Mortgage-bond investors represented by Dallas lawyer Talcott Franklin will send letters to securities trustees complaining that they shouldn’t bear the costs of loan servicers’ so-called robo-signing.
The investors, who Franklin has said own more than $500 billion of the securities, are “pretty disturbed” that mortgage-bond trusts are being forced to pay penalties after loan servicers including Detroit-based Ally Financial Inc. filed affidavits in foreclosure cases that falsely said the signers reviewed documents, he said. Judges are forcing the trusts to cover homeowners’ attorney fees when servicer misdeeds are discovered, he said.
“Look who got sanctioned,” Franklin said today at a conference in New York organized by law firm Grais & Ellsworth LLP. “It wasn’t the servicer, it was the holder of the note.”
Franklin joined three other adversaries of the financial companies that created or sold mortgage bonds or now manage the underlying loans, in speaking at the conference. Risky lending and the financial crisis that began in 2007 led to the highest number of foreclosures since the Great Depression.
Presentations at the conference covered claims that mortgage sellers must repurchase bad loans, the conflicts of interest of loan servicers who also own second mortgages and foreclosure issues.
“We have and will continue to absorb any additional fees related to rectifying the affidavit matter,” Gina Proia, a spokeswoman for Ally, said in an e-mail.
Bank of America
This month, attorneys general in all 50 states began investigating foreclosure practices, and a bondholder group said to include BlackRock Inc. and the Federal Reserve Bank of New York asked Bank of America Corp. to repurchase mortgages, citing alleged servicing failures by the company’s Countrywide Financial Corp. unit as part of its strategy.
Investors in non-guaranteed securities may be able to benefit from as much as $97 billion of so-called mortgage putbacks, Amherst Securities Group LP analyst Laurie Goodman said during a presentation. The actual number likely will be lower because bondholders will need to band together to gain standing to force action, face more challenging contracts in some cases and find certain lenders no longer exist, she said.
With foreclosure mistakes, “the fear among investors here is that any AG settlement will involve a large-scale modification effort” that hurts bondholders “rather than monetary penalties born by servicers,” Goodman said.
New York-based lawyer David Grais hosted the conference, which about 100 people attended and about 150 were expected to listen to via a webcast. He represented securities firm Greenwich Financial Services LLC in a lawsuit that stemmed from Bank of America’s 2008 agreement with a group of attorneys general to rework debt to settle charges of fraudulent lending by Countrywide Financial, which the bank bought that year.
While Grais lost the case this month as the court ruled Greenwich Financial didn’t own enough of the bonds to pursue it, investors may have more luck heading off a new settlement by mortgage companies that harms them, he said today.
“Unlike in 2008, investors now are much better organized,” he said. “When attorneys general think of investors they should not think of large greedy, faceless institutions, they should think of pensioners,” he added.
‘War of Attrition’
Among investors’ challenges in using their contractual rights have been mortgage-bond trustees that have been “aggressively passive,” with the exception of Deutsche Bank AG, Grais said. Because of so-called no-action clauses in securities contracts, bondholders can be blocked from pursuing legal action, needing to instead rely on the trustees, unless they band together and can prove missteps, he said.
Investors’ battles with lenders over misrepresentations about the quality of the debt aren’t for “the faint of heart or those with a short attention span” because procedural hurdles and banks’ plans to fight a “war of attrition” mean that they may take as long as three years, he said.
About one-quarter to one-third of the mortgages packaged into bonds without government-backed guarantees before the market collapsed probably deserve to be repurchased under the terms of securities contracts, he said.
Grais is suing securities underwriters including Charlotte, North Carolina-based Bank of America and New York-based JPMorgan Chase & Co. to try to force them to buy back whole securities because of disclosure mistakes, representing Charles Schwab Corp. and the Federal Home Loan Banks of San Francisco and Seattle. It was a tactic for investors who bought new bonds he also discussed today, saying statues of limitations may limit its use.
Mortgage servicers have been reworking investor-owned loans while not seeking amendments on debts they hold themselves, a misstep investors can use to bypass trustees or force them to act, Bill Frey, the head of Greenwich Financial, said at the conference. The four largest U.S. banks, which service a majority of U.S. mortgages, own more than $400 billion of home-equity debt, Goodman said.
“We found servicer defaults in 100 percent of the trusts,” Frey said.
Franklin said the group of investors coordinating through his firm’s RMBS Investor Clearing House owns more than 25 percent of so-called voting rights for about 2,600 mortgage securitizations, and more than 50 percent for about 1,150 deals.
Participants in the clearing house include BlackRock, Pacific Investment Management Co., Fortress Investment Group LLC, Fannie Mae and Federal Home Loan Banks, people familiar with the matter said last month.