Securities and Securitization

What is a security?

The Securities Act of 1933 defines “security” broadly, including any note, stock, bond, debenture, evidence of indebtedness, and investment contract, among others (15 U.S.C. § 77b(a)(1)). In SEC v. W.J. Howey Co., 328 U.S. 293 (1946), the Supreme Court described an investment contract as a contract, transaction or scheme whereby a person invests money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.

How a mortgage securitization works

• Loans are originated and then sold, often through intermediate entities, to a trust or other special-purpose entity.
• A pooling and servicing agreement (PSA) or similar contract governs the transfer of the loans, the trustee’s duties and the servicer’s role.
• The trust issues certificates or notes to investors, who receive payments from the pooled loans.
• A servicer collects payments from borrowers and handles defaults on behalf of the trust.

What securitization does — and does not — change

Securitization changes who owns the loan and who receives the payments; it is a sale and transfer of the lender’s rights. Whether a particular loan was properly transferred into a trust, and what follows if it was not, are questions of contract law, the UCC and state law decided case by case. See standing for how courts have treated borrower challenges based on securitization agreements.

Where to read more

Read the Securities Act definitions at 15 U.S.C. § 77b and the SEC’s investor education materials.

Researching securitization in your state

First, find the statute or rule that governs securitization where you live. State law controls most of these questions, so the answer can change from one state to the next. Next, read recent decisions from the appellate courts in your state. They show how judges apply the law today. Also, check the local rules of the court that would hear your case. Our state procedures guide links to each state’s official rules. In addition, the Research Center explains how to confirm a source is still good law.

Sources and further reading

Official sources used on this page:

• law.cornell.edu
• supreme.justia.com

Related reading on Lawtopolis:

• Receivables and the Sale of Accounts (UCC Article 9)
• Forward Flow Agreements
• Assignments of Notes, Mortgages and Receivables
• Standing