Opinion ID: 216493
Heading Depth: 3
Heading Rank: 1

Heading: Mortgage Pass-Through Certificates

Text: In the period from 2005 to 2007, plaintiffs and similarly situated persons purchased approximately $155 billion worth of mortgage pass-through certificates registered with the Securities and Exchange Commission (SEC) entitling them to distributions from underlying pools of mortgages. To create such certificates, a sponsor originates or acquires mortgages. Next, the loans are sold to a depositor that securitizes the loansmeaning, in effect, that the depositor secures the rights to cash flows from the loans so that those rights can be sold to investors. The loans are then placed in issuing trusts, which collect the principal and interest payments made by the individual mortgage borrowers and, in turn, pay out distributions to the purchasers of the mortgage pass-through certificates. Finally, different risk levels, or tranches of risk, are created by using various types of credit enhancement, such as subordinating lower tranches to absorb losses first, overcollateralizing the loan pools in excess of the bond amount, or creating an excess spread fund to cover the difference between the interest collected from borrowers and amounts owed to investors. [1] Each tranche is denominated by a credit ratingin these cases issued by one or more Rating Agenciesdetermined by the seniority level and the expected loss of the loan pool. Finally, the depositor sells the certificates to underwriters, who then offer them to investors. Many of the certificates here at issue received AAA ratings, the safest tranche supposedly least likely to default. Investment-grade ratings were crucial to the certificates' sale because many institutional investors must purchase investment-grade securities. Moreover, some senior certificates' sales were conditioned on the receipt of AAA ratings.