Legal

A few months back, I predicted that New York's six-year statute of limitations on breach of contract suits was going to mean an uptick in put-back claims against the financial institutions that issued mortgage-backed securities. It's not easy for MBS investors to muster the 25 percent voting rights they need to initiate breach-of-contract litigation under standard securitization agreements, but with the clock ticking on 2006 notes, I was pretty sure Bank of America -- which was then (and now) battling for the survival of its proposed $8.5 billion reps and warranties settlement with Countrywide MBS investors -- would soon have company as a put-back defendant.

It took longer than I expected, but that prediction now seems about to come true. On Wednesday, the Houston litigation boutique that negotiated the BofA deal, Gibbs & Bruns, announced that its clients have instructed the securitization trustees overseeing Wells Fargo mortgage-backed securities with a face value of $19 billion to "open investigations of ineligible mortgages." That announcement follows a Gibbs & Bruns press release in December proclaiming a similar instruction to five JPMorgan Chase securitization trustees overseeing $95 billion in mortgage-backed notes. Morgan Stanley, meanwhile, disclosed in November that it, too, has been targeted by Gibbs & Bruns, over MBS with a face value of $6 billion.

Those demands for trustee investigation are a procedural hoop investors must jump through en route to litigation against MBS issuers. The trustees have a defined period of time under the operative securization agreements to take action, usually 60 or 90 days. If the trustees don't act, investors can file suits alleging that the issuer breached representations and warranties about the underlying mortgage loans. (MBS sponsors are typically liable to repurchase, or put back, deficient loans.)

In order to sue, investors have to have 25 percent voting rights in each of the trusts for which they're asserting claims, but the Gibbs press releases say the firm's client group meets that standard. Gibbs & Bruns isn't disclosing which of its clients is involved in the Morgan Stanley, JPMorgan, or Wells Fargo put-back efforts, but the group presumably includes Pimco and BlackRock, the giant funds that led the BofA case. Gibbs partner Kathy Patrick declined my request to comment beyond the press release on the Wells and JPMC announcements.

I did a totally speculative, back-of-the-envelope calculation to estimate that it would take at least $1 to $2 billion for JPMorgan to settle with the Gibbs group, assuming that the group or the bank would even agree to anything but a global deal. The same calculation suggests Wells Fargo could be looking at several hundred millions of dollars in put-back liability. (My numbers might have changed if New York State Supreme Court Justice Eileen Bransten had ruled differently this week in the MBIA and Syncora cases against Countrywide, but as I reported Wednesday, her decisions won't help MBS investors.)

It took Gibbs & Bruns eight months from its initial announcement, in October 2010, of demand on the Countrywide securitization trustee Bank of New York Mellon to reach a settlement with BofA in June 2011. The firm's new targets are situated differently than Bank of America, and could be less willing to negotiate. (Though on that score, it's worth noting that Wells Fargo was the first MBS issuer to settle a securities class action, a $125 million deal this summer.) But it's a good bet that Patrick and her Gibbs & Bruns partners are going to be spending a lot of time in airports in the next several months.

(Reporting by Alison Frankel)