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Clash of the Titans: RMBS Edition

posted by Adam Levitin

And so it begins. We're about to witness the main event in financial institution internecine warefare: investment funds (MBS buyers) vs. banks (MBS sellers). 

There have already been some opening skirmishes. The monoline bond insurers (MBIA, Syncora, FGIC, Ambac (and here), CIFG (and here), and--I haven't found any litigation with them on this, but there's gotta be some--ACA) have been litigating against some of the banks whose securitizations they insured for various fraud, negligent misrepresentation, and breach of warranty claims. Many of the Federal Home Loan Banks (Chicago, Indianapolis, Pittsburgh, San Francisco, Seattle, maybe others that I don't recall of the top of my head), which slurped up RMBS during the bubble, only to find them toxic, have brought (separate) suits mainly on securities fraud charges, but also on common law fraud and negligent misrepresentation claims. (See here for a totally dated, August 2010 estimation of the liabilities in these suits.)

Then last fall the financial world was shaken by the New York Fed, BlackRock, and PIMCO's demand letter to Bank of New York Mellon and Countrywide. That showed that A-list financial institutions were taking the range of problems with RMBS, from representation and warranty breaches to servicer malfeasance, seriously. (You can see the NY Fed, acting for the Maiden Lane LLCs, as really another representing AIG, essentially the mother of all monolines for these purposes.) But that wasn't litigation proper, just an angry growl, with a threat of litigation if things weren't resolved. (When you see the letterhead for the response, you'll see that BoA/CW is taking this mighty seriously. Despite the typo in that snippy letter, it didn't come cheap. These guys are lawyering up.)   

And now we have the first A-list litigation. We have TIAA-CREF, New York Life, and Dexia suing Countrywide (and assorted other defendants). And it alleges invalid chain of title--the mortgage-backed securities are actually non-mortgage backed securities!

The complaint only alleges chain of title problems based on Kemp v. Countrywide, really as a tag-on, and doesn't show a lot of thought on the issue, but that's enough for the genie to be out of the bottle. Yup. They went there.

As I've blogged previously, there are a variety of potential chain of title problems. Some relate to the mortgage, some to the note. Some are generic legal problems, while others are execution problems. What is alleged in this suit is an execution problem, albeit one that seems to be the case for all Countrywide deals.

I don't think we'll ever see the banks admit that there's a problem on chain of title until the whole thing blows up (and why would they admit to such a thing), but as this suit makes clear, it's not just wild-eyed law professors and consumer attorneys (and the Massachusetts Supreme Judicial Court) that think there's a problem. The Street is starting to think so too, and the momentum in this area is only like to pick up. 

[Update: it looks like the trustees see that it's checkmate once the investors get to the collective action threshold and are finally squeezing the servicers.  Wells Fargo, as trustee, has sued EMC (formerly Bear now JPM subsidiary) for failure to hand over loan files.  And Deutsche Bank, as trustee, is going after JPM and FDIC for failure to hand over WaMu loan files. This ain't gonna end pretty.] 


WSJ: ACA Sues Goldman Over Abacus, Jan. 7, 2011

Index Number 650027/2011

The Summons and Complaint are available online through the NYS Trial Court database

Thanks Transor. I didn't link to the Abacus litigation because I don't think it's about the underlying mortgages. (I haven't looked at the complaint yet, so I might be wrong on this.) If it tracks the SEC's suit, it would be about the disclosures regarding the formation of the synthetic CDO, namely the role of Paulson in the deal formation.

Adam, you're correct that ACA v. Goldman tracks the SEC suit. They're only seeking $90 mil in damages on counts of misrepresentation, concealment and unjust enrichment. And as you mention it was re: synthetic CDO and so abstracted from the RMBS -- so sorry for being "right church, wrong pew" for the post topic.

The genie is indeed out of the bottle and growing larger and larger all the time. I see fair deal cutting with homeowners outside of the courts in the future if my hunch is right.

Thanks for linking to some of the articles on my blog, The Subprime Shakeout. I, too, see trustee involvement on behalf of bondholders as a sign that the tides are turning and private label repurchase actions have reached critical mass. You can read my analysis of the Wells Fargo and Deutsche Bank actions against servicers in the larger context of bondholder litigation here: http://subprimeshakeout.blogspot.com/2011/01/wells-fargo-sues-emc-as-trustees-start.html.

The wild-eyed argument is that chain of title had to be in place and the PSA adhered to perfectly at the time of trust formation otherwise the whole structure is blown. That argument hasn't been supported by Ibanez and isn't supported by any of these suits.

JPE: fair enough. We haven't seen anyone litigate the PSA claim to a decision yet, but there are cases with that argument pending. If any of those win, I lay down money that you'll see investor litigation on that basis. If I recall, just a couple of months ago ASF was claiming that there were no problems whatsoever. That position clearly isn't tenable anymore.

The ASF position of claiming there were no problems was never tenable. That was never anything more than industry spin.

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