In July, not long after The Economist dubbed its revered founder
Seth Klarman "The Oracle of Boston," the hedge fund Baupost
abruptly dropped out of the litigation challenging Bank of
America's proposed $8.5 billion settlement with investors in
Countrywide mortgage-backed securities. Baupost also sold off at
least some of its Countrywide notes, signaling that after
battling fruitlessly to get Countrywide and BofA to buy back
allegedly deficient underlying loans, the hedge fund had decided
to cut its MBS losses and run.
But it turns out that Baupost isn't out of the MBS put-back
game. On Sept. 4, the Law Debenture Trust Company of New York,
as trustee for a Bear Stearns MBS trust, filed an amended complaint in Delaware Chancery Court demanding that the onetime
Bear mortgage lending unit EMC (now part of JPMorgan Chase) buy
back 1,141 underlying mortgage loans that allegedly breached the
representations and warranties EMC made about them. The 66-page
amended complaint is a must-read for MBS fans, since it's based
on a review of the actual loan origination documents for more
than 1,500 mortgagesin the underlying pool. The trustee obtained
the files through litigation that launched in February 2011,
then had them re-underwritten by The Barrett Group, which found
that more than 80 percent of the mortgages it reviewed breached
EMC's reps and warranties. The complaint details not only
aggregated stats on the breaches but also specific examples of
how EMC supposedly failed to meet underwriting standards and let
utterly unqualified borrowers take out mortgages.
The amended complaint does not name Baupost, but an Aug. 15 status report on the year-old litigation does. "A representative
of the directing certificateholders attended the meet-and-confer
sessions on August 6 and 7," the report said. "The directing
certificateholders are the Ashford Square Entities, which are
wholly-owned subsidiaries of funds managed by The Baupost
Group."
Baupost's lead counsel, Harvey Wolkoff of Ropes & Gray,
confirmed Tuesday that the hedge fund is, in fact, directing the
put-back litigation against EMC. As the new complaint explains,
the hedge fund began agitating for information about the
underlying mortgages all the way back in 2009. At its direction,
the trustee sued for the repurchase of more than 800 loans
almost a year ago. Thanks to the additional information Baupost
obtained through discovery in the suit, the amended complaint
upped the demand.
Wolkoff said the 88 percent breach rate the re-underwriter
found in its "exhaustive" review is "alarming." Nevertheless, he
said, EMC (which is represented by Sullivan & Cromwell) has been
exceedingly reluctant to concede that loans materially breached
reps and warranties. How reluctant? So far, Wolkoff said, EMC
has agreed to buy back a grand total of 54 loans, of the more
than 1,100 that Baupost contends are deficient. (I emailed a
JPMorgan spokesman with a copy of the complaint, but he didn't
respond.)
Wolkoff declined to comment when I asked whether this is the
only put-back case Baupost is pursuing, and a Baupost
spokeswoman didn't return my call. I also asked Wolkoff how
Baupost's case would be affected if, as I've speculated it
might, JPMorgan negotiates a global MBS settlement with the
major institutional investors represented by Gibbs & Bruns, the
firm that orchestrated the global Countrywide MBS settlement
Baupost previously objected to. Wolkoff (rightly) pointed out
that my question rested on a hypothetical but said, "We
represent the trustee in this matter, not Gibbs & Bruns." He
also said Gibbs has not reached out to Baupost about the hedge
fund's put-back claims.
(Reporting by Alison Frankel)
Follow us on Twitter @AlisonFrankel, @ReutersLegal | Like us on Facebook