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“ROYALTY” FEES FOR USE OF THEIR NAME UNDER SCRUTINY

EDITOR’S COMMENT: Investors are starting to get restless as they see what is left of their “equity” in the MBS deals they advanced money to buy, dwindling to zero. They are onto the game and the pension fund and other fund managers responsible for the purchase had best start acting to protect their pensioners or they will find themselves in the same position as the so-called trustees of what are now emerging as non-existent trusts for pools of money that have nothing but the investor money in them as assets and no loans.

Let’s first get our terms straight so you know who the players are and what they do. Start at the beginning:

  1. Working people get a pension benefit that vests to them after a certain number of years of employment. Sometimes they contribute to the fund themselves, and sometimes it is entirely funded by their employer. 
  2. Those contributions are then aggregated into a fund which often is an entity unto itself — like  a corporation, LLC, Trust etc. organized and existing under the laws of the state where the pension fund is located.
  3. A fund manager is hired to invest those funds to assure that the balances keep up with inflation and so forth. Usually there are restrictions as to what kind of investments the fund manager is allowed to buy for the fund, whose purpose is to give the pensioners, the monthly payment they are expecting when they retire. 
  4. The hired fund manager could be an individual or a company. If it is a company then some person who works at the company is appointed to take care of that fund and perhaps some others.
  5. Usually when the media speaks of “investors” they mean the pension funds or other types of funds under management that constitute qualified investors because they are professionally managed by people of financial sophistication and they have a lot more money than the average Joe so they can check things out pretty carefully. When you have $1 billion under management, it doesn’t take much to spend $50,000 checking out a potential investment. 
  6. So “investors” are basically conduits through which the money funding pensions and the money paying pension benefits are processed, managed and invested. The real people who are affected by the performance of the fund manager are those people who worked for their pension benefits.
  7. The fund manager is usually paid for performance and hired and fired on the same basis. If the fund balances are properly maintained and the investments are all AAA and were checked out by the fund manager, they avoid most of the tricks and scams that Wall Street is always generating.
  8. So the fund manager, in order to preserve his employment, compensation and bonuses (everything on Wall Street is about bonuses) has a vested interest in managing the information that reaches the media and members of the fund. If there is a Board of Directors or other overseeing body they should be checking under the hood as well to make sure that the fund manager is investing according to the rules and make sure that the fund manager is not embezzling funds.
  9. Thus fund managers who invested heavily into MBS Mortgage Bonds or other MBS products that carved up and pooled debts arising from student loans, credit cards etc, all with AAA ratings from the rating agencies, are now sitting on some liabilities that they don’t want to report because if they do, then they will probably lose their bonus, job or other compensation.
  10. Enter the MBS Trustee seen often as Deutsch Bank, as Trustee for series abcnde-2005a. As Reynaldo Reyes has stated in taped interviews, the function of Deutsch Bank is to do nothing. Only the servicer calls the shots, along with instructions from other entities created by the investment banks in order to put layers between them and the acts that caused all this mess. See organized crime structure as the model for what Wall Street did. 
  11. The fund managers for the pension funds (investors) are actually representing real people who are expecting their pension benefits. So now some of them are looking to the MBS Trustee to ACT like a Trustee and ACT like they care what happens to the investors (pension funds) and all the pensioners depending upon that fund. But the same disdain and contempt that has been shown to homeowners in foreclosure is being displayed against the pensioners. They are the “little people” who in the culture of Wall Street “don’t count.”
  12. Many fund managers were duped by several attributes of these bogus MBS Bonds. The AAA ratings were a big factor as was the presence of the largest banks in the world acting as “Trustees.” The Trustees’ deal with Wall Street was to get paid a fee so their name could be used in foreclosures and other transactions. That is why the actual Trust Departments of the same banks serving as MBS Trustees don’t have anything to do with the MBS Trusts. Besides the fact that the Trusts probably don’t exist at all, the deal was that the MBS Trustee would be completely insulated from all the actual workings of the securitization chain.
  13. Recent case decisions are pointing  the way toward holding the MBS Trustees liable for their inaction. That is what Biden And Schneiderman are looking into as well, to see if laws were broken with those deals. Of course laws were broken. The MBS Trustee was advertised as a Trustee with fiduciary duties. Neither the Trust nor the duties actually existed, and even if they did the MBS Trustee had no intention of doing anything because that wasn’t the deal. [You might want to look at both the original Trustee on Deed of Trust and the “substitute Trustee” for additional potential liability — to borrowers.]

At the end of the day, everybody knows everything. I first heard that on Wall Street of all places but they keep forgetting their own little axioms. The MBS Trustees like Deutsch, US BANK, etc. have long been known to be doing absolutely nothing. The purpose of using their name was to provide window dressing: a big name like HSBC is more likely to be taken seriously than some unknown title agent, which is why in the non-judicial states that ALWAYS have a substitution of trustee. The other reason is that the original trustee would insist on performing the due diligence that the statutes require and oops, they are not going foreclose on property at the instruction of someone who is out of the chain of title.

