Thursday, March 29, 2007

Mortgaged Back Securities--Bankruptcy Risk

I found this clause in the GS S-3 registration
What is says to me (and I'm not lawyer nor do I play one on TV) is that in
the event of a bankruptcy (think New Century), that the
loans might end up the property of the issuing entity. What does this mean?
I think that it means that these loans could be grabbed by the creditors
of the sponsor (such as New Century)and the certificate holders will be left
high and dry.

Let's watch the news for these items. I cannot stress how critical this clause
is--and I'm not sure how remote a probability such action could/would be.
Here's an interesting conflict of interest. You have Morgan Stanley (or any
other mortgage banker) who has securitized these notes and they are
left holding the bag for warehouse loans. How do you think THEY would want
a bankruptcy judge to rule? I think that they would want the judge to rule
these loans as assets of the depositor (e. g. New Century) so they can get their
loans paid from the proceeds of the loans. Very strange circumstances, you think?

Bankruptcy of the Depositor or the The depositor and the sponsor may be
Sponsor May Delay or Reduce eligible to become a debtor under the
Collections on Loans United States Bankruptcy Code. If the
depositor or the sponsor for the
certificates were to become a debtor
under the United States Bankruptcy Code,
the bankruptcy court could be asked to
determine whether the mortgage loans
constitute property of the debtor, or
whether they constitute property of the
issuing entity. If the bankruptcy court
were to determine that the mortgage
loans constitute property of the estate
of the debtor, there could be delays in
payments to certificateholders of
collections on the mortgage loans and/or
reductions in the amount of the payments
paid to certificateholders. The mortgage
loans would not constitute property of
the estate of the depositor or of the
sponsor if the transfer of the mortgage
loans from the sponsor to the depositor
and from the depositor to the issuing
entity are treated as true sales, rather
than pledges, of the mortgage loans.

The transactions contemplated by this
prospectus supplement and the related
prospectus will be structured so that,
if there were to be a bankruptcy
proceeding with respect to the sponsor
or the depositor, the transfers
described above should be treated as
true sales, and not as pledges. The
mortgage loans should accordingly be
treated as


                                        property of the related issuing entity
and not as part of the bankruptcy estate
of the depositor or sponsor. In
addition, the depositor is operated in a
manner that should make it unlikely that
it would become the subject of a
bankruptcy filing.

However, there can be no assurance that
a bankruptcy court would not
recharacterize the transfers described
above as borrowings of the depositor or
sponsor secured by pledges of the
mortgage loans. Any request by the
debtor (or any of its creditors) for
such a recharacterization of these
transfers, if successful, could result
in delays in payments of collections on
the mortgage loans and/or reductions in
the amount of the payments paid to
certificateholders, which could result
in losses on the certificates. Even if a
request to recharacterize these
transfers were to be denied, delays in
payments on the mortgage loans and
resulting delays or losses on the
certificates could result.