Last week we witnessed an occurrence almost as rare as an
ivory-billed woodpecker sighting: The mortgage-backed securities
trustee U.S. Bank National Association brought a put-back suit
against a mortgage originator. The 23-page complaint, filed in
Manhattan federal district court by Kasowitz Benson Torres &
Friedman, claims that WMC Mortgage breached representations and
warranties it made about a pool of loans it originated and sold
to UBS for about $900 million in December 2005. UBS, in turn,
securitized the loans and sold them via trusts overseen by U.S.
Bank.
The trustee asserts that at least 75 percent of the almost
800 randomly sampled loans it reviewed (at the direction of
certain MBS noteholders) breached WMC's reps and warranties.
U.S. Bank alleges that when it notified WMC of the breaches, the
mortgage company refused to correct or buy back the defective
loans, so the trustee sued for breach of contract. It claims to
have suffered more than $70 million in damages.
We all know how reluctant MBS trustees have been to assert
put-back claims. Under standard MBS pooling and servicing
provisions, investors have to jump through high procedural hoops
to serve demands on trustees, who typically have no contractual
obligation to act unless investors with 25 percent voting rights
in a trust demand an investigation of the underlying mortgages.
Some investors have challenged those terms: In a controversial
ruling last month, U.S. District Judge William Pauley of
Manhattan federal court held that investors can sue MBS trusteesunder the federal Trust Indenture Act for failing to alert
noteholders about breaches and failing to take action on behalf
of the trusts. Scott + Scott, the plaintiffs' firm that won that
Trust Indenture Act ruling, in a case against Countrywide MBS
trustee Bank of New York Mellon, followed up with an April 12
suit asserting the same theory against Bank of America and U.S.Bancorp as MBS trustees.
U.S. Bank, meanwhile, has actually been one of the few MBS
trustees to bring suits to enforce put-back provisions. Last
August its Kasowitz lawyers sued Bank of America in New York
State Supreme Court for breaches in reps and warranties for
loans underlying Greenwich Financial's Harborview offerings, and
in September U.S. Bank filed a complaint in Minneapolis federal
district court against EquiFirst and WMC Mortgage as originators
of loans in other UBS MBS trusts. The only other MBS trustee
put-back suit that I'm aware of is a Wells Fargo case againstthe onetime Bear Stearns mortgage unit EMC in Delaware Chancery
Court.
U.S. Bank's case against BofA has disappeared from the New
York state docket, and Wells Fargo's EMC suit was dismissed on a
joint stipulation last May, which suggests it was settled. That
means the only litigated MBS trustee put-back suit has been U.S.
Bank's federal case in Minneapolis against WMC and EquiFirst.
And if that's a guide, MBS trustees should not expect that suing
mortgage originators will be a fast and easy route to enforcing
put-back claims.
In February, in a 10-page ruling, U.S. District Judge Paul
Magnuson dismissed all of U.S. Bank's claims against EquiFirst
as time-barred. (EquiFirst was represented by Arnold & Porter.)
He kept alive breach of contract claims based on about 150
underlying WMC mortgages -- but said the trustee can only seek
the repurchase or replacement of those loans, not broader
relief. WMC's lawyers at Jenner & Block and Greene Espel have
moved for summary judgment on the remaining put-back claims. A
hearing is scheduled for July.
I left messages with Michael Fay at Kasowitz and Barbara
Steiner at Jenner to see if the new U.S. Bank suit against WMC
would be a reprise of the Minneapolis case, but neither called
me back.
(Reporting by Alison Frankel)
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