Economist: US Trustee Program Challenges Right of Servicers to Foreclose

“the right of mortgage servicers (which administer payments to investors) to foreclose on loans that were sliced and diced in securitisations is being challenged by, among others, the United States Trustee Programme, the arm of the Justice Department with the job of protecting the integrity of the bankruptcy system.”

5-7 Years of Litigation Ahead

The American mortgage mess

Invest then protest

Dec 9th 2010 | NEW YORK

AMERICA’S foreclosure scandal is still reverberating. Congress recently held hearings on mortgage lenders’ use of “robo-signers” to stamp eviction documents without bothering to read them first. An investigation by the 50 states’ attorneys-general may result in a settlement with banks—perhaps early next year—that could include pledges to reform industry practices. And the right of mortgage servicers (which administer payments to investors) to foreclose on loans that were sliced and diced in securitisations is being challenged by, among others, the United States Trustee Programme, the arm of the Justice Department with the job of protecting the integrity of the bankruptcy system.

Worse, investors in mortgage-backed securities (MBSs) are trying to make the banks that underwrote the deals buy them back at par. They have to do this if they breached assurances about the quality of the mortgages in the pool. So shoddily were these securities cobbled together in 2005-07 that analysts at Compass Point Research & Trading, a broker, reckon loan “putbacks” could cause more than $130 billion in losses, almost half of them to be borne by JPMorgan Chase and Bank of America (BofA), whose purchase of Countrywide greatly increased its exposure. Most other estimates lie between $50 billion and $100 billion.

In the vanguard of this battle are Fannie Mae and Freddie Mac, America’s nationalised housing agencies, which have so far forced banks to take back $13 billion-worth of dodgy debt. Five of the 12 Federal Home Loan Banks, industry-owned co-operatives that lend to mortgage banks, are also pressing claims against the big securitisers. Bond insurers such as MBIA and Assured Guaranty, which took hits on mortgage securities they had “wrapped” with credit enhancement, are becoming more active too. In a lawsuit this week MBIA claimed Morgan Stanley had “fraudulently induced” it to insure $223m in bonds.

Private MBS investors might be an even bigger threat to the banks. Mortgage servicers got a shock in October when a group of fund managers and others (including the Federal Reserve Bank of New York) threatened legal action against BofA over $47 billion of bonds formerly serviced by Countrywide. More and more investors are coalescing into groups, hopeful of reaching the threshold at which they can instruct mortgage-pool trustees to act against servicers (25% of note-holders in a given issue). Dozens have, for instance, joined a clearing house for investors run by a litigator based in Dallas.

They face numerous hurdles. It may be hard to prove in court that losses stemmed directly from poor underwriting, not economic turmoil. Investors may have to go to law just to gain access to loan files. And some cases are rubbing up against time limits, since under New York law, which governs most securitisations, breach-of-contract cases must be brought within six years of the alleged wrongdoing. There is little time to act on deals packaged in 2005, the first year of really poor underwriting.

Some fund managers also worry that banks they sue will restrict their allocation of bonds in future offerings, while hedge funds fret that their prime brokers will close off finance to them, says David Grais, a lawyer who works with aggrieved investors. He is trying to create structures that would allow investors to join suits anonymously, thus avoiding retribution. Then there is the free-rider problem: the cost of litigation falls on those that sue, but the proceeds from putbacks flow to all investors. This increases the incentive to wait for someone else to act. Finally, the value of subprime and Alt-A mortgage bonds has soared in secondary markets this year, assuaging investor anger.

Banks have made clear that they will fight back. BofA has assembled a vast legal team to help with this “hand-to-hand combat”, as the bank’s boss, Brian Moynihan, has described its tussles with investors. He has vowed to stand firm against “people who come back and say, ‘I bought a Chevy Vega but I want it to be a Mercedes.’” Tough talk, if not exactly a ringing endorsement of the original product.

So, it could be a hard slog for investors. “This is not for the faint of heart…It’s a five- to seven-year enterprise,” says Mr Grais. A protracted battle suits the banks: if they can spread the pain over several years, repurchases will continue to hack at their profits but will not threaten their solvency—not even that of the heavily exposed BofA. Still, the fight has already been sufficiently bruising that some want out: Goldman Sachs is said to be seeking buyers for its mortgage-servicing unit, Litton, which it acquired only three years ago.

13 Responses

  1. […] Economist: US Trustee Program Challenges Right of Servicers to Foreclose   Tags: gtc | honor, securities fraud, united-states Posted in: […]

  2. Congressional Oversight Panel Reviews Treasury’s Foreclosure Prevention Programs

  3. Peter

    Good question – see below.. Just tonight hearing conflicting statements as to actually what went on with government bailout — and as to “note” and “securities” — and what the government purchased — one way or another — the government has likely got your number. But, I have always stated — securitization is just an accounting gimmick to covert receivables to notes into securities. The note remains with the bank until they dispose of collection rights – or “interests” in the debt itself.

