Consideration Doctrine and Regulatory Arbitrage in Mortgage Securitization
Abstract: Our review of mortgage securitization transactions from 2005 to 2007 suggests that many intermediate mortgage transfers structured as promissory note sales involved the exchange of only nominal consideration. The Uniform Commercial Code requires consideration “sufficient to support a simple contract” as a prerequisite for treatment of a transaction as a promissory note sale. The transactions’ status as sales of promissory notes may ultimately determine whether the mortgages were effectively transferred to the trusts intended to hold them on behalf of investors and whether the mortgages are enforceable. Status as a note sale apparently turns on the sufficiency of nominal consideration “to support a simple contract,” so the mortgage securitizations apparently present classic contract-law questions about nominal consideration in a context of contemporary practical importance. Because the effect of treating nominal consideration as sufficient in this context is to permit parties to opt into a regulatory regime that is more favorable to them and less favorable to third parties, the mid-2000s mortgage securitizations present an attractive case for finding nominal consideration ineffective on the ground that it is a sham.