Securities Industry Association v. Clarke
United States Court of Appeals for the Second Circuit
885 F.2d 1034 (1989)
- Written by Brett Stavin, JD
Facts
Through an arrangement that was typical of the industry, Security Pacific National Bank (SPN) (defendant) originated mortgages and placed those mortgages into a pool. The pool was made up of conventional fixed-rate residential mortgages that met certain characteristics, as outlined in a prospectus and prospectus supplement dated January 23, 1987. The mortgages in the pool were then assigned to a trustee. The trustee simultaneously authenticated and delivered mortgage pass-through certificates representing fractional undivided interests in the mortgage pool. SPN then was able to sell the certificates publicly or privately. SPN acted as servicer of the mortgages, collecting principal and interest and then passing through such payments on a pro rata basis to the certificate holders. In exchange for servicing the mortgage pool, SPN received a contractually specified fee. There were protections in place that limited, but did not entirely eliminate, the credit risk to the certificate holders. Limited credit support was available in three forms. First, SPN was able to issue an irrevocable letter of credit. Second, a limited guaranty could be obtained from a third party. Third, SPN could purchase third-party mortgage insurance. Beyond these credit-support mechanisms, the risk of loss was borne by the certificate holders.
Rule of Law
Issue
Holding and Reasoning (Meskill, J.)
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