Fannie Mae and Freddie Mac: Holders in Due Course? – NO

We’ve received a few questions regarding the impact of the “takeover” of Fannie Mae and Freddie Mac by the Federal government. These were chartered by congress as opposed to any state and it is questionable whether anything has actually changed except for management personnel and style. They were theoretically private corporations with their common stock traded publicly, but there was a “guarantee” aspect to their function that was backed by the U.S. Treasury. This problem is not unlike the dubious standing of the “guarantee” of student loans. Once they are securitized, they are paid, which means there is nothing to guarantee.

Thus my basic answer is that nothing has changed. They bought pools of “assets” of dubious quality and diverse and dubious description. The dumping of the note into the pool (or the intent to do so, even if it was not properly executed), which note is only evidence of the debt, not the obligation itself, may have destroyed or altered the obligation (or might have imposed conditions that did not originally exist when the promise to pay was created, which would make the note a conditional promise to pay and therefore non-negotiable) — if the act of putting the note into the pool changed the obligation (or was evidence of changing the obligation) in some way.

For example, cross collateralization, over-collateralization and reserve pools, combined with insurance products and credit default swaps, combined with the various covenants in the pooling and service agreement, the assignment and assumption agreement, and the creation of the SPV and the certificates of “mortgage” backed securities usually allow for application of receipts to be used in accordance with the requirements of the and covenants of the documents creating the pool — contrary to the express terms of the original note and the original promise to pay wherein payments from the borrower are only applied to satisfy obligations due under his/her obligation as evidenced by the original promissory note.

The assignor would then be substituted as the obligor, which might be a novation. If that is the case, then the mortgage becomes meaningless and subject to removal by quiet title action. It brings up the interesting question of splitting the note from the mortgage and having one party as obligor and another party as mortgagor — and whether the novation creates a merger of mortgagor and mortgagee.

One Response

  1. Hello:

    A friend suggested that the “government buy-out” (his words) of the Fannie Mae and Freddie Mac mortgages meant that the U.S. government now OWNED the land that one-half of all Americans lived on. He thought this was scary. I thought that his understanding of the whole problem was incorrect. Who’s right?

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