Bondholders Get It Now and Are Firing Servicers

Thanks to Gator Bradshaw

Editor’s Comment: Like I said, the investors and the homeowners have a lot of interests in common. When they finally get together and compare notes, they find a giant donut hole where assets or money were supposed to be. The amount of theft or undisclosed fees and profits staggers the imagination. It would take 200 like Bernie Madoff to even get close.

Watch these lawsuits and the news reports. As the investors start firing the servicers (who probably don’t have any authority now anyway) and start hiring new servicers they will be performing due diligence. As they trace the paperwork and discover the incurable gaps in title, ownership, credit and money trails, you will find them changing the narrative considerably from blame the borrower to how can we work with borrowers to minimize our losses?

And wait until they figure out that millions of foreclosed homes are NOT being held for the investors in inventory and hundreds of thousands of homes “sold” have toxic titles where the proceeds of sale were not given tot he investors either. I’m no psychic but I’ll bet those investors will be surprised and pretty damned angry.

see subprimeshakeout.blogspot.com

see bondholders-considering-plan-to-tell.html

With lawsuits against servicers grinding a slow path through the court system, investors are looking to make an end-run around the intransigent banks who are refusing to service mortgages in accordance with bondholder wishes. Their solution to break through the gridlock surrounding so-called “toxic” mortgage-backed securities? Use the mechanisms in their pooling and servicing agreements (PSAs)–the agreements that govern the creation, maintenance and payment streams of mortgage-backed securities–to remove conflicted servicers from their roles and insert friendly institutions willing to service the loans consistent with the best interests of the investors.

According to one group of prominent investors (hereinafter the “Securitization Syndicate”), who asked to remain anonymous because the plan is still in the works, investors with large holdings in mortgage-backed securities are beginning to join forces to petition securitization Trustees to relieve Master Servicers from their posts. Under the terms of most PSAs (which tend to vary little from trust to trust), the Master Servicer is required to service loans in such a way as to maximize investor returns. However, due to recognized conflicts of interest (such as significant holdings in junior mortgages and an interest in accumulating fees from delinquent loans), servicers instead have frequently breached these obligations and refused to liquidate or modify loans that borrowers are incapable of repaying.

The problem is that, under the terms of most PSAs, the only party with the power to do anything about a breach of an obligation by a Master Servicer is the Trustee. Trustees are generally large financial institutions that are paid a fee to oversee the flow of money through the securitization waterfall and to carry out certain administrative tasks. Though the Trustee may remove a Master Servicer, because the Trustee was designed to play a fairly passive role, it is not required to enforce servicer breaches on its own initiative.

Instead, bondholders must petition the Trustee to take action. In this regard, most PSAs require that at least 25% of the Voting Rights (evidenced by beneficial ownership of 25% of the bonds) give notice to the Trustee of a breach by the Master Servicer before triggering any obligations by the Trustee. Only when the Trustee fails to remedy the breach within 60 days after such a petition may the bondholders bring legal action on behalf of the Trust.

However, most PSAs also provide the following: “The Holders of Certificates entitled to at least 51% of the Voting Rights may at any time remove the Trustee and appoint a successor trustee.” (quoted from the representative PSA for Countrywide Alternative Loan Trust 2005-35CB) Anticipating that the Trustee will not take action against the Master Servicer, and reluctant to engage in yet another protracted legal battle to enforce servicers’ obligations, the Securitization Syndicate is shooting for a more ambitious goal: amass a 51% interest in one securitization so that they may remove the Trustee, appoint a friendly successor, and get that successor to fire the Master Servicer.

Sound difficult? It will be. Most prudent investors seek to diversify their holdings so that they do not hold too high a percentage in any one securitization, let alone any one asset class. Finding a few investors with large enough holdings in one particular securitization to obtain 51% could be a challenge. Finding institutional investors willing to take on large financial institutions with which they have longstanding relationships–and risk being portrayed as opposed to politically popular loan modifications–may be even harder.

Yet, according to one member of the Securitization Syndicate, “all it takes is one. What do you think will happen if we tell a Trustee or a Master Servicer, ‘you’re fired’? What will happen the next time we notify a Trustee that we’ve caught a servicer breaching its obligations? I think you’ll find they begin to sit up and take notice.”

