Prudential v Goldman Sachs Raises Chain-of-Title in Securitization of Mortgage Notes

Several Prudential Insurance companies filed a lawsuit against Goldman Sachs related to a series of mortgage-backed-securities deals, particularly a lot of the GSAMP deals.  Prudential v Goldman here.  It contains some interesting allegations based upon Prudential’s systematic review of the collateral files:

Evidence That Goldman’s Representations Concerning the Mortgage Loans’ Chain of Title Were Systemically False

Goldman’s representations about the valid transfer of title of the Mortgage Loans to the Trusts were false. In many instances, the collateral did not properly secure the underlying Mortgage Loans and the Trusts could not foreclose on delinquent borrowers because Goldman.  Contrary to its representations, Goldman did not properly assign large numbers of the Mortgage Loans to the Trusts. In its rush to securitize loans and thereby offload risky collateral onto investors such as Prudential, Goldman did not comply with the strict rules governing assignment of mortgages and the transfer of promissory notes and loan files.  Goldman lost much of the paperwork relating to the Mortgage Loans underlying the securitizations, or made no attempt to assign the Mortgage Loans and deliver the original mortgage notes to the issuing trusts, as represented.

As part of its loan-level analysis of the Mortgage Loans underlying its Certificates, Prudential also examined if the chain of mortgage assignments was complete with respect to the Mortgage Loans. The review demonstrates that Goldman’s representations regarding the title for the Mortgage Loans were false and misleading, and that Goldman fraudulently failed to disclose problems in the chain of title for the Mortgage Loans.

As discussed in Section IV, this analysis could not have been performed by investors before 2010, because investors were not able to identify the specific properties at issue at the time. Nor was it industry practice for investors to do an independent loan-level assessment of the accuracy of the representations made in the Offering Materials-Prudential reasonably relied upon Goldman to represent the Mortgage Loans correctly in the Offering Materials.

The review demonstrates, for each Securitization, (a) how many Mortgage Loans are currently held by the RMBS trust; (b) how many are held in the MERS electronic-recording system; (c) how many are still held in the originator’s name; and (d) how many were assigned to a third party. Loans that are still held by the originator, or were assigned to a third party other than the Trust or MERS, violate Goldman’s representations that the loans would be assigned to the Trust (or, in some cases, would be held by MERS).

Even among Loans that were assigned to the Trusts, a large number were still missing intervening assignments. In sum, among the 9,252 Loans for which sufficient data were available to conduct this analysis, 562 loans were improperly assigned to a third party (other than MERS) and 3,159 were still held in the originator’s name-an over 40% defective rate. Further, of the loans that were nominally assigned to the Trust, over 58% are missing necessary intervening assignments. Each of these loans also represent breaches of Goldman’s representations.

As with the occupancy and appraisal analysis discussed above, the consistency and size of Goldman’s title-related misrepresentations confirms that, in addition to the originators, Goldman itself systemically abandoned sound underwriting and securitization practices.

Goldman also defrauded Prudential by stating that an assignment to MERS ensured that each Trust could foreclose upon the underlying collateral; these representations were false. As multiple courts have held, because the actual mortgage note is typically not transferred to MERS, no interest is acquired by it and it cannot bring a foreclosure action. See, e.g., Bank of New Yorkv. Silverberg, 86 A.D.3d 274 (N.Y. App. Div. 2d Dep’t 2011). In February 2011, MERS instructed its lender members to stop foreclosing in the name of MERS in light of overwhelming authority that beneficial ownership of an underlying mortgage cannot be transferred to MERS. Goldman’s representations in the Offering Materials that MERS would be the “beneficial owner” of each Mortgage were false. As MERS Recommended Foreclosure Procedure 8 provides, “MERS does not create or transfer beneficial interests in mortgage loans or create electronic assignments of the mortgage.”


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