Mortgage-Backed Securities. See page 4 of Super Future
Equities v. Wells Fargo (2006) (3rd amended complaint, N.D. Texas)
was posted on Wikipedia and has a good explanation of how mortgage
securitization works, and an example of a breach-of-duty dispute. I
don’t know how accurate the complaint itself is; the defendants reply here.
I’m actually surprised these securities work at all, they require so
much trust. A bank sells some mortgages to a trust it creates for
the occasion. The trust creates certificates of various risks that get
rated from AAA to BBB- that it sells publicly and from BB+ to unrated
that it sells privately to various persons. Class A (not *rated* A)
certificates get paid in full before any Class B certificates get paid.
There is a Servicer, who processes most of the mortgages’ payments to
the Trust, and a Special Servicer, who processes problem mortgages, ones
that are in default or some other specially defined troubled
circumstances. Usually about 2% of loans are in the Special Service
category. Service fees are naturally much higher for this category.
Northern Rock’s trust, Granite, has a prospectus up on the web.