Securitization Trustees in the Crosshairs in Mortgage Mess

Naked Capitalism:

Let’s begin with a meaty section of the American Banker story (sadly, no online version):


Deutsche Bank AG, the second-largest trustee of asset-backed securities in the U.S. according to Thomson Reuters, recently demanded that the servicers of its deals indemnify the German bank, and the investors it represents, against any “liability, loss, cost and expense of any kind” from “alleged foreclosure deficiencies or from any other alleged acts or omissions of the servicer.”

The Financial Crisis Inquiry Commission is also investigating trustees’ role in the foreclosure mess, according to several people with knowledge of the body’s work. The commission, which was created last year and has held a number of hearings, has no real teeth, but it plans to issue a report Dec. 15 on its findings about the causes of the financial crisis. The report is expected to include some discussion of trustees in securitizations, the people said.

In an Oct. 8 letter, Deutsche cautioned the major mortgage servicers that had halted foreclosures to examine their processes — including Ally Financial Inc. and JPMorgan Chase & Co. — of the need to ensure ownership of loans was properly transferred to trusts when securitizations were formed.

Deutsche Bank told the servicers to “comply with all applicable laws relating to foreclosures,” and requested additional information about alleged loan defects and any actions taken by servicers to fix them.

Thomas Hiner, a partner at Hunton & Williams LLP, said Deutsche Bank, which forwarded the servicer warning to investors on Oct. 25, was trying to appear proactive. “They are attempting to show a good face to the bondholders, that they are in front of the issue and they’re telling the servicers to comply with the law and the documents,” Hiner said.

He also said Deutsche bank was trying “to disclaim responsibility for” servicers’ paperwork blunders.

“Proactive”? This is comical. It appears that Deutsche is trying awfully hard to shift blame to servicers for its own failures. And a misleading letter to investors looks to be a device to get them off Deutshe’s trail.

This is the section, if Thompson Reuters has recounted it correctly, that is dishonest:

Deutsche cautioned the major mortgage servicers that had halted foreclosures to examine their processes — including Ally Financial Inc. and JPMorgan Chase & Co. — of the need to ensure ownership of loans was properly transferred to trusts when securitizations were formed.

Ahem! It was the TRUSTEE’S job to make sure the loans got to the trust! This wasn’t the servicer’s duty. And it is the trustee that is on the hook legally, since it provided certifications that everything was hunky dory. Moreover, it is the trustee that selects the custodian (when a separate custodian is used; trustees often provide custody services). Furthermore, trustees for New York trusts (and New York was overwhelmingly the state law elected for the trusts) are required to segregate trust assets (as in have the assets for each trust in separate place). New York trust law also requires specific endorsement (as in a trust is not only not permitted to hold bearer paper, such as notes endorsed in blank, but the trust assets must be endorsed in the name of the trust, not merely the trustee, which was the lower standard specified in the pooling and servicing agreements).

So if what we are increasingly led to believe it true turns out to be correct, that borrower notes never were conveyed to the trust, and were also not endorsed over to the trust (through the proper chain of conveyance specified in a PSA) in the stipulated time frame (a LONG time ago), the trustees were derelict in the performance of their duties.