Recent Developments in Residential Mortgage-Backed Securities Litigation

In the wake of the 2007–2008 economic crisis, disputes concerning responsibility for loans in default that are pooled in residential mortgage-backed securities (“RMBS”) became one of the most active areas of mortgage-related consumer finance litigation. This survey will provide a brief primer on residential mortgage securitization for background purposes, will discuss the landmark decision in ACE Securities Corp. v. DB Structured Products, Inc.,¹ and will provide an overview of other noteworthy RMBS-related developments.

Primer on RMBS Transactions

RMBS litigation involves disputes arising from the securitization of residential mortgage loans.² One court recently described the securitization process as
follows:

The RMBS process begins when lending institutions, or “originators,” make home loans to consumers that are secured by mortgages. An RMBS “sponsor” or “seller”—usually an investment bank affiliate [of the originator]—purchases th[o]se mortgages in bulk from one or more originators. . . . Sponsors [then] sell the loans to a “depositor”—often another affiliate of that same bank. The depositor is also . . . the securities’ “issuer.” An issuer typically re-underwrites the loans made by the originators, independently assessing the borrowers’ ability to meet mortgage obligations. . . . [T]he depositor [then] “deposits” all of the loans into [a] trust.³

Originally published on www.americanbar.org. Reposted with permission.