Just a few blissful years ago, one would never think of originators getting wound up or sellers being liquidated. In the world of structured finance, the possibilities of that doomsday scenario were remote, unthinkable and above all, no one wanted to discuss its potential occurrence.
That changed with the Lehman collapse and with that, a domino effect ensued.
Of course, that’s not to say that the industry never thought of what would happen in that unlikely occurrence and the transaction documents do provide for some sort of crisis resolution. Despite the existence of clauses to deal with bankrupt originators, these would prove to be tedious and impractical at best and totally unworkable at worst.
The documents would commonly provide for the mortgage titles and collection bank accounts held in the name of the soon to be defunct originator to be transferred to the issuer. At first blush, this would seem sensible. After all, it is the issuer in whose name all the underlying assets are legally owned. Take a deeper look however, and the cracks begin to show.
First of all, most issuers are special purpose vehicles whose directors are provided by corporate service providers who certainly did not sign up for that degree of involvement. Secondly, the process of transferring mortgage titles and bank accounts is not as simple as it sounds!
For a bank to collect payments from borrowers on an underlying mortgage, both the mortgage title and the bank account must be held by the same entity. This would mean that bank accounts and mortgage titles must be transferred to the issuer at the same time. This would involve getting entities that are beyond the control of the issuer to work within a concurrent and stipulated timeframe!
Unlike the neat and simple way in which these clauses were drafted, the commercial reality of affecting such transfers would prove to be a lengthy process. At the same time, effective and timely mortgage payment collections are vital to the deal in question and so the issuer finds itself in a classic catch-22 situation.
We did get to the end of the tunnel through negotiation and careful strategising but the entire process took the best part of two years. Hardly, the quick solution the documents envisaged.
In truth, a lot of the clauses did not accurately reflect the operating procedures they were supposed to document and there were gaping holes between what happened in theory and what occurred in practice.
We certainly know the industry better from this experience and all the institutions involved have developed a deeper understanding of their own operations. As a whole, we have definitely come out better informed and better equipped to deal with such winding ups and liquidations. Now, the key is, will we use that knowledge effectively when we do new deals?