A new avenue of attack may be opening up for investors seeking to force big banks to buy back billions of dollars in mortgages: drag the trustees into the fight.
Last month, the Knights of Columbus sued Bank of New York Mellon Corp., the trustee for two mortgage-backed securities that the Catholic fraternal group invested in. The plaintiffs' real target was not named as a defendant: Bank of America Corp., whose mortgage unit, the former Countrywide Home Loans, issued the securities. The Knights are demanding that BNY Mellon account for unauthorized fees that Bank of America, the servicer of the pools, has allegedly been charging to the investor trusts.
Despite widespread reports of improper practices in the securitization and servicing of mortgages, investors have had a hard time proving that their own securities were affected by such malfeasance. One reason is a refusal by trustees, which are supposed to be looking out for investors' interests, to prod servicers to provide loan documents. In this case, the Knights of Columbus are using the threat of liability to scare BNY into acting.
"It is the most novel and sensible of the litigation strategies that we have seen," says Josh Rosner, managing director of Graham Fisher & Co., an investment consultancy, of the Knights of Columbus suit. "It doesn't threaten to blow up the trusts, but it does in fact create a wedge with which investors should start being able to get the information they need to pursue rep and warranty violations."
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