Have Four Pension Funds Blown Up the $8.5 Billion Bank of America Settlement?

[girl gone mad]

Some good news for a change.

... a ruling on Tuesday by Judge William Pauley against Bank of New York on 26 Countrywide securitizations may have opened the floodgates to trustee litigation. Heretofore, trustees have effectively told investors to pound sand when they’ve petitioned them to take action against servicers, relying on their belief that it would be unlikely that they’d be able to get a day in court, thanks to the barriers built into the PSA.

But four pension funds which are investors in $30 billion of Countrywide trusts, sued under the Trust Indenture Act of 1939. I haven’t seen the actual original filing or Pauley’s ruling, but here is the background, per Alison Frankel:

…the pension funds accused Bank of New York Mellon of negligence and breach of fiduciary duty for doing nothing to remedy Countrywide’s inadequate servicing of home loans contained in the trusts.

The bondholders said Bank of New York Mellon failed to take possession of loan files, including the original mortgage notes, or require Countrywide to fix or buy back defective loans.

read more: http://www.nakedcapitalism.com/2012/04/have-four-pension-funds-blown-up-the-8-5-billion-bank-of-america-settlement.html

[aquart]

1. Yes!

[westerebus]

2. + a brizillion.

[Ruby the Liberal]

3. Excellent news!

[mbperrin]

4. Fiduciary duty! God, what a wonderful phrase!

Now let's stick it to 'em!

[dixiegrrrrl]

5. "inadequate servicing of home loans contained in the trusts."

Deserves an award for the understatement of the year.

The loans are not even IN the trusts, legally or otherwise.
No one knows where the original papers are,
nor how many different trusts each loan was sold to.
Which makes the trusts responsible for taxes
and for allowing investors to get ripped off.

A giant mess from beginning to end.

[Agony]

6. prob have to wait for the appeal...

and the appeal judge sounds less friendly if this follows the Walnut Place trajectory.... New York State Supreme Court Justice Barbara Kapnick - see link

http://newsandinsight.thomsonreuters.com/Legal/News/2012/04_-_April/Does_Pauley_s_BNYM_ruling_spell_new_liability_for_MBS_trustees_/

~~~
Kaswan, who said her firm was the first to assert the federal law against an MBS trustee, believes Pauley's 19-page decision offers a significant new route to damages for MBS investors. The Manhattan federal judge ruled that the Chicago fund only has standing to bring claims for the trusts in which it invested, reducing the number of Countrywide MBS trusts in the case from 530 to 26. But he also said that investors in those 26 trusts can sue BNY Mellon for allegedly failing to notify certificateholders that Countrywide and Bank of America supposedly breached their obligations to the trusts and for failing to take action on those breaches.
~~~
All of the benefits Kaswan sees in Pauley's ruling derive from the judge's conclusion that the Trust Indenture Act applies to mortgage-backed securities. Pauley's holding, in turn, relies on his finding that mortgage-backed notes are equivalent to bonds, not equity. Pauley pointed to other court rulings that have likened MBS pass-through certificates to bonds, to the Internal Revenue Service's distinction between creditors and shareholders, and to the payment structure of MBS trusts to conclude that trust certificates are more like bonds than ownership interests.
~~~
BNY Mellon argued that under the plain language of the pooling and services agreements, which refer to the "ownership" interest of certificateholders, the New York trust securities are equity. The bank also cited the Securities and Exchange Commission, the U.S. Treasury, and the U.S. Department of Labor as authorities that treat mortgage-backed certificates as equity, not debt.

The bank will almost certainly challenge Pauley's conclusion that MBS certificates are debt, which could have implications beyond this case for the securitization industry.(BNY Mellon spokesman told Jon Stempel of Reuters Tuesday that the bank disagrees with the judge's finding on its potential liability under the Trust Indenture Act.) So we won't really know if Pauley's ruling amounts to a watershed for MBS investors until it's tested on appeal.
~~~

more at the link...