I’ve been getting a lot of emails and on-line comments in recent days from people who work in the mortgage industry about the Lisa Cook mortgage situation. What I’m seeing in these comments is a serious gulf between lawyers and non-lawyers. The non-lawyers tell me that “This is how it is supposed to work.”  To which my response is “Have you actually read the legal documentation?”

For example, lots of mortgage professionals (and too many journalists, following Pulte and Trump) are sloppy about conflating “primary residence” and “principal residence.” The term “primary residence” is used in the uniform residential mortgage application, but the uniform covenant in the security instrument refers to a “principal residence.” “Primary” is more restrictive than “principal.” That sort of terminology difference can matter a lot for legal purposes. I know that this sort of pedantry is why everyone hates lawyers, but it is also the sort of precision that allows parties to strike exactly the deal they want. (And if you love this sort of thing, then you really ought to be in law school or yeshivah.)

This is hardly the first time the mortgage industry has learned that its legal documentation doesn’t work the way it thought it did. First there was the MERS debacle—the private mortgage title recording system just didn’t fit very well with state law. Then there was all of the securitization chain of title issues with non-delivery of notes indorsed in blank. Then there was the putback litigation–the putbacks that should have happened more or less automatically didn’t work very well when sellers resisted. And getting much less attention was litigation over the default servicing provisions in the Fannie/Freddie uniform security instruments or the contractual permissibility of post-acceleration late fees.

I’ve spent a lot of time reading, teaching, and testifying about the Fannie/Freddie uniform instruments. They are probably the most widely used standard contract in the United States. There’s scant interpretive caselaw, but there are lots of ambiguities and imprecisions in the documents. No one much cares…until litigation arises. But the documents don’t necessarily work the way mortgage professionals assume they do.

I’ll note that this is not an issue limited to the mortgage industry. It’s basically a version of the whole covenant loophole play that facilitates dropdown liability management exercises. (You see, there is a connection between the chapter 11 stuff I do and the consumer finance stuff…) Legal documentation often has glitches, gaps, and loopholes that no one notices when deals are going as intended, but fail the stress test of litigation.