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A Maryland Ruling Threatens to Upset Virtually All Residential Securitization Trusts

Maryland has established itself as a center of frustration for commercial real estate. Last year, Montgomery County and Prince George's County passed rent control that limited rent increases on both occupied and unoccupied units. It means landlords can’t necessarily increase rents on new leases to make up for ongoing tenancies.

And yet, that’s nothing compared to the latest issue. A 2024 Maryland appellate court decision said that a home equity line of credit was subject to licensing. On January 10, 2025, the Maryland Office of Financial Regulation issued a note of emergency regulations and formal guidance, according to KBRA.

“The scope of our concern to be clear, is the broad concept that a passive trust has to be licensed,” Sharif Mahdavian, managing director at Kroll Bond Rating Agency, told GlobeSt.com.

Since the 1980s, securitization has become a mechanism to provide mortgages and then package a group of them together, creating a debt-based bond-like instrument called an RMBS, or residential mortgage-backed security. The bundler can be Freddie Mac, Fannie Mae, or a non-government-sponsored agency entity. The mortgage payments on the individual properties create a pool to pay investors who purchase the bonds.

“In securitization, the ownership of the loan is transferred to the trust,” Mahdavian says. “But the trust engages licensed servicers to service those loans. This is how it works nationwide. That’s a way of financing it. The investors are getting a return on investing in it. The servicer gets paid for servicing.”

The trust is supposed to be a passive vehicle that purchases the loans and doesn’t originate them. In Maryland, however, that no longer matters. There is no de minimis of registration; should the trust hold one mortgage from Maryland, it must register, which means that someone has to be designated as the trustee.

Other states could potentially consider similar measures, but that isn’t necessary. Maryland alone creates a heavy impact.

“Say in the average [securitization] deal, 1%, 2%, 3% could be Maryland loans,” says Mahdavian. People are concerned just because Maryland has taken the action.

Liquidity in loans, particularly non-agency ones, is a problem in Maryland, although the issues also extend to agency loans.

“We became aware of this very recently when we heard that people were not going to include Maryland loans” in the RMBS deals, Mahdavian says.

Further complicating the picture is the lack of any grandfathering language or temporal limitation. By the language of the regulations and guidance, even if a securitization was done in, say, 2001, it seems that trust would also need to be licensed. As such, “it will impose a huge expense across the entire industry,” according to Mahdavian.

Maryland might feel a particularly tight pinch. If the issue were one in California, there is so much contribution that presumably the industry could create state-only pools. Maryland is included in many RMBS deals but The Old Line State doesn’t have the volume that would allow effective isolation.

To be clear, this does apply to both Fannie Mae and Freddie Mac because they both use trusts to create RMBS deals and, as Mahdavian points out, 90% of housing credit goes through them. “This is a whole new imposed framework that the securitization market hasn’t had before,” he says.

Reprinted with permission from the Tuesday, 21 January 2025 07:01:59 EST online edition of GlobeSt © 2025 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-256-2472 or reprints@alm.com.