Are Trusts or Trustees on the Hook for Mortgage Mess?

Are Trusts on the Hook for Mortgage Mess?

Published: Thursday, 14 Oct 2010 | 1:45 PM ET
By: Diana Olick
CNBC Real Estate Reporter

Foreclosed Home
Will there soon be a flood of investor lawsuits filed against trusts?


We’ve talked a lot about the robosigning scandal with respect to borrowers’ rights and the possibility that foreclosure documents were signed improperly.

A bigger issue emerging is what those robosigners, perhaps unbeknown to them, were covering up—big flaws in mortgage securitization that could open the floodgates to investor lawsuits against trusts.

What are trusts?

In the mortgage process, after mortgage securities are “bundled” and sold to investors, they are then assigned to trusts, which manage the assets of the beneficiaries, i.e. the investors. There are only a few trusts out there, primarily Deustche Bank [DB  57.06  -0.43  (-0.75%)   ], Wells Fargo [WFC  24.01  -0.71  (-2.87%)   ], Bank of New York Mellon [BK  26.18  0.07  (+0.27%)   ] and US Bank [USB  22.6706  0.1006  (+0.45%)   ]. They are responsible for holding on to all the documentation of these loans—the mortgage, title, note, etc. subject to mortgage pooling and servicing agreements.

The trouble is a lot of the paperwork was not properly transferred, and if not, “the ‘true sale’ of mortgages to the trusts that issued mortgage backed-securities would be in question,” says Josh Rosner of Graham Fisher.

“The problem is the MERS system is keeping track of the deed of trust without recording the interest on the deed,” says Janet Tavakoli, of Tavakoli Structured Finance. “You can’t seal a deal with a handshake; we’ve got to have a signed document. It has to be on paper. That’s what all states require.”

“Probably the end game is that the litigation all ends up on the heads of the large financial institutions of this country.”

Adam Levitin
Prof., Georgetown University

In other words, you can put it in an electronic database, but you can’t just declare it’s done.

All this means that investors in mortgage-backed securities, and about 2/3 of the nearly $11 trillion worth of U.S. mortgage were securitized and traded worldwide, could have a standing to cut their losses.


They could argue that they took losses on securities that the trusts never legally had.

“I think you’re going to see investors in securitization trusts suing the trustee, on the grounds that the trustee did not properly inspect all the documents it was supposed to,” says Georgetown University law professor Adam Levitin. Then you could also have the trustees suing the investment banks that bundled the mortgages and sold them to the trusts on the basis that they may not have delivered what they said they were going to.

“Probably the end game is that the litigation all ends up on the heads of the large financial institutions of this country,” adds Levitin.

Many have already argued that the big banks have prepared for this and have taken the appropriate cash reserves to deal with it.

But what about the trusts?

“If it wasn’t correct, these investors did not have a proper asset-backed securitization,” notes Tavakoli. “The trustee is at fault, but the trustees tend not to have any money.”

So then you go after the securitizers, the folks who bundled these—which are of course the big banks.

6 Responses

  1. Whoa – Mr. Levitan – and we have spoken before – a couple of years ago. We know the loans were not properly conveyed, and appreciate what you are doing but…..

    Here is the problem – the certificates to the Trusts were sold to the security underwriters. You state ” I think you’re going to see investors in securitization trusts suing the trustee” – but the security underwriter did the due diligence – the trustee was only hired to adhere to their due diligence – and maintain ledgers – nothing more.

    The pass-through security investors were investors who invested in derivatives derived from the certificates to the Trust – that is, CDOs. BUT, it was It was rare that the security underwriters sold their “purchased certificates” (they actually purchased the whole loans first) – to any party other than another financial institution that used the certificate for a CDO – and squared CDO derivative pass-through for security investments. The certificates are not the same as the pass-through security investors. .

    So, the “investors” in the securitization trust (the certificate holders) are the security underwriters – and other financial institution security underwriters. This means the investment banks are going to sue the trustee they hired to “care for” their own certificates?? Do not think so. The investment banks would be, in effect, suing themselves.

    Please, Mr. Levitan, since you are advising Citigroup, the security underwriters are the certificate holders.

    One exception – the residual tranches were not sold the security underwriters – but, rather, servicer owned. And, the servicer, unless they acquire legal title, are never the creditor. And, it is by these residual tranches that servicer advances are funded – but ONLY for a short time. Rules now for 90 days? Was probably always not longer than 90 days – and up to the discretion of the servicer as to likelihood of collection.

  2. Yep, the pools are empty and investors have been diving in to find out that they have no water. My note was supposedly transferred into the trust 2 years after the cut-off date and my note does NOT have MERS…..therefore no argument of “well, we transferred it electronically and did the paperwork two years later.” Huh uh…..won’t hold water, boys.

  3. Hello… I found this very interesting article from the other side of the street.

    JPM: Robo-signing now borrower strategy to avoid foreclosure

    Another attempt is to challenge what is referred to as “assignment in blank,” a formal transfer of title to bonds where the name of the new mortgage holder is left blank. The rationale is that the correct name may be written in later; but borrowers are also challenging the legality of this as well, Reardon said.

    “That is not correct and that is not how the law works,” he said. “The ‘assignment in blank’ is to facilitate the secondary market loan transfer…protected under Article 9 of the consumer credit code.”

    And Reardon is correct according to trade group the American Securitization Forum. The ASF recently consulted with several lawfirms that all agreed the current method of title transfer under US securitization laws is correct and adequate.

    “In the last few days, concerns have been raised as to whether the standard industry methods of transferring ownership of residential mortgage loans to securitization trusts are sufficient and appropriate,” said ASF director Tom Deutsch. “These concerns are without merit and our membership is confident that these methods of transfer are sound and based on a well-established body of law governing a multi-trillion dollar secondary market.”

  4. “Many have already argued that the big banks have prepared for this and have taken the appropriate cash reserves to deal with it.”

    Sorry, but I don’t agree with the many. I don’t think too big to fail has prepared for anything at all. Only time will tell, I suppose…

  5. Well if its like you say and I didnt’ realize there were so FEW trusts. AND what is interesting is if the trust is defunct how can they be suing in name of trust??? This goes to a blogpost about separation of documents. Would love to add information to it. How do you see using the securities pools and investor lawsuits fitting with homeowner lawsuit??

  6. And here I am with a Litton/MERS-generated 5-year late assignment that would place a defaulted loan into a pool that supposedly closed way back in 2005. They did not attempt to back date it. For a loan issued in 2005, the assignment goes from the originator directly into the pool and is dated in 2010.

    So, now, other than claiming a clouded title, how would my documents that would presumably help an investor, also help me?

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