorizes federal regulators to set new collateral requirements for derivatives that are exempted from those central clearing requirements. To view a downloadable and complete abstract for Erik F. Gerding, follow this link

     Erik F. Gerding – Credit Derivatives, Leverage, and Financial Regulation’s Missing Macroeconomic Dimension
     Erik F. Gerding’s PowerPoint Presentation

Money Market Funds: Preserving Systemic Benefits without Systemic Risks

Mark D. Perlow, K&L Gates

During September 2008, soon after Lehman Brothers filed for Chapter 11 protection, the Reserve Primary Fund, a large and prominent money market mutual fund, “broke the buck”:  it declared a net asset value that was less that the $1 per share that is standard for such funds because it marked down the value of Lehman debt in its portfolio.  This event triggered a run on money market funds, particularly those with a large institutional investor shareholder base, as investors rushed to redeem their shares out of concern that they too might fall in value below $1 per share.  A number of large money market funds avoided “breaking the buck” and stemmed redemptions only because their managers, often affiliated with large financial institutions, injected capital into the funds by purchasing troubled assets at par.  Nonetheless, the run did not stop until the U.S. Treasury stepped in and guaranteed (albeit on a limited and temporary basis) money market fund shares against loss.To view a downloadable and complete abstract for Mark D. Perlow follow this link

     Mark D. Perlow – Money Market Funds: Preserving Systemic Benefits, Minimizing Systemic Risks 
     Mark D. Perlow PowerPoint Presentation
     Gary Gorton & Andrew Metrick – Regulating the Shadow Banking System
     Investment Company Institute – Report of the Money Market Working Group
     Jeffrey N. Gordon – Letter to the SEC on Money Market Fund Reform
     Jonathan R. Macey – Reducing Systemic Risk: The Role of Money Market Mutual Funds
     Mark Kacperczyk & Philipp Schnabl – Commercial Paper During the Financial Crisis of 07-09
     Melaine L. Fein – The Truth about Money Funds
     Melanie L. Fein – The Group of Thirty Report: Misconceptions about Money Market Mutual Funds
     Melanie L. Fein – The Perceived Guarantee of Bank-Affiliated Money Market Funds
     Mercer E. Bullard – Federally-Insured Money Market Funds and Narrow Banks: The Path of Least Insurance 
     Report of the President’s Working Group on Financial Markets
     Reforming Money Market Funds: A Proposal by the Squam Lake Group
     Russ Wermers – Money Fund Runs 
     Securities and Exchange Commission: Money Market Fund Reform; Final Rule
     Viktoria Baklanova – Money Market Funds: An Introduction to the Literature 
     William A. Birthistle – Breaking Bucks in Money Market Funds