I would tend to agree with this assessment. Many large banks earn significant fees from serving as the Trustee or Master Servicer of securitizations, and would not want to lose those revenues. Further, while many institutional investors may be reluctant to go out on a limb an take on a major bank, just one reported instance of this plan being successful will likely create a chain reaction. Soon, many bondholders will be open to joining forces and taking on Servicers and Trustees who aren’t honoring their fiduciary duties.

With Treasury officials admitting last month to the failure of their efforts to cajole servicers into modifying loans or working with borrowers to allow short-sales (the sale of the property for an amount less than the amount owed on the mortgage), maybe it’s time that institutional investors take matters into their own hands. Large funds such as CalPERS, whose investment portfolio took a hit of over $56 billion in the last fiscal year, should be eager to find a way to cut their losses and rid their books of their large holdings in mortgage-backed securities.

This can only be done with the cooperation of servicers, who have the sole power to modify a loan, foreclose, or allow a short sale, and who have generally been responsible for dragging their feet and keeping these loans in stasis. When servicers refuse to service loans in the best interests of the ultimate owners, which they’re contractually-obligated to do, they should be shown the door just like anyone else that fails to perform their basic job functions. The question is whether any of these institutional investors will have the courage to break ranks and stand up to banks that have demonstrated unparalleled influence in Washington and on Wall Street.

Donald W. Bradshaw Esq.
Law Office of Donald W. Bradshaw
303 SE 17th Street #309-218
Ocala, Florida 34471
Phone: (352) 484-1145
Fax: (352) 484-1117
gator.bradshaw@yahoo.com

8 Responses

  1. $90 billion set aside for compensation .. we need some of the trick exploding paint money so these criminals are all identified to the general public
    http://www.nytimes.com/2010/01/10/business/10pay.html?hp

  2. Bank of America, N.A. new trick-

    Bank of America, N.A was servicer for my loan. NOW they have set up a new company called BAC Loan Services, LP and transferred the loan.

    ISNT THIS GOOD, becuase they transferred the loan while in default so the servicer now has to act under the FDCPA and the fact my loan is an XYZ trust is even better.

  3. bt,

    I just put it on scribd:

    X_http://www.scribd.com/doc/24953095/What-is-a-Securitization

  4. Securtization chart by Denver Post from this article

    COuld anyone find this in a PDF so we can use this in our lawsuits

  5. Interesting news from the NY Times http://www.nytimes.com/2010/01/10/magazine/10FOB-wwln-t.html

  6. Yes, and the GSE model depended on (and still depends on) absolute opaqueness for loan data (what loans are in what pools of MBS, if at all) via special exemptions from even the most ridiculously minimal disclosure requirements for non-GSE loan securitizations.

    With the complete lack of public disclosure for the GSE’s “black box” securitizations, it would not surprise me in the least if, after merely “pledging” the income from the loan notes (and not, in fact actually transferring the loan notes to the certificate holders as required by language of the Trust Indentures), the “selling” pretender lenders actually kept the loan notes on their own books, and pledged them to the Fed as “collateral” to secure 10x funding from the Federal window.

    There is presently a movement to audit the Fed because, among other unknowns, nobody knows who owns it and how much money goes around to whom. Equally unknown is just what the GSE’s have been getting away with for the last 10 years with their secretive accounting. Somebody in the Treasury Department must know how bad it is or will get, or else they wouldn’t have removed the support limitations on taxpayer support for the next three years. The GSE’s are emaciated cows, but still sacred cows nonetheless for some and, yes, the taxpayers are footing the bill to keep the milk flowing for those who drink it.

  7. How do new servicers cure the outstanding statatory defects?

    And are homeowner’s expected to “feel sorry” for “investors” who speculated and lost?

    I never felt bad for anyone who did business with madoff. Why? Because when you lay down with dogs you get up with fleas.

  8. Here’s the problem—-the “investors” have been for years major “players” in the “Goverment Sponsored Enterprise Business Model”. A cursory application of due dilligence would have revealed that the business Model is and was “fatally flawed”. It simply does not work and it never did. Investors however distant ignored common sense all as a result of years of returns (how could this be wrong if I am getting paid). Just ask Bernie Madoff.

    Each “player” in the Model is protected by the GSE Guides boilerplate language guaranteeing mininum adherence to the Guides which are inherent in all of thier contractual agreements between players. These Guides proffered to congress in exchange for the government guarantee (without this guanrantee we would be discussing nothing) were simply ignored by all players…including the investors who are now crying foul. This will continue by all “players” in the Model until it dawns on the taxpayer who has footed the bill to date.

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