Biden of Delaware and Schneiderman of New York, both Attorney generals in the center of the securitization playground, are now looking at one of the weakest links in the Great Securitization Scam — i.e., the claim that securitization happened when it didn’t. The fact is that the parties took the money as though the securitization documents were followed but they didn’t have the the loans, transfer documents, mortgage documents, or for that matter even a conforming mortgage that was an actual lien on anyone’s property.

Pauley’s BofA MBS ruling is boon to New York, Delaware AGs

10/25/2011 COMMENTS (0)

In 1998, 400 investors in a trust that distributed revenue from a communications satellite got word that their securitization trustee had settled a $41-million suit against the satellite’s fuel supplier. The trustee, IBJ Schroeder, filed a New York State Article 77 proceeding to obtain a judge’s endorsement of the $8.5 million settlement. Some of the investors protested the deal, arguing that the trustee didn’t have the power to settle the case without consulting them. In 2000, a New York appeals court ruled that, in fact, IBJ Schroeder did have that power, under both New York law and the contract governing the satellite revenue trust. The lower court ultimately ruled in the Article 77 case that even if investors considered the settlement amount too low, Schroeder hadn’t acted unreasonably or imprudently in striking the deal.

If you’re wondering why I’m telling you about an 11-year old ruling involving a defunct communications satellite, it’s because the IBJ Schroeder opinion is sure to be invoked by Bank of New York Mellon, the trustee of those Countrywide mortgage-backed securities, as well as the 22 Countrywide MBS investors represented by Gibbs & Bruns as they appeal last week’s decision by U.S. District Judge William Pauley III of Manhattan federal court. In holding that the federal courts have jurisdiction over Bank of America’s proposed $8.5 billion settlement, Pauley took issue with BNY Mellon’s use of an Article 77 proceeding to get the deal approved. The judge wrote that Article 77 is usually employed to resolve garden-variety trust administration issues; BNY Mellon and Gibbs & Bruns will use the IBJ Schroeder ruling to argue at the U.S. Court of Appeals for the Second Circuit that, contrary to Pauley’s assertion, there’s precedent for using Article 77 exactly as they did in the BofA MBS case.

But even as the Second Circuit decides whether to take up the issue of the rights and responsibilities of securitization trustees, state attorneys general are likely to pounce upon some of the language in Pauley’s 21-page ruling. I warned that there might be unintended consequences for indentured trustees when the judge asked for briefing on the BNY Mellon’s duties. After Pauley’s ruling, that warning is now a red alert. New York attorney general Eric Schneiderman and his faithful follower, Joseph Biden III of Delaware, have both announced that they’re investigating MBS securitization trustees. Schneiderman showed he’s serious by filing state-law fraud claims against BNY Mellon along with his petition to intervene in the BofA Article 77 proceeding. In his complaint against BNY, Schneiderman argued that once an investment goes south, as many of the MBS trusts have, the indentured trustee has a fiduciary duty to trust beneficiaries under New York common law.

BNY Mellon’s lawyers, on the other hand, argued in a brief to Pauley that an indentured trustee does not have a fiduciary duty to beneficiaries. The investment contract, BNY Mellon said, governs the trustee’s responsibilities. Standard securitization contracts, known as pooling and servicing agreements, say the indentured trustee serves a ministerial function, mostly making revenue distributions to investors. BNY Mellon told the judge that its only responsibilities, aside from those specified in pooling and servicing agreements, are common law duties to avoid conflicts of interest and to exercise due care.

The judge, however, took a broader view of the source of the trustee’s responsibilities — and that’s good news for regulators who are trying to find routes to liability for securitization trustees. Pauley considered the question in the context of determining whether the proposed BofA settlement falls into an exception to federal court jurisdiction in the Class Action Fairness Act. But his reasoning, of course, can be cited in other contexts.

Pauley cited Judge Learned Hand — who sat on the same court a century ago — to conclude that indentured trustees can’t evade a duty of loyalty to beneficiaries just because their responsibilities are defined by a contract. BNY Mellon had asserted its only duty to act in good faith came from the Countrywide pooling and servicing agreements. Pauley said it comes instead from state common law. As New York and Delaware regulators consider causes of action against securitization trustees, they’re going to have stronger claims if they can argue that trustees breached their state-law duties to investors. Similarly, trustee defenses are weakened if they can’t argue that their responsibilities were strictly defined by pooling and servicing agreements.

The New York and Delaware AGs are in an awkward limbo right now in the BofA MBS litigation. When Grais & Ellsworth removed the case to federal court, their intervention petitions were pending before Judge Barbara Kapnick in New York State Supreme Court. (BNY Mellon and Gibbs & Bruns, you may recall, filed fiery briefs opposing the N.Y. AG’s intervention.) The AGs stayed out of the federal court case while Pauley decided whether to remand it. But now they’re likely to renew their intervention petitions before the federal court judge, who has already raised a lot of the same questions as the AGs about the fairness of a binding settlement that was reached without consulting most of the investors it will affect. (The New York AG’s Martin Act counterclaim against BNY Mellon, in case you’re wondering, can technically proceed in federal court as well.) As I’ve said before, it’s too soon to say for sure that the proposed settlement will stay with Pauley. But if it does, invigorated attorneys general are the last thing BofA, BNY Mellon, and the Gibbs & Bruns group need.

(Reporting by Alison Frankel)

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