Trusts are being used more often for financing mortgage loans, which can be an effective way to optimize asset management and minimize lender risk.

Key Benefits of Using Trusts in Mortgage Loan Financing

1. Titling Trusts for Mortgage Loans: A Titling Trust holds the legal title to mortgage loans while allowing the beneficial interest in the loans to be financed, including being packaged into securities. This eliminates the need to retitle the loans when beneficial ownership changes, offering significant administrative efficiencies.
   • Example: A mortgage lender sets up a Titling Trust to hold the legal title to a pool of mortgage loans. As ownership of the loans transfers to investors, the legal title remains with the trust, and only the beneficial interests are given as collateral security for a financing facility or sold as securities, avoiding the need to retitle each loan.
2. Delaware Statutory Trusts (DSTs): A DST is a popular legal structure in mortgage loan securitization. It is easy to set up, providing flexibility in managing mortgage assets while ensuring asset protection. The DST holds the legal title, while the investors hold the economic beneficial interest.
   • Example: A mortgage lender forms a DST to pool multiple mortgage loans. The DST can grant a security interest in some or all the beneficial ownership interest in the mortgage loans or issue mortgage-backed securities (MBS), enabling investors to buy shares of the mortgage pool while the legal title remains with the DST.
3. Series Trusts for Mortgage Loan Pools: A Series Trust allows assets to be divided into Special Units of Beneficial Interest (SUBI). For example, different mortgage loan pools can be allocated into separate SUBIs, each representing a specific pool of loans. This segmentation reduces risk exposure and simplifies asset management. The Delaware statute governing DSTs provides that assets allocated to a SUBI are not subject to the claims of other Trust stakeholders including other SUBI holders.
   • Example: A lender sets up a Series Trust with multiple SUBIs, each holding a distinct pool of mortgages (e.g., residential, commercial). Each SUBI is independently managed, and its assets are protected from creditors with interests in other mortgage loan pools.

Risks and Considerations

• Jurisdictional Limitations: DSTs including Series Trusts may not be recognized in all states, which could impact their use in certain jurisdictions.
• Bankruptcy Concerns: While trusts may provide protection from creditors of the beneficial holders, the structure’s bankruptcy risks, including possibly fraudulent conveyance risks, have not been fully tested.

Conclusion

Using trusts, especially DSTs and Series Trusts, offers significant benefits for structuring mortgage loan financings. These vehicles provide flexibility, asset protection, and administrative efficiencies, making them ideal for pooling and financing mortgage loans. However, it’s essential to consider the risks, particularly related to jurisdiction and bankruptcy, when setting up these structures.