    Bonds have an inverse relationship — when yields (interest rates) go down — prices go up. And, the opposite – if interest go up – prices go down.
    Since interest rates having been going down due to Quantitative Easing — bond prices have been going up. Believe that is the answer.

  4. You know I smell a shared loss agreement
    but indeed what about sccounability for the damages on lives lots if lives and the little guy gets the breadcrumbs if anything another thing comes to mind the banks lost nothing when they claimed they did( was other peoples money) so now they stand to loose billions” they are loosing money our gov gave them( as well as credit Suisse and deutsche (foreign banks) so they lodt exactly what, bonuses still got handed out and god knows they including Fannie n Freddie paid sterns bucket shop a pretty packet to steal homes from old people pregnant people cancer ridden people remember. Sickening I understand it’s too late to get eat up our souls blaming but what’s wrong with shutting down the big banks I like neils thoery on how thst might be approached our 50 state atty general could play s key role inneach states programs to get the money back and restore faith on many levels amongst communities it’s clear thst wall street banks are too big to police and government can’t handle it for real ,they arnt handling it
    god knows we must do that from here on because the trust has gone there is no other way shift the money ( what’s left if it) back to the prople. Community banking community building giving rise to strong community strong states strong nation. It will be a while though. I’m
    in. Yes o know way over amplified

  5. So what happens to the little guy whose home is being foreclosed on while the big boys are shifting and trading procedures to cover their losses?
    What procedure should we follow to protect our investment that was conceived in sin from the inception ( At the closing table) The signing away of our constitutional rights, allowing (under extortion) the release of the power of attorney. The threat of not being able to close if you don’t sign the insurance agreement, that you don’t even collect on. The lender collects if you default on the loan, they foreclose and collect. This is un fair lending practices that border on predatory activity.

  6. Now is the time to email the state AGs , here is the link I found on naked capitalism.

    I have signed this and want every else to do so.

  7. Does anyone understand why the Alt-A Bonds are soaring as it states in this article? We got an Alternative loan…totally sub-prime…10 year interest-only. I’ve seen a lot of foreclosures on the Trust that our mortgage was supposed to be included in. Why are the bonds doing well if people are defaulting and there are foreclosures?

  8. The AG of Florida is doing the job. Regarding here in California.

    The AG is now changing for the better Kamala Harris campaigned to fight Predatory Lending. So their is a transition period.

    The problem with California is that it is in Debt and the MegaBanks cover the Payroll (IOU’s when necessary) and probably more. So it is a very delicate situation.

    I am being very positive.

    On the Negative side.

    The State of California sold its soul to the devil.

  9. leapfrog they are exposed. they are not used to being exposed.

    It’s Humpty dumpty and the “The Emperor’s New Clothes's_New_Clothes

    Provided the above link to refresh your memories.

    Be Strong and Courageous.

  10. Many problems with this – including – Breach of Contract is 6 years — but fraud on court is indefinite. And, much fraud on court for foreclosures. Trustees/ Trusts are not pocketing any foreclosure proceeds — so — fraud on court all across the country..

    As to BofA and Countrywide —- Countrywide sold the loans to BofA at origination — and before Countrywide was acquired by BofA — just that no one recorded the loan sales — buried in hidden agreements. As Bob G pointed out — “Corridor Contracts”. Countrywide did not retain their originations. .

    Above quote – “while hedge funds fret that their prime brokers will close off finance to them” — the banks had proprietary relationships with the hedge funds — selling off distressed debt (non-performing loans). Now the battle is — were they even valid mortgage loans to begin with??? Did the banks pawn off non-performing mortgage loans that were never mortgage loans to begin with?? Of course, hedge funds worry about the hand that feeds them.

    Fannie and Freddie — do not know what is going on. The balance sheets are – a mess.

    Agree with THE A MAN — this is job for AGs and government. And, up to now — where have they been???.

  11. The pretender-lender’s attorney in my case is frantically trying to get the trustee to join (on her side, I suppose). What an idiot. Talk about shooting yourself in the foot.

  12. I think some of the lawyers suing BofA for put backs are going to get more savy about their litigation. I think there will be some back and forth that will stomp the banks more than they are letting on. Litigation is not static and more stuff comes to light. In addition, new laws are sure to be coming down the pike, which is going to bring more regulation and transparency. This “scandal” is going to bloom. It is my fearless forecast that some really outrageous behavior is going to come to light. I think it is going to blow everybody’s mind. It is going to be worse than we have imagined.

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