The New York and Delaware probes involve banks that assembled
the securities and firms that act as trustees on behalf of investors in the
debt, said one of the people and a third person familiar with the matter.
The top issuers of mortgage securities without government
backing in 2005 included Bank of America’s Countrywide Financial unit, GMAC,
Bear Stearns Cos. and Washington Mutual, according to
trade publication Inside MBS & ABS. Total volume for the top 10 issuers was
$672 billion. JPMorgan acquired Bear Stearns andWashington Mutual in 2008.
The sale of mortgages into the trusts that pool loans may be
void if banks didn’t follow strict requirements for such transfers, Biden said
in a lawsuit filed last year over a national mortgage database used by banks.
The requirements for transferring documents were “frequently not complied with”
and likely led to the failure to properly transfer loans “on a large scale,”
Biden said in the complaint.
“Most of this was done under the cover of darkness and anything
that shines a light on these practices is going to be good for investors,” Talcott
Franklin, an attorney whose firm represents mortgage-bond investors, said about
the state probes.
Critical to Investors
Proper document transfers are critical to investors because if
there are defects, the trusts, which act on behalf of investors, can’t
foreclose on borrowers when they default, leading to losses, said Beth Kaswan,
an attorney whose firm, Scott + Scott LLP, represents pension funds that have
sued Bank of New York Mellon Corp. (BK)
and US Bancorp as bond trustees. The banks are accused of failing in their job
to review loan files for missing and incomplete documents and ensure any
problems were corrected, according to court filings.
“You have very
significant losses in the trusts and very high delinquencies and foreclosures,
and when you attempt to foreclose you can’t collect,” Kaswan said.
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