Opinion

Alison Frankel

N.Y. AG’s new MERS suit: Where are the MBS investors?

Alison Frankel
Feb 7, 2012 15:43 UTC

After New York Attorney General Eric Schneiderman filed his new complaint against JPMorgan Chase, Bank of America, Wells Fargo, and the Mortgage Electronic Registry System, I got an email from the AG’s spokesman. “Looking forward to your story on the MERS lawsuit in the wake of your inaccurate conjecture this week,” it said, referring to my column expressing skepticism that the recently-announced joint mortgage-backed securities task force will accomplish more than the individual task force members have.

As I said in that piece, I’m eager for my skepticism to be proved unfounded. I hope the task force tells the world exactly who is responsible for the greed-driven securitization deficiencies already alleged in private MBS suits and in Congressional reports. I hope someone comes up with a legal theory to hold wrongdoers accountable for packaging mortgages that never should have been issued into securities that were (allegedly) not what they were represented to be.

That, however, is not what the AG’s new case does.

The suit, filed Friday in New York State Supreme Court in Brooklyn, asserts that the Mortgage Electronic Registration Systems — the privately-held organization established in the 1995 to streamline the securitization process by centralizing mortgage-transfer records — was essentially a sham operation that swindled localities out of $2 billion in mortgage-transfer fees and improperly foreclosed on homeowners whose mortgages it didn’t actually own. The AG’s office alleges that MERS and the defendant banks, all members of the MERS system, have foreclosed on hundreds of homes to which MERS was nominally the mortgage assignee, even though such foreclosures were “faulty and deceptive in several respects.” (The alleged deficiencies include MERS’s lack of standing to bring foreclosure actions; MERS’s misrepresentation of its foreclosure rights to homeowners and judges; and the mortgage registry’s submission of robosigned affidavits to courts in foreclosure cases.) Moreover, according to the complaint, MERS’s deeply flawed, private database hid mortgage transfers from courts and homeowners who needed to track them down.

Those are all serious allegations, but they are familiar. Here is MERS’s official response to Schneiderman’s complaint, but MERS offers a more detailed explanation of its record in defending against similar charges in its motion to dismiss the Delaware Attorney General’s October 2011 suit against it.

“Courts throughout the country have routinely and consistently held that MERS’s initiation of foreclosures is authorized by the express language of the mortgage contracts executed by the borrowers of member-originators and by the assignments MERS obtained from mortgagees of non-member-originators,” wrote MERS’s lawyers at Morgan, Lewis & Bockius, citing eight cases from state and federal courts around the country that have upheld the mortgage registry’s standing to foreclose.

Pauley’s BofA MBS ruling is boon to New York, Delaware AGs

Alison Frankel
Oct 25, 2011 21:31 UTC

In 1998, 400 investors in a trust that distributed revenue from a communications satellite got word that their securitization trustee had settled a $41 million suit against the satellite’s fuel supplier. The trustee, IBJ Schroeder, filed a New York State Article 77 proceeding to obtain a judge’s endorsement of the $8.5 million settlement. Some of the investors protested the deal, arguing that the trustee didn’t have the power to settle the case without consulting them. In 2000, a New York appeals court ruled that, in fact, IBJ Schroeder did have that power, under both New York law and the contract governing the satellite revenue trust. The lower court ultimately ruled in the Article 77 case that even if investors considered the settlement amount too low, Schroeder hadn’t acted unreasonably or imprudently in striking the deal.

If you’re wondering why I’m telling you about an 11-year old ruling involving a defunct communications satellite, it’s because the IBJ Schroeder opinion is sure to be invoked by Bank of New York Mellon, the trustee of those Countrywide mortgage-backed securities, as well as the 22 Countrywide MBS investors represented by Gibbs & Bruns as they appeal last week’s decision by U.S. District Judge William Pauley III of Manhattan federal court. In holding that the federal courts have jurisdiction over Bank of America’s proposed $8.5 billion settlement, Pauley took issue with BNY Mellon’s use of an Article 77 proceeding to get the deal approved. The judge wrote that Article 77 is usually employed to resolve garden-variety trust administration issues; BNY Mellon and Gibbs & Bruns will use the IBJ Schroeder ruling to argue at the U.S. Court of Appeals for the Second Circuit that, contrary to Pauley’s assertion, there’s precedent for using Article 77 exactly as they did in the BofA MBS case.

