by Yves Smith
Tom Adams pointed to an article in American Banker by Kate Berry which discusses how mortgage securitization trustees are increasingly coming under scrutiny in the foreclosure crisis. By way of background, the trustee is the party responsible for securing the assets (the borrower promissory IOUs, liens, and various other documents related to the securitization). The trustee in theory is also responsible for overseeing the servicer. In practice, the trustee does very little, and the pooling and servicing agreement has all sorts of carveouts and indemnifications with the intent of severely limiting (cynics might say eliminating) any risk trustees might have by virtue of their supposed supervisory role.
The biggest mortgage securitization trustees are Bank of New York, Deutsche Bank, Wells Fargo, and US Bank.
The interesting thing about the American Banker article is that the trustees appear to be in a great deal of denial as to how much hot water they are in. No where does the story mention their biggest exposure: that they gave multiple certifications to the investors in the mortgage securtizations that they did indeed have the trust assets. If, as it now appears to be the case, that many mortgage loans were not properly conveyed to the trust (as in endorsed by the originator and all the intermediary parties specified in the contract governing the deal, the pooling and servicing agreement, and finally over to the trust), then all those certifictions were patently untrue. Since investors relied upon these certifications (no one in their right mind would have ponied up for these deals if they had had any doubt that the trust owned the mortgage loans) and the failure to convey the notes is a big cause of problems with foreclosures, it would seem that the trustees are very logical targets for investor litigation.
Let’s begin with a meaty section of the American Banker story (sadly, no online version):
Deutsche Bank AG, the second-largest trustee of asset-backed securities in the U.S. according to Thomson Reuters, recently demanded that the servicers of its deals indemnify the German bank, and the investors it represents, against any “liability, loss, cost and expense of any kind” from “alleged foreclosure deficiencies or from any other alleged acts or omissions of the servicer.”
The Financial Crisis Inquiry Commission is also investigating trustees’ role in the foreclosure mess, according to several people with knowledge of the body’s work. The commission, which was created last year and has held a number of hearings, has no real teeth, but it plans to issue a report Dec. 15 on its findings about the causes of the financial crisis. The report is expected to include some discussion of trustees in securitizations, the people said.
In an Oct. 8 letter, Deutsche cautioned the major mortgage servicers that had halted foreclosures to examine their processes — including Ally Financial Inc. and JPMorgan Chase & Co. — of the need to ensure ownership of loans was properly transferred to trusts when securitizations were formed.
Deutsche Bank told the servicers to “comply with all applicable laws relating to foreclosures,” and requested additional information about alleged loan defects and any actions taken by servicers to fix them.
Thomas Hiner, a partner at Hunton & Williams LLP, said Deutsche Bank, which forwarded the servicer warning to investors on Oct. 25, was trying to appear proactive. “They are attempting to show a good face to the bondholders, that they are in front of the issue and they’re telling the servicers to comply with the law and the documents,” Hiner said.
He also said Deutsche bank was trying “to disclaim responsibility for” servicers’ paperwork blunders.
“Proactive”? This is comical. It appears that Deutsche is trying awfully hard to shift blame to servicers for its own failures. And a misleading letter to investors looks to be a device to get them off Deutshe’s trail.
This is the section, if Thompson Reuters has recounted it correctly, that is dishonest:
Deutsche cautioned the major mortgage servicers that had halted foreclosures to examine their processes — including Ally Financial Inc. and JPMorgan Chase & Co. — of the need to ensure ownership of loans was properly transferred to trusts when securitizations were formed.
Ahem! It was the TRUSTEE’S job to…
Find out here…