Banks Pressed by Investors on “Mortgage-Backed” Loans

Wall Street Journal

In any case, analysts say the efforts could force banks to disclose difficult-to-obtain information about the loans, such as how poorly they might have been originated or are being managed.

Some investors “had no idea that their money was being invested in mortgage-backed securities,” said Mr. Franklin. “And yet somehow these people are now the ones being punished, and that’s just not right.”


Big U.S. banks are facing legal pressure to make up for losses tied to pools of soured low-end mortgage loans.

In the latest effort, a group of investors in 2,300 mortgage securities worth roughly $500 billion is seeking to force several banks that originated or are now servicing faulty subprime-mortgage loans to repurchase or modify them.

Matt Nager for The Wall Street JournalSome investors ‘had no idea that their money was being invested in mortgage-backed securities,’ says Talcott Franklin, a Dallas lawyer.



The move follows other similar efforts. Bond and mortgage insurers, hard hit in the housing crisis, have filed lawsuits accusing lenders and banks of sticking them with flawed loans marred by poor underwriting and faulty appraisals.

Federal Home Loan Banks in Pittsburgh, Seattle and San Francisco have sued Wall Street banks, seeking to force them to buy back mortgage-backed bonds. In July, the Federal Housing Finance Agency issued 64 subpoenas to obtain information about loans underpinning securities sold to mortgage giants Fannie Mae and Freddie Mac.

The banks and lenders are fighting these efforts, saying they aren’t responsible for the housing crash.

And the outcome is far from certain and could depend on potentially contentious negotiations and litigation that could drag out for years.

In any case, analysts say the efforts could force banks to disclose difficult-to-obtain information about the loans, such as how poorly they might have been originated or are being managed.

That data could be used to force banks to repurchase as much as $133 billion in souring home loans, according to Compass Point Research & Trading, a Washington, D.C., boutique investment bank.

The legal efforts focus on the contractual duties of lenders known as “representations and warranties,” which can at times require them to repurchase loans or modify them so borrowers can keep paying monthly mortgage bills, which maintains value for mortgage securities tied to the loans.

The Trustees’ Roles

At issue are the roles of trustees and loan servicers. Trustees are little-known administrators inside banks responsible for overseeing loan pools, or securitizations, on behalf of investors. Loan servicers handle day-to-day management of loans, including deciding how and whether to modify the terms of a loan. Both are charged with oversight of pools that hold thousands of loans.

If a trustee, for example, discovers that a borrower lied when getting a loan, the trustee or loan servicer is responsible for forcing the originating bank to repurchase the loan on behalf of mortgage investors. Trustees enforce warranties made by loan originators when they sell loans to a trust, and oversee loan-servicing firms.


But some loan-servicing units reside inside the same banks that originated or underwrote the loans or securities. This sets up a potential conflict of interest because a loan-servicing arm would have to force another department or affiliate inside a bank to take back a problem loan.

In a letter to the trust departments of several large banks, Talcott Franklin, a Dallas lawyer representing the investors holding 2,300 mortgage bonds, claims the loan-servicing units too infrequently modify poor-performing home loans underpinning mortgage securities or replace them with better loans.

“This is of great concern to the pension funds, bank and credit-union depositors, mutual fund holders, 401(k) holders, endowments, state and local governments and taxpayers who depend on the performance of these investments,” the letter says.

U.S. Bancorp, Bank of America Corp., Bank of New York Mellon Corp., and Wells Fargo & Co. received the letter from Mr. Franklin, while Deutsche Bank AG didn’t, according to people familiar with the situation. The banks either declined to comment or didn’t return requests for comment on the letter.

In a statement, a spokeswoman for Wells Fargo said the bank has “an established track record of responding to all legitimate verified bondholder inquiries in a timely manner.”

A key first step in the legal fights is obtaining the loan files that will detail how the loans were originated and what is being done now to salvage investors’ money.

If the investor maneuver is successful in getting the loan information, “this will lead to similar actions taken by a larger set of bondholders,” said Chris Gamaitoni, a Compass Point senior analyst. “We believe that once loan files are acquired, that the breaches of reps and warranties will be relatively clear.”

