The foreclosure document debacle, a huge embarrassment and liability for mortgage servicers, could soon also ensnare the banks that act as trustees for securitizations.

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.

Gina Proia, a spokeswoman for Ally, said the company "will continue to absorb any additional fees related to rectifying the affidavit matter." Proia also said, "We are fully aware of our responsibilities to trustees representing MBS investors and will continue to execute them diligently."

Deutsche has been burned before in the area of documentation. In 2008 a federal judge in Ohio dismissed 14 foreclosure cases because Deutsche, as the trustee for investors in the mortgages, could not produce the underlying notes.

But that was two years before robo-signing — a term for back-office employees who signed thousands of affidavits in foreclosure cases without examining the loan files — became part of the popular lexicon.

It is unclear whether other trustees will follow Deutsche Bank's lead and demand indemnification from servicers. Executives at Bank of New York Mellon Corp., one of the largest trustees, said on a third-quarter conference call last month that their company did not foresee any liability from its roles as a trustee and document custodian for mortgage securitizations.

David Hendler, an analyst at CreditSights Inc., wrote in a recent report that although BNY Mellon "may not hold any direct liability" for servicers' foreclosure document problems, it could face "a modest increase in costs associated with its mortgage trustee and custodian businesses."

Trustees are charged with overseeing mortgage servicers and mediating between them and investors in securitization deals.

Many also serve as document custodians, maintaining the underlying paperwork, including mortgage notes and assignments that are supposed to be delivered to the trusts by a specific date.

Some investors in mortgage-backed securities now claim that loan documents were not properly delivered to the trusts because of the rush to securitize mortgages during the heady days of the real estate bubble from 2005 to 2008.

Moreover, if the trustees have their hands on the documents proving their right to foreclose, some say, why are they not simply showing up in court with them?

"If they just show up with the mortgage note, all of their problems go away," said Christopher Peterson, an associate dean and law professor at the University of Utah.

Hiner said that some of the issues with affidavits "do seem to arise in order to prove ownership by the trust of the loan and its standing to foreclose."

"They need to produce good original documents," Hiner said. "The original note, properly endorsed, could obviate the necessity for affidavits."

Another wrinkle is investors do not have access to borrowers' loan files — but foreclosure defense attorneys do. Many of them claim loan documents were not delivered to trusts as required by the investor's pooling and servicing agreements. "The only fix for the fraudulent documents is not more fraudulent documents, but the production of the original documentation of the transfers," to the trusts, said April Charney, a consumer lawyer at Jacksonville Area Legal Aid.

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