Investors Try to Use Trustees as Wedge in Mortgage Put-Back Fight


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EDITOR’S NOTE: Instead of looking for “buy-backs” they should be suing for fraud, because there are no mortgages.

American Banker  |  Monday, June 27, 2011

By Alex Ulam
A new avenue of attack may be opening up for investors seeking to force big banks to buy back billions of dollars in mortgages: drag the trustees into the fight.

Last month, the Knights of Columbus sued Bank of New York Mellon Corp., the trustee for two mortgage-backed securities that the Catholic fraternal group invested in. The plaintiffs’ real target was not named as a defendant: Bank of America Corp., whose mortgage unit, the former Countrywide Home Loans, issued the securities. The Knights are demanding that BNY Mellon account for unauthorized fees that Bank of America, the servicer of the pools, has allegedly been charging to the investor trusts.

Despite widespread reports of improper practices in the securitization and servicing of mortgages, investors have had a hard time proving that their own securities were affected by such malfeasance. One reason is a refusal by trustees, which are supposed to be looking out for investors’ interests, to prod servicers to provide loan documents. In this case, the Knights of Columbus are using the threat of liability to scare BNY into acting.

“It is the most novel and sensible of the litigation strategies that we have seen,” says Josh Rosner, managing director of Graham Fisher & Co., an investment consultancy, of the Knights of Columbus suit. “It doesn’t threaten to blow up the trusts, but it does in fact create a wedge with which investors should start being able to get the information they need to pursue rep and warranty violations.”

Many attempted put-backs flamed out after investor coalitions failed to get the 25% of bondholder votes that pooling and servicing agreements require for a trustee to be forced to take action against a mortgage servicer. But investors don’t need to meet such a threshold to sue the trustees for failing to meet their obligations.

The role of trustees in the mortgage securitization process also faces new scrutiny. Attorney Generals Eric Schneiderman of New York and Joseph Biden III of Delawate are examining whether BNY Mellon and Deutsche Bank fulfilled their obligation to ensure loan files placed into the securities were complete. Neither Deutsche nor BNY Mellon would discuss the attorney generals’ inquiry.

Research by Amherst Securities Group indicates that trustees may routinely have failed to fulfill their obligations to investors. For example, trustees only loosely enforced early payment default provisions, which should have been a slam-dunk for mortgage put-backs. According to Amherst, in instances where borrowers never made a payment, only 37% of mortgages were put back to securitizers, with much smaller amounts for loans making only one to six payments.

Although trustees on securitization deals are supposed to represent investors’ interests, there are various disincentives for them to take action against a servicer or a securitizer. Compensation is based on volume and trustees have do not earn extra money for going after servicers over violations of representations and warrantys. If I trustee did in fact establish that a servicer was guilty of rep and warranty violations, it would have little recourse other than to tell investors who could then take legal action themselves. Trustees generally cannot fire servicers except for specific reasons such as a failure to remit payments when a servicer becomes insolvent. In addition, in the event of a servicer default, the trust could find itself liable for the expense of making advances on the bonds to investors.

“Trustees are paid very little because their duties are ministerial prior to a default,” says Cris Naser, senior counsel for the American Bankers Association’s Center for Securities, Trust, and Investments. “They are not paid like the underwriters or attorneys and if they are going to undertake action, it is going to cost them a lot of money.”

Further, there is the risk of alienating a trustee’s best customers. Research by Adam Levitin, a law professor at Georgetown University, and Tara Twomey, of counsel at the National Consumer Law Center, shows that four mortgage trustees accounted for about two-thirds of all the residential mortgage-backed security trustee business from 2003 to 2009. During the same period, according to the paper, almost two thirds of Bank of New York Mellon’s residential mortgage bond trustee business was on Countrywide or Bank of America deals. In many instances, the mortgage servicer is obligated to pick up the legal expenses of Bank of New York Mellon in investor suits.

“What you are seeing with the Knights of Columbus case is the investors holding the servicer responsible for doing its job,” Twomey said in an interview. “There are lots of reasons set forth in the complaint showing that the trustee should have been aware of the problems and should have done something about it.”

The Knights of Columbus lawsuit, filed in the New York State Supreme Court, describes a litany of alleged mortgage servicing abuses, which it states are grounds for Bank of New York to take action against Bank of America. It notes that federal agencies have taken the bank to task for failing to follow legal procedures in the foreclosure crisis. It also points out that the trust has been the target of lawsuits over the dilapidated state of foreclosed properties that the Knights claim is due to poor care by Bank of America. And the complaint cites a Federal Trade Commission complaint and reports in the media (including American Banker) about inflated default servicing fees which the plaintiff alleges that Bank of America is passing along to the trust.

