Adventures with otiose trustees, RMBS edition
Carrick Mollenkamp writes today about Talcott Franklin, a lawyer in Dallas who has taken it upon himself to wage war against trustees — those impossible-to-find people buried deep within big banks who technically work on behalf of bondholders but who in practice do absolutely nothing.
Last year, I wrote about US Bancorp as being one of the worst of these trustees, and it’s no surprise to see them on Mollenkamp’s list. Here’s what they’re meant to do:
If a trustee, for example, discovers that a borrower lied when getting a loan, the trustee or loan servicer is responsible for forcing the originating bank to repurchase the loan on behalf of mortgage investors. Trustees enforce warranties made by loan originators when they sell loans to a trust, and oversee loan-servicing firms.
In practice, you won’t be surprised to hear, the trustees ended up doing little or nothing, despite their obligation to protect the rights of bondholders:
In the past, complaints by mortgage-security investors went unheeded. But because Mr. Franklin now represents enough investors to meet certain legal thresholds—he, for example, represents 50% or more of the voting rights of 900 mortgage securities—his clients could fire a trustee, demand changes in the way a mortgage bond is managed or ultimately file a suit on behalf of a huge group of bondholders.
In the letter, Mr. Franklin said that in some trusts where the lender and servicer sit inside the same bank, the number of recent repurchases by the lender is zero, even though the default rate for the loan pool is 25%.
Things have come to a pretty pass when bondholders need to group together to sue their own trustee. But it’s been clear for a while that almost nobody has been looking out for bondholders’ rights; certainly the government has been much more interested in keeping the banks solvent. Good for Mr Franklin for fighting this fight; I hope he gets results.