Selling any big-ticket item involves three steps: getting prospects to hear a pitch, demonstrating the item's attractiveness and making the argument that it's worth the price — even when the product is an antibank lawsuit.
Plaintiffs attorneys seeking to enlist investors in litigation against the banks that sold and serviced mortgage-backed securities did all three at a conference Wednesday.
Hosted by Grais & Ellsworth, a firm already representing some Federal Home Loan banks in litigation over soured securities, the event was titled "Robosigners and Other Servicing Failures." But while the recent furor over false affidavits did wonders to rile up investors, David Grais made it clear that the issue will likely take a backseat in litigation to other, potentially larger, investor grievances.
Speakers from Amherst Securities' MBS Analyst Laurie Goodman to Talcott Franklin, an attorney gathering MBS investors into large enough groups to achieve legal standing, provided a list of serious issues. It included fundamental violations of securities' representations and warranties, servicer efforts to keep second liens current even as first liens foundered, and myriad other instances in which banks were said to have protected themselves at the expense of the investors they're supposed to serve.
According to Goodman's research, banks that originated and serviced mortgages to borrowers who never made a single payment regularly ignored their contractual obligations to buy them back. Moreover, second liens owned by the servicers' parent performed suspiciously well compared with first liens owned by investors, she said.
"What the banks seem to be doing with the borrowers is tell them just keep paying on your second lien and we'll modify your first," she said. "That is very clear."
Franklin, meanwhile, said banks showed a propensity to pass along the legal costs of servicing errors to the trusts they are supposed to work on behalf of. Though trustees have generally not taken an active role in forcing servicers to eat those costs and individual investors have lacked standing to pursue claims, his firm now represents the majority of investors in more than 1,150 residential mortgage-backed securities deals.
There are numerous possible claims investors could make, from servicers' failure to remove bad loans from a trust to the delay in foreclosures caused by the robosigning trouble. The preferred approach, Grais said, was the one he's already laid out in the Home Loan Bank cases. Rather than engaging in a loan-by-loan fight with servicers, investors could claims banks misrepresented the securities that contain them and use states' so-called blue sky laws to forcibly return the securities to the sellers.
Even that may be a challenge — citing Bank of America Corp. CEO Brian Moynihan's recent statement that investor complaints often amounted to "I bought a Chevy Vega, but I want it to be a Mercedes" he noted that banks "have made it quite clear that this is a war of attrition."
During questioning following the presentations, investors in the audience did not dwell on the merits of a legal challenge but on the likelihood and costs of winning. Question after question dealt with legal hurdles, from passive trustees to the materiality of loan defects to how many years litigation would take.
Toward the end of the session, Grais noted that there were affordable ways for trusts to pursue litigation and encouraged the investors to consider signing on with Franklin's firm, Talcott Franklin P.C., which coordinates strategy with Grais' firm.
"The fees are very modest," he said, adding that investors could maintain anonymity. This was, after all, a sales pitch — albeit by a group of attorneys who have spent several years gathering evidence on servicer shortfalls and sketching out ways in which they could be addressed in court.
Nothing about "robosigning" did much to change that strategy. But allegations of unforced errors by servicers has helped bring more investors on board an effort that will need a high degree of investor participation to have a chance. After the conference, Franklin noted the industry's missteps had done a great deal to help him gather disparate investors together.
Moynihan's comments about investors who bought Chevys, he said, "was the best advertisement I ever had."
