On Tuesday, in a little-noticed filing, Bank of New York Mellon sued WMC Mortgage and GE Mortgage Holding in federal court in Manhattan. BNY Mellon oversees a $680 million trust whose notes are securitized by WMC and GE Mortgage loans. Its new complaint explains that BNY Mellon, as the mortgage-backed securities trustee, is suing at the direction of a certificate holder for breaches of representations and warranties about those underlying mortgages. I left a message with BNY Mellon counsel at Boies, Schiller & Flexner, asking about the identity of the certificate holder, but didn't hear back. Nevertheless, the filing is the latest indication that MBS trustees are very slowly beginning to bring breach of contract, or put-back, claims on behalf of MBS investors.

As my Reuters colleague Rick Rothaker reported earlier this month (and as I predicted last year), banks that issued mortgage-backed securities are facing mounting put-back claims, not just by the government-sponsored mortgage guarantors Fannie Mae and Freddie Mac but also by private MBS investors. By contract, those investors have to jump through a series of procedural hoops to assert claims of breach of reps and warranties: They must amass 25 percent of the voting rights within the trust, demand an investigation of potential breaches by the MBS trustee, and then, if the trustee does not act to their satisfaction, wait a specified amount of time -- typically, between 60 and 120 days -- before filing suit on their own. The burst of trustee complaints we've seen in the last few months indicates that some MBS trustees are beginning to take seriously their duty to act at the direction of certificate holders.

But seeing the BNY Mellon suit reminded me that there's been no public disclosure about what's going on with the biggest certificate-holder claims out there. Last fall and winter, you may recall, an institutional investor group represented by Gibbs & Bruns announced that it had sent demand letters to MBS trustees overseeing notes securitized by Morgan Stanley, JPMorgan Chase and Wells Fargo. Gibbs & Bruns has not identified the members of the investor group, but it's widely assumed that the big players in Gibbs & Bruns' negotiations with Bank of America in 2011 -- including BlackRock and Pimco -- are behind the demands to the other three banks as well. The Gibbs-represented investors are asserting breach of contract claims on a huge portfolio of mortgage-backed securities: JPMorgan notes with $95 billion in face value, $19 billion in Wells Fargo MBS certificates and $6 billion in Morgan Stanley notes.

We're now well past the deadline for the Morgan Stanley, JPMorgan Chase and Wells Fargo MBS trustees to take action. I believe the silence from Gibbs & Bruns and the trustees means settlement talks are under way. I should note that this is no more than speculation based on history; Kathy Patrick of Gibbs and spokesmen for Wells Fargo and Morgan Stanley declined to comment. (A JPMorgan spokesman did not return my call.) But back in 2010, after Gibbs & Bruns sent a demand to Bank of New York Mellon in its capacity as Countrywide's MBS trustee and BNY Mellon resisted taking action, the law firm released to the public a letter it sent to BofA and BNY Mellon threatening litigation. There's been no such public letter about the JPMorgan, Morgan Stanley and Wells Fargo trustees. Nor has there been a suit filed by any of those trustees at the direction of the Gibbs & Bruns group. That suggests the investor group believes it is making progress.

Similarly, if history is a guide, settlement announcements could be coming soon. It took Gibbs & Bruns eight months to negotiate a global settlement with Bank of America. That proposed deal was incredibly intricate: It employed the novel device of a special proceeding under New York state trust law to resolve claims in hundreds of trusts, and also included extensive mortgage-servicing reforms. Assuming that the other banks and Gibbs & Bruns' clients don't want to reinvent the settlement wheel, it should be easier for them to construct an agreement, especially because whatever servicing reforms the deals include would already be shaped by the nationwide mortgage settlement signed by JPMorgan and Wells Fargo, among others. Gibbs & Bruns' demand letter went to Morgan Stanley in November, JPMorgan Chase in December and Wells Fargo in January. That's already more time than it took to negotiate the BofA deal.

But even if the banks are willing to settle, one holdup could be the objections dissenting investors have raised to Bank of New York Mellon's use of the special trust-law proceeding to win approval of BofA's proposed $8.5 billion MBS settlement. New York State Supreme Court Justice Barbara Kapnick will hear final objections to that settlement in May.

I've previously speculated that, based on the terms of the proposed $8.5 billion settlement Gibbs & Bruns negotiated with BofA, JPMorgan would have to come up with at least $1 billion to reach a global put-back deal with investors; Wells Fargo's payment, under that calculation, would be several hundred million dollars.

(Reporting by Alison Frankel)

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