BlackRock, Pimco Sue Banks for Mortgage-Bond Trustee Role

BlackRock Inc., the world’s biggest money manager, and Pacific Investment Management Co. are among investors that sued banks including Citigroup Inc. and Deutsche Bank AG over their roles as mortgage-bond trustees, as investors continue to try to recover losses from the financial crisis.

The banks knew the loans underlying trillions of dollars of residential mortgage-backed securities were misrepresented and failed to invoke their rights to force the sellers to buy them back or act against servicers, causing billions of dollars in losses, according to complaints filed yesterday in New York State Supreme Court in Manhattan.

Bank of New York Mellon Corp., as trustee for more than 1,000 trusts backed by almost $1 trillion worth of residential mortgages, “ignored pervasive and systemic deficiencies” in the pools of loans and their servicing and failed to take any action, according to the complaint against it.

The bank “did nothing to protect the trusts and certificate holders, choosing instead to deliberately ignore the egregious events of default for its own benefit and to the detriment of the trusts,” the investors said in the complaint.

Pools of home loans securitized into bonds were central to the housing bubble that helped send the U.S. into the worst recession since the 1930s. The housing market collapsed and the market for the securities evaporated.

Too Early

It’s too early to gauge the potential outcomes for investor suits against trustees given that the suits were recently filed and the range of outcomes is wide, Nomura Securities International analysts, including Paul Nikodem and Pratik Gupta, said in a note to investors today.

However, the cases could have broader implications for the residential-mortgage backed securities market, including the potential disclosures of agreements to extend statues of limitations for suits on specific deals, other potential settlements and possible delays in reviewing proposed settlement offers, the Nomura analysts said.

Ron Gruendl, a spokesman for New York-based BNY Mellon, and Renee Calabro, a spokeswoman for Deutsche Bank, declined to comment on the suits. Representatives of other banks named as defendants also declined to comment, including Juanita Gutierrez, of HSBC Holdings Plc in New York, Robert W. Julavits, of Citigroup, and Teri Charest, of U.S. Bancorp.

Wells Fargo

“We strongly disagree that Wells Fargo is in any way respondible for any losses incurred on these transactions,” said Ancel Martinez, a spokesman for the San Francisco-based bank.

The Association of Institutional Investors, whose members include Pimco, asked Congress in April to create an “unambiguous fiduciary standard” for trustees of mortgage bonds without government backing as a Senate committee considered a bill to overhaul the $9.4 trillion home-loan market by replacing U.S.-controlled Fannie Mae and Freddie Mac.

The money managers are pushing for Congress to step in as they did with the corporate-bond market in 1939, when the Trust Indenture Act created new duties and responsibilities for debt administrators to protect investors and give them the confidence to extend credit following evidence of misdeeds after the stock market crash of 1929.

Mortgage-bond investors are seeking the shift after finding they needed to band together to prod trustees into action to receive compensation from banks for loans that were riskier than promised. They also seek to change allegedly poor management of the debt by servicers.

The cases are Blackrock Allocation Target Shares: Series S Portfolio v. U.S. Bank National Association, 651864/2014; Blackrock Balanced Capital Portfolio (FI) v. Deutsche Bank National Trust Co., 651865/2014; BlackRock Allocation Target Shares: Series S Portfolio v. Bank of New York Mellon, 651866/2014; BlackRock Allocation Target Shares: Series S Portfolio v. Wells Fargo Bank N.A., 651867/2014; BlackRock Balanced Capital Portfolio (FI) v. Citibank N.A., 651868/2014; and BlackRock Core Active Libor Fund B v. HSBC Bank USA, 651869/2014, New York State Supreme Court, New York County (Manhattan).

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