Mortgage securitization trustees were once considered interchangeable. For a nominal monthly fee, a trust bank's back office employees would catalogue documents and track payments. What difference could the choice of the trust bank make?
The answer to that question, it turns out, may be worth billions of dollars.
As the mortgage putback fight drags on, some trustees appear far more responsive than others to investors seeking to sue securitizers.
On Tuesday, U.S. Bank filed a lawsuit against Bank of America Corp. on behalf of investors in a $1.75 billion Countrywide securitization deal. Acting at the investors' behest, the unit of U.S. Bancorp alleged that Countrywide (which B of A took over in 2008) shirked its obligation to repurchase problem loans. Two-thirds of the loans sampled by an underwriting consultant — 786 in total — failed to meet Countrywide's representations, U.S. Bank claimed, which should have resulted in their immediate repurchase.
"Upon learning of the results of the loan review," U.S. Bank's brief states, "the Trustee promptly … demanded that Countrywide comply with its obligations and either cure the breaches or repurchase the Loans. Countrywide has failed, and continues to fail, to do either."
U.S. Bank took Bank of America to court, it said, because it has been "forced to fight through administrative and legal roadblocks created by Defendants, who clearly have no intention of complying with their contractual duties."
That language is not, strictly speaking, the bank's; it was written by attorneys hired by the investors seeking redress. Under the terms of the trusts, U.S. Bank acts only in response to investor demands. But that U.S. Bank allowed the brief to be filed at all is in keeping with mortgage litigation observers' contention that the bank is, from the point of investors, among the most attractive trustees.
Chris Gamaitoni, a Compass Point analyst, noted early this month that the bank was the trustee for UBS AG securitizations that are now the subject of the first repurchase lawsuit filed by the Federal Housing Finance Agency. The likely reason for that, he said, was that U.S. Bank had been faster than peers in providing the FHFA with sufficient fodder for a suit.
"Our contacts have indicated that some trustees have been more responsive to subpoenas issued 7/12/10 than others," Gamaitoni wrote in an Aug. 2 report.
Other trustees have proven less willing or able to aid investor investigations. Gamaitoni argues that banks which formerly had sizable mortgage securitization businesses are reluctant to using their trustee position to help plaintiffs' attorneys. He points to New York Attorney General Eric Schneiderman's recent allegation that Bank of New York Mellon signed off on Bank of America's $8.5 billion Countrywide settlement in part because the trustee bank had failed to keep track of key mortgage documents.
"If you're still being obstructionist as a trustee, you're risking your own legal liability at this point," Gamaitoni told American Banker. "Unless you're trying to protect a business relationship or you did something wrong, why fight it?"
Whatever the reason, there appear to be some differences between BNY Mellon's approach to investor litigation and that taken in U.S. Bank's trustee suit.
Attorneys for Grais & Ellsworth, which represents a number of objectors to the B of A settlement, complained in a court filing that BNY Mellon had thrown up obstacles to bringing precisely the sort of action that U.S. Bank filed on Tuesday.
Despite promises of an indemnification and offers to hire a forensic examiner, the attorneys wrote, BNY Mellon ignored several subsequent written requests for help in forcing Bank of America to turn over documents.
Manal Mehta, a partner at Branch Hill Capital — which has invested in monoline bond insurers in the belief that Bank of America will have to have eat a bigger share of losses than anticipated — notes another key difference between U.S. Bancorp's approach and that taken by BNY Mellon.
In its justification for supporting the settlement, BNY Mellon relied on a consultant's opinion that investors would plausibly recover no more than 40% of their losses on loans in which Countrywide breached its obligations. U.S. Bank took no stance on the question, allowing investors to argue they are entitled to collect their full losses.
Such a difference in thinking alone, Mehta says, could vastly change the perceptions of how much B of A should pay investors. If investors were entitled to return all breached loans, he notes, the costs of the settlement would more than double.
"If you use U.S. Bancorp's numbers, the settlement would magnify pretty quickly," he said.
Luckily for Bank of America, it doesn't have to consider the possibility of facing off against U.S. Bank over Countrywide's soured loans in many cases. While U.S. Bank oversees 21% of all subprime and Alt-A securitization trusts formed from 2005 to 2007, according to data compiled by Gamaitoni, only 0.6% of the Countrywide securitization trusts are overseen by U.S. Bank.
Merrill Lynch had a higher proportion of deals with U.S. Bank as the trustee, leaving Bank of America with a combined ratio of 9.7%. That's still far lower than the exposure at some other banks. Credit Suisse left 44% of its $114 billion of mortgage deals in the hands of U.S. Bank, and the Minneapolis bank oversees nearly 97% of Wells Fargo's $15 billion of mortgage pools, which it largely inherited from Wachovia. U.S. Bank said it's skeptical of any breakdown of its trustee market share.