In an Aug. 17 report, Compass Point said the litigation makes common claims: “A significant portion of the underlying loans failed to comply with the underwriting guidelines or other reps and warranties, and thus misrepresentations and material omissions were made in connection with the sale of” residential mortgage-bond securities.

In recent weeks, some of the banks have begun early-stage talks with Mr. Franklin to provide data about the loans underpinning the securities, such as loan documents and how the loan has been serviced. Separately, Mr. Franklin hopes to persuade the trustees to take increased steps to deal with souring loans, such as forcing loan sellers to repurchase the loans or requiring loan servicers to improve loan servicing.

In the past, complaints by mortgage-security investors went unheeded. But because Mr. Franklin now represents enough investors to meet certain legal thresholds—he, for example, represents 50% or more of the voting rights of 900 mortgage securities—his clients could fire a trustee, demand changes in the way a mortgage bond is managed or ultimately file a suit on behalf of a huge group of bondholders.

In the letter, Mr. Franklin said that in some trusts where the lender and servicer sit inside the same bank, the number of recent repurchases by the lender is zero, even though the default rate for the loan pool is 25%.

‘That’s Just Not Right’

Some investors “had no idea that their money was being invested in mortgage-backed securities,” said Mr. Franklin. “And yet somehow these people are now the ones being punished, and that’s just not right.”

To keep track of the securities his clients own and protect his clients’ confidential holdings, Mr. Franklin uses a software system he designed with a college friend, who consults on how to design large databases. Mr. Franklin calls it the “Tranche” program, a reference to the French word for slice or layer. Mortgage securities are chopped into tranches based on risk and return.

His clients’ information is coded and Mr. Franklin keeps a secret code book as a reference. Mr. Franklin said the system is important because it lets him know when his clients in a specific deal have amassed enough voting power.

In the other cases, bond insurer MBIA Inc. sued Credit Suisse Group in New York state court in December over a $900 million loan pool, a large portion of which MBIA agreed to cover. MBIA said it had relied on Credit Suisse to vet the quality of the loans.

In January, Ambac Assurance Corp., the bond-insurance unit of Ambac Financial Group Inc., sued a Credit Suisse unit in New York state court, alleging that it made “false and misleading” representations about home-equity lines of credit backing bonds that the insurer guaranteed in 2007.

A Credit Suisse spokesman said the claims are without merit and the bank will defend itself against the claims.

Separately, American International Group Inc. is analyzing mortgage deals it insured before it imploded in 2008. Chief Executive Robert Benmosche told investors in May that the company will take “appropriate action” if it finds it was harmed by the transactions.

Write to Carrick Mollenkamp at

5 Responses

  1. Talcott Franklin used to do attorney work for the banks. His so-called database is funded by Blackrock which is co-owed by three major banks. This is a case of the fox guarding the henhouse. It never ends!

  2. The issue is REPURCHASES. And, I am telling you that this may involve insurance fraud against the GSEs. NOT defending the GSEs – as my friends here may counter – but there is something much more than has NOT been exposed.

    And, I might add – that judges across the country have no idea about securitization – “Mortgage Schedule” – “what is that??” This is is what we are exposed to in courts across the country. And, then, just try to get past the Original Mortgage Schedule – and what happened after that.. The so-called securities are tied to derivative rights – the banks are protecting those transferred collection rights – and the courts do not know have a clue. WHY? Because….the courts say – “You owe the money”. BUT, you owe the money to WHO?? and what money do you owe on a fraudulent contract based on a fraudulent appraisal??? And, who denied you a modification? Or, even the opportunity to request a valid modification.?

    You cannot come out – saying – I owe nothing – it will not work. You have to call the bluff – and take it from there.

