Sept. 13 (Bloomberg) -- Bank of New York Mellon Corp. will ignore a demand from a law firm representing mortgage-bond investors asking the bank to investigate whether loans backing $26 billion of Countrywide Financial Corp. securities should be repurchased, a spokesman said.
As trustee for the home-loan securities, “we’re prepared to act on proper instructions received from investors,” Kevin Heine, the spokesman for the New York-based company, said. Gibbs & Bruns LLP’s letter did “not comply with multiple requirements,” Heine said. He declined to detail the issues.
The law firm said in a statement earlier this month that it had “issued binding instructions” to Bank of New York from bondholders, requiring a probe into whether the mortgages underlying the securities matched the quality represented to investors by Countrywide, which Charlotte, North Carolina-based Bank of America Corp. bought in 2008.
Bank of New York’s response shows the difficulties that investors in mortgage bonds without government-backed guarantees face in trying to use provisions in the debt’s contracts to minimize their losses after the worst U.S. housing slump since the Great Depression. At the same time, other investors and insurers are finding it simpler to win relief through the so-called representations and warranties made by lenders.
Message to Moynihan
A trade group for bond insurers said in a Sept. 2 letter to Bank of America Chief Executive Officer Brian T. Moynihan that his company may need to repurchase as much as $20 billion of home loans backing securities guaranteed by its members. Unlike bond investors, the insurers don’t need to rely on trustees for access to loan files that can be used to find underwriting errors such as faulty appraisals and inflated borrower incomes.
Guarantors including MBIA Inc. and Ambac Financial Group Inc. are fighting with lenders such as BofA and JPMorgan Chase & Co. units in court over what they call ineligible loans. Banks say they are setting aside the most money to pay for repurchases of loans bought or insured by Fannie Mae and Freddie Mac, the government-supported mortgage-finance companies.
Gibbs & Bruns sent the letter after an Aug. 2 meeting between investors, which it didn’t identify, and “senior representatives” of Bank of New York and its counsel, according to the firm’s Sept. 3 statement on PR Newswire. The bondholders, who hired Houston-based Gibbs & Bruns, own debt representing at least 25 percent of the “voting rights” of the residential mortgage-backed securities, or RMBS, they are seeking action on, the law firm said.
“Our clients will pursue all contractual remedies available to them in these and the many other Countrywide RMBS deals where they have instructed us to take action to protect their rights and recover their losses,” Kathy Patrick, a partner at Gibbs & Bruns, said in the statement.
While Heine, who spoke today in a telephone interview, declined to specify why the demand to Bank of New York wasn’t adequate, so-called pooling and servicing agreements for at least some Countrywide securities require requests to trustees for investigations to come from holders of at least 25 percent of each class of the deals, rather than that amount of the entire transaction.
Patrick didn’t return a telephone message today seeking comment. Jerry Dubrowski, a spokesman for Bank of America, declined to comment.
Bank of America has been dealing with a “very limited” number of requests to repurchase soured loans out of so-called private-label, or non-agency, mortgage securities, according to an Aug. 6 securities filing. It had $33 million of such requests unresolved as of June 30 compared with $11.1 billion related to demands by Fannie Mae and Freddie Mac, bond insurers and other investors, according to the filing.
Mortgage-bond trustees are responsible for passing payments collected from borrowers to investors, handling suggested amendments to transaction terms and overseeing loan servicers, which manage the underlying loans.
A main reason that loan repurchases related to the $3 trillion of non-agency home-loan securities sold in 2005, 2006 and 2007 have been limited is that contracts for trustees and mortgage servicers don’t require them to proactively look for breaches, according to Jonathan C. Wishnia, a lawyer at Lowenstein Sandler PC in Roseland, New Jersey.
“That is and was a real gap that existed for the life of the industry,” Wishnia, who has represented financial companies including loan servicers and investment firms, said last month in a telephone interview.
To contact the reporter on this story: Jody Shenn in New York at email@example.com
To contact the editor responsible for this story: Alan Goldstein at firstname.lastname@example.org