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July 23, 1980


The opinion of the court was delivered by: RICHEY



 This case is before the Court on defendants' motion for summary judgment and plaintiff's opposition thereto. Because there are no issues of material fact genuinely in dispute, summary judgment is appropriate. For the reasons set forth below, the Court grants summary judgment to defendants with the exception of count five of plaintiff's amended complaint, upon which judgment is granted to plaintiff.


 Plaintiff, Consolidated Mortgage and Finance Corporation ("Consolidated"), brought this action challenging the validity of the Government National Mortgage Association's ("GNMA") termination of Consolidated as an issuer/servicer in the GNMA Mortgage Backed Securities Program. Issues relating to the validity of the termination and subsequent transfer of service rights to International Charter Mortgage Corporation ("Charter") came before the Court on cross motions for partial summary judgment. In a memorandum opinion and order issued September 5, 1979, the Court upheld Consolidated's termination as an issuer/servicer in the GNMA program, as well as the subsequent transfer of service rights to Charter, and granted partial summary judgment to defendants.

 The Court set forth a substantial amount of background information regarding this action in its September 5, 1979, memorandum opinion ("opinion"). A coherent discussion of the issues now at bar mandates a summary of a portion of that information here.

 The Mortgage Backed Securities Program ("MBS Program") administered by GNMA is designed to attract capital into the housing market through an investment instrument known as a mortgage-backed security. 12 U.S.C. § 1721(g) (1976). In connection with this program, GNMA is authorized to issue securities "based on and backed by" a pool of mortgages guaranteed by one of several government agencies *fn1" and to authorize qualifying private parties to issue such securities. Id. GNMA is further authorized to guarantee, with the full faith and credit of the United States, the timely payment of principal and interest falling due on such securities. Id.

 The MBS Program generally operates as follows: To participate in the Program a financial institution or mortgage servicing company must assemble or acquire a pool of government insured or guaranteed mortgages. GNMA then enters into a standard form Guaranty Agreement ("Agreement") with the issuer *fn2" under which, inter alia, GNMA agrees to guarantee timely payment of principal and interest as required by the terms of the securities, Agreement § 6.01, and the issuer agrees to remit in a timely manner all payments required by the terms of the securities. Id. § 4.01. Should the issuer fail to make timely payments as required, the security holder's sole recourse is against GNMA. Id. § 7.01. However, GNMA may treat the issuer's failure to make the required payments as an event of default *fn3" under the Guaranty Agreement (s 8.01), and this provides GNMA with the option of extinguishing the issuer's interest in the pooled mortgages and becoming the owner of those mortgages "subject only to the unsatisfied rights of the holders of the securities . . .." 12 U.S.C. § 1721(g) (1976); Agreement § 8.05.

 On February 7, 1978, GNMA lawfully declared Consolidated in default *fn4" under the Agreements and began the search for a substitute servicer. Of five potential servicers invited to make offers, only one, Charter, offered to purchase the service rights associated with the mortgage portfolio. On April 13, 1978, GNMA accepted Charter's $ 126,000 offer and transferred Consolidated's responsibilities to Charter.


 A. Consolidated Is Not Entitled to the Proceeds of the Sale of the Portfolio.

 In count six of its amended complaint Consolidated seeks recovery of $ 126,000, which represents the proceeds from the sale of the servicing rights of the portfolio by GNMA to Charter. Plaintiff claims property and contract rights in these proceeds based on a property interest in the mortgage portfolio. Defendants submit that upon the occurrence of default all plaintiff's right, title and interest in the mortgage portfolio, including service rights, terminated and the portfolio became the absolute property of GNMA.

 An issuer of mortgage-backed securities assembles a pool of mortgages that will constitute the basis and backing of GNMA-guaranteed securities to be sold over the counter to investors. In assembling the mortgage pool, the issuer may expend funds in the form of loans to mortgagors or the purchase price of existing mortgages. After assembly of the pool, but before issuance of the mortgage-backed securities, the issuer is the sole owner of the mortgage pool and all rights and interest derived therefrom are its alone. Agreement p. 3, P 3. Upon transfer of these rights and interest, the issuer is clearly entitled to some compensation. Defendants do not dispute this right to compensation, but submit that the issuer is compensated for the transfer of these rights and interest when it sells the mortgage-backed securities to investors. The Court agrees.

 Under the Guaranty Agreement, the issuer is required to assign to GNMA "all the right, title and interest of the Issuer" in the pool mortgages. Agreement § 3.01. The mortgages are customarily delivered to a designated custodian along with the original notes endorsed in blank, and assignments to GNMA in "recordable form but not recorded." Id. § 3.06. Since the assignments remain unrecorded, nominal title remains in the issuer. This assists the issuer in the performance of its duty to service the mortgages. Id. § 3.04. Thus, by virtue of the Guaranty Agreement entered into by the issuer and GNMA, GNMA takes all the issuer's right, title and interest in the pooled mortgages. While the issuer may have expended funds in assembling the mortgage pool, it is compensated for this disbursement by the proceeds of the sale of GNMA-guaranteed securities to investors in the market. The mortgage pool itself cannot be the basis of a further claim for compensation by the issuer because the issuer has transferred all its rights in the pool to GNMA and has received compensation for the transfer. Thus, Consolidated must look elsewhere for support of its contention that it is entitled to the proceeds from the sale of the service rights of the mortgage portfolio.

 Though Consolidated transferred all its rights and interest in the mortgage pool to GNMA when it entered into the Guaranty Agreement, the Agreement granted Consolidated the right to service the mortgage pool and the securities "backed" by the pool. Id. § 4.14. Thus, Consolidated enjoyed the right to future servicing income. See MBS Guide, Ch. 5, § 5-1(c). This right, however, is not unlimited. Upon the default of an issuer, GNMA is authorized by statute to provide by contract for the extinguishment of all "right, title and interest" of the issuer in the mortgage portfolio. 12 U.S.C. § 1721(g) (1976). As a result of such extinguishment, the mortgages and all rights and interest associated with them become the "absolute property" of GNMA. Id. Accordingly, the Guaranty Agreements existing between the parties provide that GNMA may, "by letter directed to the Issuer, . . . effect and complete the extinguishment of any . . . right, title or interest of the Issuer" in the mortgage portfolio and further provide that in such event, the mortgages "become the absolute property of GNMA." Agreement § 8.05. Upon the default by Consolidated, GNMA directed a letter to Consolidated on February 7, 1978, formally declaring an event of default. SX 13. This action operated to extinguish all of Consolidated's rights and interest in future servicing income. See MBS Guide Ch. 11, P 11-5. As a ...

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