    SEE –

    Quote –

    When they sell the loans, the banks make representations and warrants to the investors that the borrowers meet certain loan criteria, such as the level of their FICO credit scores or their income. If it turns out later that this information is wrong, the investor can force the bank to repurchase the mortgage from the trust that holds them” (ad-lib – holds what?? – but assume, for argument – that they are correct)

    Continue –

    “The first is what the banks have termed “putbacks,” but are really repurchases of mortgages. Most banks don’t keep mortgages on their books any more. Instead, they pool home loans together and sell slices of those bundled securities to investors, who assume the credit and interest rate risk on the underlying loans.”

    From me – just as the banks “pooled” sale of receivables (which only qualify as securities) – in the same way – banks SELL “pooled” derivatives of collection rights. If the banks do not honor these collection rights – they are in for bigger legal actions than anyone here can assert. This would devastate stock price. All is structured to cover up.

    We are doomed unless some aggressive court measures are taken. We are no match for Wall Street/political power. And, we will not win by claiming no money is owed – we will win by claiming it is NOT owed to the party demanding foreclosure. Must show the affidavits/assignments/note/endorsement/allonge/chain of title – is FALSE. And, that you have been denied the right to confront your true creditor.

    They know this – and are doing everything to stop you in court – and the judges know nothing about anything except – “You owe the money.”


    By Charles Riley, staff reporter
    October 18, 2010: 5:43 PM ET

    NEW YORK ( — Bank of America reviewed 102,000 foreclosures in the 23 states where a court must sign off on the proceedings, and it is now restarting the process on those cases, the company said Monday.

    The company said the first of the new affidavits will be submitted by Oct. 25, and that it will continue its review in 27 other states.

    According to a spokeswoman for the bank, no errors were found during the review, and fewer than 30,000 foreclosure sales across all 50 states will be delayed as a result of the investigation.

    The announcement comes one day before the bank’s third quarter earnings report, and might ease investor concerns over the scale and timeframe of the bank’s review process.

    “THIS IS AN EVEN BETTER OUTCOME THAN WE PREVIOUSLY THOUGHT,” said Paul Miller, an analyst at FBR Capital Markets. “We thought January was a more likely time to restart the [foreclosure] process.”

    The news sent Bank of America shares up 36 cents to $12.34, or 3.01%.


    State attorneys general have stepped up pressure on banks in recent weeks after it was revealed that some bank employees had signed foreclosure affidavits without verifying that the documents were accurate, a process known as “robo-signing.”

    Foreclosures: Next to hit banks?

    Bank of America launched its initial review on Oct.1, and said on Oct. 18 that it was expanding its document probe to all 50 states.

    The company maintained that initial assessments in the remaining 27 states show the basis for foreclosure decisions were accurate.

    At least five other major mortgage servicers have announced their own document reviews.

    All told, 1.8 million loans are in foreclosure in the 23 so-called judicial states, while 1.3 million are pending elsewhere in the country, according to a Morgan Stanley analyst report. To top of page

  4. The reporters need to get their stuff right. The investors and the insurers did not insure for the loans, they insured the bonds,the securities.

    the servicers are not banks, they are simply debt collectors, that is why they put that annoying recording on the answering service letting you know they are attempting to collect a debt.

    they record all phone calls, you need to check in your state if you can do the same with or without notice to them, I call it gathering evidence of their abuse and lies.

    And the ones that allege to be the banks are impostors, so what are left with a home where the only person with standing is the borrower.

    i hope the courts see it that way, we are on the right track!

  5. I bet the farm that is about to be foreclosed by these felons, that these loans were denied loan modifications and the borrowers were thrown in the foreclosure dumpster after the SERVICERS (SELF SERVED S.O.B.’s) told every one the INVESTORS DENIED YOUR LOAN MOD!

    When is our government going to realize that this is a racket, and that the same crooks that came up with the securitization pyramid also own the LACK OF SERVICE ” Servicers ”

    We need to be aware of these law suits their discovery will be crucial for us.

    I can bet you the servicers took it upon themselves to repossess all these homes, forged all the affidavits so they would not notify the investors as to the poor quality of the loans they had allegedly paid for.

    These servicers are just fronts for fraud and theft.

    And to top it all they are unregulated!!!!!!!!!!!!

    wonder why. This is their golden cow!

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