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MBS trustees (finally) getting feisty: Wells sues Bear unit

9/15/2011 COMMENTS (1)

If I were the kind of blogger to say I told you so -- which I definitely am -- I'd remind you that last week, when the prolific securitization trustee U.S. Bank filed a second suit demanding that a mortgage-backed securities issuer buy-back deficient underlying mortgage loans, I predicted that this was the beginning of a trend. Trustees are under serious pressure both from regulators fed up with their chronic reluctance to assert put-back demands against MBS sponsors and from MBS investors running out of time on securities claims. If their duties as trustees are anything short of a joke, they have to begin to take action.

On Wednesday, my prediction of a trend got a little more support. Wells Fargo filed a Delaware Chancery Court suit against EMC Mortgage, the erstwhile Bear Stearns mortgage-lending unit, demanding that EMC buy back more than 800 mortgages that breach the representations EMC made about them. Wells is suing in its capacity as trustee of a Bear Stearns MBS offering in which three-quarters of the 2000 underlying loans, according to the complaint, are deficient.

The put-back suit comes seven months after Wells sued EMC (now part of JPMorgan Chase) to obtain information about those underlying mortgage loans. As Wells Fargo said in that January 2011 Delaware Chancery Court complaint, it was under pressure from a Bear Stearns MBS noteholder who held 42 percent of the certificates in the trust. (The noteholder, who has not been identified, is represented by David Grais of Grais & Ellsworth.) Wednesday's suit asserts that Wells Fargo's analysis of the loan documentation it received via the January case reveals rampant misrepresentations about the underlying mortgages.

One other interesting aspect of the new Wells filing: As it was in the January suit, the bank is represented by Ropes & Gray and Abrams & Bayliss. Ropes & Gray's involvement is notable; law firms with robust corporate practices usually avoid suing banks, even on behalf of other banks. That's why litigation-centric firms like Quinn Emanuel Urquhart & Sullivan and Kasowitz Benson Torres & Friedman have been able to carve out a lucrative specialty in cases against banks.

Lawyers at Abrams and Ropes referred me to a Wells Fargo spokeswoman, who said that this is the largest put-back case the bank has filed, and that it was brought at the direction of investors in the trust. She declined comment on Ropes's involvement.

I left messages with Daniel Rath of Landis Rath & Cobb, who represented EMC in the earlier Wells suit, and with Stacey Friedman of Sullivan & Cromwell, who's representing JPMorgan in Ambac's blistering MBS case against EMC. Neither got back to me.

(Reporting by Alison Frankel)

Follow Alison on Twitter: @AlisonFrankel

Comments (1)

9/19/2011 2:06:40 PM by markferraris

No doubt that the bond trustees are gun shy but most of those investors that are disappointed or even angry with their behavoir fail to understand that the trustee's position in the typical mbs transaction is not as simple as some might assume. For one, their compensation levels do not provide them with any incentive to act in any manner other than very conservatively. They often represent a number of bond holders with very different agendas and objectives. For example, anyone who follows the bond markets closely knows that when a bond issue runs into problems, there are typically 2 significant classes of holders that emerge. The first is the "term holder" (perhaps a pension fund) and the second is the "distressed" investor. This second class of holder typically got in very late in the game and often cares little about the long term prospects for the recovery of the security; only that they can squeeze a few pennies more in value from each bond, before dumping it on another investor. This puts the trustee in a very ticklish postion, trying to determine which class of holder they should listen to. The trustee's role, therefore, is not as simple as doing what is right. Each class of holder has a very different definition of what is right for them. Motivations to sue an issuer or the investment banker or the bond guarantor are all very different. The other point I would make goes back to my commnent about compensation levels for the trustee. Given the fact that different groups of holders will have different motivations and objectives, the trustee must be able to rely upon their rights to be provided with a financial indemnity from the group of holders which would like to pursue ltigation; if for no other reason then they must be able to protect themselves from a countersuit from other bondholders with a different perspective. When these bond issues were performing (paying principal and interest) the trustee is typically compensated in the form of a fraction of a basis point of the bonds outstanding. Typically this might be something like a few thousand dollars per month. When the bond issue goes belly up, their compensation often stops. All one has to do to understand why a trustee is acting so conservatively in these situations is to understand that there is little in the way of motivation for a trustee to jump in with both feet into a messy litigation with the potential for millions of dollars of liability. Mark F. Ferraris Managing Principal Orchard Street Partners LLC

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MBS trustees (finally) getting feisty: Wells sues Bear unit

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