“The complaint does not assert any claims against Bank of New York Mellon or seek damages,” says Kevin Heine, a BNY Mellon spokesman. “It merely seeks an accounting.” B of A didn’t return a request for comment.

Rosner says that the Knights of Columbus case and the New York and Delaware attorneys general inquiry raise troubling questions about the relationship between the trustees and the big banks.

“The conflict is very real,” he says. “If the trustee’s interest are supposed to be serving the interest of the note holder, then given how much of their business is coming from the banks, you do wonder what was their real interest.”

7 Responses

  1. Right, when are the accountants going to be prosecuted??? Seems to me there are a LOT of shady ones in all this…

  2. @ johngault,

    You must mean Maher Soliman.

  3. What are the names of the 4 mortgage trustess stated in this article that account for 2/3 of all RMBS trustee business from 2003 to 2009?

  4. If a bankster, not the investor, were paid by insurance, credit default, or what not by/for betting against your loan, and the proceeds of these did not retire your note, is that akin to unclean hands? What’s the value of that?
    And I dont know how that could survive since they insulated themselves by having so many intermediaries – one would have to prove complicity, rico, something, I would think. And if that’s true, then we would in fact need to get into the accounting ‘shananigans’ as alleged by what’s his name, the terminally inarticulate one (or alternatively tease) who has departed – again – this website. M something.

  5. Carie, you’re right about that. Does anyone know the mechanics of the
    money trail? JoeBankster forecloses. If there were pool or other insurance, doesn’t it kick in these days after the post f/c sale? I guess that would be determined by the terms of the insurance. I believe how and when this insurance pays may, among other things, impact whether or not you get modification aka subsidation on your loan. I
    know people believe otherwise, but insurance generally only covers the dollar amt of the actual loss, and how is that known until the dust settles after a re-sale,when the sale amt is known as well as the costs of holding and sale?
    But say there were no insurance. 500k is owed on the note and the ultimate re-sale of the property, etc. after the dust settled resulted in a capture of 250k. So what exactly happens to that 250k? I know some of you think it’s pure profit, but I am interested in knowing where that 250k goes. In other words, when an asset which is to generate the payment stream for a trust
    is liquidated, what happens as to payment stream and the certificates?

    If a pool of 1000 loans has only one loan default, is it handled differently than if that same pool has a default of say 20%, with all those properties / or assets which determine the value of the certificates (don’t they?) being liquidated? I think I’ve framed this correctly…..not sure.
    I had always thought it was just the bankster who took the insurance(s), but read an article last night which indicated some of the investors did. In fact, the article seems to say it was only the investors who took it.

    At any rate, since the homeowners and the investors are each claiming to have gotten the shaft (and I’m not implying they didn’t), these things need to be determined in order to make proper allegations in law suits. If the investors are ‘annoyed’ that these put-backs weren’t done as they should have been, then clearly it’s their position they were harmed and have not been made whole by foreclosure. I’m looking at the mechanics of where the 250k goes, and then, if the investors were the beneficiaries of any insurance, they would be made whole, would they not? What would that look like with securitization?

    If someone other than the investors got the benefit of some kind of insurance in regard to one’s note, or if the entire default amt were paid, I would think we’d have to see how that is paid in order to determine if and how it might pay off the note pursuant to the UCC, or failing that if it would fall under some equitable theory of double collection / unjust enrichment.

    Would some company write insurance which paid off the entire unpaid balance with no regard for the bankster’s recapture by virtue of the post-foreclosure resale of the asset? They might, if a high enough premium were paid, and in greedy expectation of the default(s) which we mostly believe they engineered, the bankster might have paid it.

    It’s very easy to make assertions until we try to put them on paper. If these notes have in fact been paid off, we have to be able to write the argument
    beyond speculation and conclusive bs that won’t get past day one.

  6. From the above post:

    “It also points out that the trust has been the target of lawsuits over the dilapidated state of foreclosed properties that the Knights claim is due to poor care by Bank of America.”

    This particular outcome of all of this is the truly and horribly sad part, that never seems to get in the news…there are SO MANY of these properties all across the country that are just sitting there falling apart…the former homeowner believing they did something wrong…not knowing the incredible fraud perpetrated on them from the minute they signed the “fake” mortgage docs…all the complete devastation of society because of the greed of a few…”thieves in the night” they are—stealing our property and our land while we are asleep, not realizing what was truly happening.

    Give us our houses back and let us fix them up and make them livable again, and put us to work rebuilding our lives and rebuilding the infrastructure of America, which is also falling apart…

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