-- Daniel O’Leary
Trustees administering residential mortgage securities could demand changes to securitization documentation if investigations from the New York and Delaware state’s attorneys-general lead to litigation, according to market participants.
Bill O’Connor, partner at Crowell & Moring, said the trustees could seek to further indemnify themselves from the actions of servicers if the attorneys-general found they were liable. Trustees take on the role of the lender under state laws in a securitization scenario, possibly making them accountable for the actions of the servicers, he said. “They become the bank. They’re subjected to all the same rules and regulations as other lenders,” O’Connor said.
Trustees are said to be the latest stakeholder brought under the increasing scope of the New York AG Eric Schneiderman, and Delaware AG Joe Biden’s investigation into the RMBS market and the credit crunch (TS, 5/25). Deutsche Bank, U.S. Bank, Bank of New York Mellon and Wells Fargo are the main trustees in the securitization market. The Delaware and New York attorneys-general are interested in the RMBS market, as the majority of issuing vehicles are set up in these states under their respective laws.
O’Connor said litigation against trustees could also lead rating agencies to scrutinize their role in securitizations further. He said a success could also force trustees to be more involved in the transactions they administer. “The problem is that trustees are quite inert,” he said. “They don’t do much, but the trustees do have exposure in connection to action by the servicers.” He pointed specifically to the automated form collection system that “screwed everything up.”
While servicers were accused of robo-signing, or the automated verification of foreclosure documents, last year (TS, 10/29), it seems the attorneys-general are also looking at similar practices by the trustees, where mortgages were added to an issuance vehicle before the trustee took delivery and checked their documents.
A New York-based RMBS analyst noted the legal wrangling could center on whether the electronic transferring of mortgages equated to a legal deed transfer. “It used to be that trustees actually took over the documents physically, that hasn’t been the case for over a decade,” he said. A challenge by the attorneys-general could simply lead to a standard legalization of the method, the analyst noted.
Spokesmen at Deutsche Bank, BofA and BNY Mellon declined to comment. Spokespeople at Wells and U.S. Bank did not return phone calls.