Wells Fargo, Morgan Stanley Faulted on RMBS Servicing

A law firm that won an $8.5 billion settlement from Bank of America Corp. (BAC) tied to faulty mortgage bonds said Wells Fargo & Co. (WFC) and Morgan Stanley (MS) failed to service $73 billion of similar securities, creating a default.

Gibbs & Bruns LLP cited at least $15 billion of Wells Fargo’s residential mortgage-backed securities and $5 billion from Morgan Stanley where holders have 25 percent or 50 percent or more of the voting rights, according to a statement today from the Houston-based law firm. The dispute also covers $23 billion of Morgan Stanley-issued RMBS and $30 billion of Wells Fargo’s RMBS where holders “have significant voting rights, but less than 25 percent or 50 percent,” the firm said.

Faulty mortgages and foreclosures have cost the largest U.S. home lenders at least $84 billion since the start of 2007, according to data compiled by Bloomberg, and have been blamed by regulators for discouraging banks from making new loans. Kathy Patrick, a partner at Gibbs & Bruns, led a bondholder group that reached a settlement in June 2011 with Bank of America covering mortgage trusts with an original loan balance of $424 billion.

“We will review any communication we receive and respond appropriately,” said Mary Eshet, a spokeswoman for San Francisco-based Wells Fargo. Mary Claire Delaney, a spokeswoman for New York-based Morgan Stanley, declined to comment.

Minimum Level

Gibbs & Bruns represents at least 20 bondholders including BlackRock Inc., Goldman Sachs Asset Management, Pacific Investment Management Co., Western Asset Management Co. and TCW Group Inc., according to two people with direct knowledge of the matter, who asked not to be identified because the information hasn’t been made public.

Patrick’s firm said in January it was seeking information on pools securing more than $19 billion of RMBS issued by affiliates of Wells Fargo, which says it’s the biggest U.S. home-mortgage lender and servicer.

Morgan Stanley also received a letter in October from the law firm, which said it was representing holders of at least 25 percent of voting rights in 17 trusts with more than $6 billion in outstanding balances, according to a filing.

The percentage of holders matters because claims must meet specific minimums before parties to mortgage-bond deals can be declared in default. If not cured, the defaults can give investors the right to sue bond creators, the deal’s trustees or both. Typically, trustees must take action on their behalf.

‘Serious Questions’

Bank of America’s settlement with 22 bondholders, including BlackRock and Pimco, seeks to allow it to pay 2 percent of the faulty bonds’ face value to avoid repurchasing the underlying loans.

While Bank of America’s deal is awaiting court approval, attorneys general from New York and Delaware have intervened to seek more information. New York has said there are “serious questions about the fairness and adequacy” of the accord, which covers “a small fraction” of losses.

Morgan Stanley earlier this year sold its Saxon Mortgage Services Inc. unit to Ocwen Financial Corp., exiting the servicing business it bought before the housing market collapsed. Mortgage servicers handle billing and collections and oversee foreclosures when borrowers fail to pay.

To contact the reporter on this story: Michael J. Moore in New York at mmoore55@bloomberg.net

To contact the editor responsible for this story: Rick Green at rgreen18@bloomberg.net

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