Are megabucks MBS breach-of-contract settlements in the offing?

Thomson Reuters News & Insight.

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.

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