But even as the Second Circuit decides whether to take up the issue of the rights and responsibilities of securitization trustees, state attorneys general are likely to pounce upon some of the language in Pauley’s 21-page ruling. I warned that there might be unintended consequences for indentured trustees when the judge asked for briefing on the BNY Mellon’s duties. After Pauley’s ruling, that warning is now a red alert. New York attorney general Eric Schneiderman and his faithful follower, Joseph Biden III of Delaware, have both announced that they’re investigating MBS securitization trustees. Schneiderman showed he’s serious by filing state-law fraud claims against BNY Mellon along with his petition to intervene in the BofA Article 77 proceeding. In his complaint against BNY, Schneiderman argued that once an investment goes south, as many of the MBS trusts have, the indentured trustee has a fiduciary duty to trust beneficiaries under New York common law.

Why Delaware and NY want a stake in BofA MBS deal

Alison Frankel
Aug 10, 2011 22:07 UTC

As expected, the Delaware attorney general’s office moved Tuesday night to intervene in Bank of America’s proposed $8.5 billion settlement with Countrywide mortgage-backed noteholders. The Delaware petition to intervene and supporting brief are notable for their moderate tone, in contrast to last week’s fiery objection and counterclaims by the New York attorney general. Tuesday’s filings, signed by Delaware deputy AG Jeremy Eicher, said that Delaware is concerned about BofA’s indemnification of the MBS trustee, Bank of New York Mellon — the same conflict-of-interest allegation raised by just about every intervenor who so far has surfaced in the case. Delaware, which noted that two of the Countrywide MBS trusts are Delaware vehicles, argued that it needs more information about the proposed settlement in order to protect investors.

The real story, though, is that both the New York and Delaware AGs believe BofA and BNY Mellon can’t resolve their liability to MBS investors without including regulators in the deal. After all, the proposed $8.5 billion settlement encroaches on turf already claimed by New York AG Eric Schneiderman and Delaware AG Joseph Biden III; in June, the New York Times broke the news that the New York and Delaware AG offices were investigating the banks involved in the mortgage-backed securitization process — including sponsors and underwriters such as Countrywide and BofA and trustees such as BNY Mellon.

The Delaware and New York securitization probes, which are running parallel to the 50-state AG investigation of banks’ mortgage foreclosure practices, gave Schneiderman and Biden a platform to argue that MBS investors, as well as homeowners, are affected by slipshod mortgage underwriting practices and widespread foreclosures. In the wider foreclosure-resolution negotiations between mortgage lenders and state AGs, New York and Delaware have taken a lead in calling for banks to also address MBS liability.

NY AG’s BofA filing will ripple far beyond $8.5 bn MBS deal

Alison Frankel
Aug 5, 2011 21:18 UTC

Before Thursday night, opposition to Bank of America’s proposed $8.5 billion settlement with Countrywide mortgage-backed securities investors consisted of a handful of investor groups represented by a handful of law firms. Even if you counted the six Federal Home Loan Banks that have moved to intervene but haven’t yet gone on record opposing the deal, intervenors represented less than 7 percent of all Countrywide MBS noteholders. The 22 gargantuan institutional investors that negotiated the settlement were a much more potent force.

That all changed when New York attorney general Eric Schneiderman -- in a move that stunned deal proponents — filed an explosive motion to intervene in the $8.5 billion settlement. Schneiderman didn’t just register his opposition to the proposed settlement, which he said had been reached “without ever giving beneficiaries or their representatives an opportunity to test [whether] the proposed settlement is reasonable.” He went far, far beyond mere opposition: Schneiderman accused the Countrywide MBS trustee, Bank of New York Mellon, of breaching its fiduciary duty and said that Bank of America may have aided and abetted the breach. And to show that he was serious about those assertions, Schneiderman actually filed counterclaims against BNY Mellon along with his intervention motion.

The countersuit — a truly revolutionary filing — alleges three causes of action against BNY Mellon, in what is thought to be the first time the AG has accused an MBS trustee of fraud. Schneiderman claimed the bank breached its duty to investors because the settlement includes indemnification for the trustee — a “direct financial benefit” for BNY Mellon, according to the AG’s filing. Schneiderman also asserted that BNYM let down Countrywide MBS investors long before proposing the $8.5 billion settlement, by failing to notify certificate holders that underlying Countrywide mortgages were in default. Finally, the New York AG accused Bank of New York Mellon of securities fraud under New York’s Martin Act.

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