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MBS Settlements--Following the Money

posted by Adam Levitin

Financial crisis litigation has been going on for several years now and has been resulting in lots of piecemeal settlements. As a result, it's easy to miss the big picture.  There's actually been quite a lot of settlements covering a fair amount of money.  (Not all of it is real money, of course, but the notionals add up).  

By my counting, there have been some $94.6 billion in settlements announced or proposed to date dealing with mortgages and MBS.  

This count excludes things like CDO litigation and Lehman Brothers litigation. I've also likely missed some settlements (although not the big ones), and the terms of some settlements are private. I'm also excluding things like the National Mortgage Servicing Settlement (another $25 billion, although a lot isn't cash payment) and OCC/FRB consent orders. Any PMI settlements are also excluded. On the other hand, I'm including some multi-billion proposed MBS trustee settlements that have not gone through yet. In other words, what I'm trying to cover are settlements for fraud and breach of contract against investors/insurers of MBS and buyers of mortgages.

Settlements aren't the same as litigation wins, and I don't know the strength of the parties' positions in detail in many of these cases, but $94.6 billion strikes me as rather low for a total settlement figure. Of course, financial crisis litigation hasn't all run its course yet.

Beyond the total figure, however, what's interesting is where the money has gone--and where it hasn't. As the graphs below show, the lion's share of settlement dollars has gone to the government and GSEs.  Very little has been recovered by private investors and most of that is from the trustee settlements (rotten though the Bank of America-BONY settlement was). What's really astonishing is how little has been recovered in private securities litigation. The RMBS litigation settlements to date total $1.6271 billion. That's a quarter of what the monoline insurers recovered, even though most RMBS did not have bond insurance. 

Distirubtion Detail


Distribution Overall

With the caveats that the litigation isn't over yet and that one might quibble with my characterization or counting of some of the settlements (but probably not the overall directional picture), I think the distribution of the recoveries points to two things.

First, it shows that legislative reforms and court rulings have seriously impeded the effectiveness of securities class action litigation. If ever there were an area ripe for private securities litigation, private-label RMBS is it, yet almost all of the recoveries are from six settlements.  This should be no surprise, but it's rare to see numbers put on the effect.  This is what securities issuers and underwriters have long wanted, and the opposition has mainly been the plaintiffs' bar, but perhaps investors will take note of the effect too.  

Second, the distribution shows how badly non-GSE investors got shafted. Remember, that private-label securitization was over 60% of the market in 2006. Yet investors have recovered only 38% of that which the GSEs/FHFA have recovered, and most of that is from the trustee settlements or proposed settlements (I'm not sure that any have actually closed). Private securities litigation has recovered a mere 4% of what the GSEs/FHFA have recovered.  

The real question is whether investors have learned that they cannot rely on either trustees or the securities laws to protect them from fraud, and if they have, what they plan to do about it. One sensible thing would be simply to invest in other asset classes. The other would be to try and reform the trustee system and/or the securities laws. 


There are other issues that stem from these bogus settlements ...let's face it the banks are loaned money from the Federal gov't at nearly zero interest, lend it back to the gov't at 3% and then pay a pittance in settlements for homeowners they duped and who caught them (some homeowners don't even realized they've been duped yet).

But here is the real problem - judges think this is a "settlement" fixes everything and guess who doesn't appear in these so-called settlement agreements? The trusts.

While there is an admission of wrong doing, fraud, etc... i.e., robo-signing (which is still a prominent on-going procedure), the loans were not allegedly owned by the banks. The loans are supposedly electronically transferred to the trusts - yet, the trusts are nowhere indicated in these settlements. And the trusts sue for foreclosure and don't have to recognize the "settlements".

Without a doubt the trust players (trust administrators), had a big hand and were a party to the wrong doing... Just look at the names of the trustees, sellers, depositors...all the same hoodlums.

Not only do the settlements not curtail the fraud, eliminate the procedures or confiscate the patents used in the procedures - it acts more like a poker game. "I call - show your hand, pay the pot...next round 7 cards, Aces wild again."

If you want to put someone asleep fast, start talking debits and credits between players in the fatally flawed "GSE Business Model". Players have anesthetized the nation in an effort to deter people from "following the money".

Being from the "old school", I would like to see the cash.

The evidence cited here demonstrates that there was precious little security fraud in the underwriting of private market MBSs and CDOs. The risks were disclosed, and the buyers for the most part didn't care because they were relying on a rising housing market. The settlements with the Government reflect the fact that the banks are highly dependent on Government support (zrp and TBTF) and forbearance and so paying protection money makes sense. My conclusion is that the securities class action reforms are working rather well, thank you.

How on earth is this evidence for precious little fraud? Have you seen the reunderwriting results in any of the litigation? Many, sometimes the overwhelming majority, of the loans in deals did not comply with the underwriting guidelines disclosed. This is what we've seen in every case where there is a reunderwriting of the loans.

Most investors weren't relying on a rising housing market. That's an issue for credit risk investors, but most weren't credit risk investors. You don't buy AAA if you want credit risk.

The GSEs have leverage of continuing business--if a bank wants to keep selling them loans, it has to honor its reps and warranties. Hence the settlements are bigger there. But that leverage does exist for private investors.

Just a friendly reminder, there are a lot of us out here still foaming the runway for these players:

SEATTLE, Aug. 26, 2014 /PRNewswire/ -- One in six (17 percent) U.S. homeowners with mortgages – or 8.7 million – were still underwater on their mortgage in the second quarter of 2014, despite rising home values, according to the Zillow® Negative Equity Report[i].

Do all these settlements mean that our problems are over?

I do believe we even have whistleblowers from Citi (I believe) who said their underwriting branches looked like commercial art studios, what with the cutting and pasting of signatures/incomes going on.

One could guess, and be correct, that "Douglas Levene" is associated with the hoodlums in some way.

I'm not writing under a pseudonym. I'm a law professor and have only an academic interest in these matters. Thanks for asking!

We need a concerted national "follow the money" project. None of the settlement numbers are meaningful without knowing the amount of money stolen.

A starting point would be to calculate the face value of the securities involved in the settlements.

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