Opinion

Alison Frankel

MBS investors’ trade group moves to counter adverse put-back rulings

By Alison Frankel
December 17, 2012

The Association of Mortgage Investors isn’t sitting around and waiting for more bad precedent on the obligations of mortgage-backed securities issuers.

Last week, the trade group of MBS investors, as well as an investment advisor that acts as a collateral manager for institutional investors in mortgage-backed notes, took the rare step of requesting leave to file an amicus brief at the trial stage of a breach-of-contract case against UBS. The trade group believes the stakes are high enough to warrant its involvement: If the bank’s interpretation of its obligation to compensate MBS trusts for deficient underlying loans is adopted by a New York court, the AMI’s memo said, “this will establish an adverse precedent that may result in a market-wide windfall to responsible parties such as (UBS) at the expense of RMBS investors.”

The filing, by counsel at Holwell Shuster & Goldberg, doesn’t come in a vacuum. A few months back, I told you about a ruling from U.S. District Judge John Tunheim of Minnesota in one of the earliest MBS put-back cases, in which the trustee of a $555 million Wells Fargo offering asserted that mortgage originators had breached representations and warranties about the underlying loans. Expanding on a previous adverse ruling for investors by U.S. Senior District Judge Paul Magnuson – who found that under MBS pooling and servicing agreements, investors can only demand the repurchase of deficient loans, not corresponding money damages — Tunheim said that MBS trustees have no cause of action based on foreclosed loans, since those mortgages are already extinguished and can’t be repurchased by originators.

I said at the time that the decisions from Magnuson and Tunheim would become standard citations for MBS issuers in put-back cases, and UBS’s lawyers at Skadden, Arps, Slate, Meagher & Flom very quickly proved me right. In a motion to dismiss filed only weeks after Tunheim’s ruling, UBS argued that three MBS trusts represented by Quinn Emanuel Urqhart & Sullivan could not claim money damages for alleged breaches of reps and warranties on the underlying loans. The sole remedy available under MBS contracts, UBS said, is repurchase of deficient mortgages — and that remedy doesn’t extend to foreclosed loans because they can’t be repurchased.

The case is unusual, since, according to UBS, the bond insurer Assured Guaranty is actually behind the trusts’ put-back case. Assured, which backed the trusts, previously filed a similar suit against UBS in federal district court in Manhattan. In August, U.S. District Judge Harold Baer ruled that the bond insurer cannot bring its own put-back claims based on UBS’s alleged breaches of representations and warranties, since those claims, under the MBS contract, belong exclusively to the trustee. UBS argued in its dismissal motion that the purported trust case, which wasn’t filed by the trustee but cited the MBS trusts themselves as plaintiffs, was simply an impermissible reprise of Assured’s dismissed put-back claims.

In its response, Quinn Emanuel made an important and nuanced argument for why MBS trustees can seek money damages, despite the Minnesota rulings restricting put-back claims to mortgage repurchases. According to the trusts, even if MBS contracts hold that the sole remedy for deficiencies in underlying mortgages is repurchase, once the mortgage originator breaches its obligation to buy back defective loans, trusts can claim damages for breach of the MBS contract. That’s a subtle but crucial point, distinguishing between the relief available under the contract and the relief available for breaches of that contract.

The AMI and MBS collateral manager Amherst Advisory don’t get into contract interpretation in their motion for leave to file an amicus brief, though I bet they will if Judge Baer grants them permission to enter the case. The filing instead focuses on “industry custom and practice,” with regard to foreclosed mortgages, which were the subject of Tunheim’s ruling in October in the Minnesota case. UBS’s assertion that it’s not responsible for the repurchase of foreclosed loans, according to the AMI filing, “should be rejected either because it is wrong as a matter of law or because the relevant agreements are ambiguous and issues of fact exist concerning the agreements’ proper interpretation in light of established custom and practice.”

Given the burgeoning number of trustee suits, it’s worth keeping an eye on this docket to see if Baer gives MBS investors a voice. I called lawyers for AMI, UBS and the trusts, but none got back to me.

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