Thanks to Gator Bradshaw
Editor’s Comment: Like I said, the investors and the
homeowners have a lot of interests in common. When they finally get
together and compare notes, they find a giant donut hole where assets
or money were supposed to be. The amount of theft or undisclosed fees
and profits staggers the imagination. It would take 200 like Bernie
Madoff to even get close.
Watch these lawsuits and the news reports. As the investors start
firing the servicers (who probably don’t have any authority now anyway)
and start hiring new servicers they will be performing due diligence.
As they trace the paperwork and discover the incurable gaps in title,
ownership, credit and money trails, you will find them changing the
narrative considerably from blame the borrower to how can we work with
borrowers to minimize our losses?
And wait until they figure out that millions of foreclosed homes are
NOT being held for the investors in inventory and hundreds of thousands
of homes “sold” have toxic titles where the proceeds of sale were not
given tot he investors either. I’m no psychic but I’ll bet those
investors will be surprised and pretty damned angry.
With lawsuits against servicers
grinding a slow path through the court system, investors are looking to
make an end-run around the intransigent banks who are refusing to
service mortgages in accordance with bondholder wishes. Their solution
to break through the gridlock surrounding so-called “toxic” mortgage-backed securities?
Use the mechanisms in their pooling and servicing agreements (PSAs)–the
agreements that govern the creation, maintenance and payment streams of
mortgage-backed securities–to remove conflicted servicers from their
roles and insert friendly institutions willing to service the loans
consistent with the best interests of the investors.
According to one group of prominent investors (hereinafter the
“Securitization Syndicate”), who asked to remain anonymous because the
plan is still in the works, investors with large holdings in
mortgage-backed securities are beginning to join forces to petition
securitization Trustees to relieve Master Servicers from their posts.
Under the terms of most PSAs (which tend to vary little from trust to
trust), the Master Servicer is required to service loans in such a way
as to maximize investor returns. However, due to recognized conflicts of interest (such as significant holdings in junior mortgages and an interest in accumulating fees from delinquent loans), servicers instead have frequently breached these obligations and refused to liquidate or modify loans that borrowers are incapable of repaying.
The problem is that, under the terms of most PSAs, the only
party with the power to do anything about a breach of an obligation by
a Master Servicer is the Trustee. Trustees are generally large
financial institutions that are paid a fee to oversee the flow of money
through the securitization waterfall and to carry out certain
administrative tasks. Though the Trustee may remove a Master Servicer,
because the Trustee was designed to play a fairly passive role, it is
not required to enforce servicer breaches on its own initiative.
Instead, bondholders must petition the Trustee to take
action. In this regard, most PSAs require that at least 25% of the
Voting Rights (evidenced by beneficial ownership of 25% of the bonds)
give notice to the Trustee of a breach by the Master Servicer before
triggering any obligations by the Trustee. Only when the Trustee fails
to remedy the breach within 60 days after such a petition may the
bondholders bring legal action on behalf of the Trust.
However, most PSAs also provide the following: “The Holders of
Certificates entitled to at least 51% of the Voting Rights may at any
time remove the Trustee and appoint a successor trustee.” (quoted from
the representative PSA for Countrywide Alternative Loan Trust 2005-35CB)
Anticipating that the Trustee will not take action against the Master
Servicer, and reluctant to engage in yet another protracted legal
battle to enforce servicers’ obligations, the Securitization Syndicate
is shooting for a more ambitious goal: amass a 51% interest in one
securitization so that they may remove the Trustee, appoint a friendly
successor, and get that successor to fire the Master Servicer.
Sound difficult? It will be. Most prudent investors seek to
diversify their holdings so that they do not hold too high a percentage
in any one securitization, let alone any one asset class. Finding a few
investors with large enough holdings in one particular securitization
to obtain 51% could be a challenge. Finding institutional investors
willing to take on large financial institutions with which they have
longstanding relationships–and risk being portrayed as opposed to
politically popular loan modifications–may be even harder.
Yet, according to one member of the Securitization Syndicate, “all
it takes is one. What do you think will happen if we tell a Trustee or
a Master Servicer, ‘you’re fired’? What will happen the next time we
notify a Trustee that we’ve caught a servicer breaching its
obligations? I think you’ll find they begin to sit up and take notice.”
I would tend to agree with this assessment. Many large banks earn
significant fees from serving as the Trustee or Master Servicer of
securitizations, and would not want to lose those revenues. Further,
while many institutional investors may be reluctant to go out on a limb
an take on a major bank, just one reported instance of this plan being
successful will likely create a chain reaction. Soon, many bondholders
will be open to joining forces and taking on Servicers and Trustees who
aren’t honoring their fiduciary duties.
With Treasury officials admitting last month to the failure of their efforts to
cajole servicers into modifying loans or working with borrowers to
allow short-sales (the sale of the property for an amount less than the
amount owed on the mortgage), maybe it’s time that institutional
investors take matters into their own hands. Large funds such as
CalPERS, whose investment portfolio took a hit of over $56 billion in the last fiscal year, should be eager to find a way to cut their losses and rid their books of their large holdings in mortgage-backed securities.
This can only be done with the cooperation of servicers, who have
the sole power to modify a loan, foreclose, or allow a short sale, and
who have generally been responsible for dragging their feet and keeping these loans in stasis.
When servicers refuse to service loans in the best interests of the
ultimate owners, which they’re contractually-obligated to do, they
should be shown the door just like anyone else that fails to perform
their basic job functions. The question is whether any of these
institutional investors will have the courage to break ranks and stand
up to banks that have demonstrated unparalleled influence in Washington and on Wall Street.
Donald W. Bradshaw Esq.
Law Office of Donald W. Bradshaw
303 SE 17th Street #309-218
Ocala, Florida 34471
Phone: (352) 484-1145
Fax: (352) 484-1117
Filed under: CDO, CORRUPTION, Eviction, GTC | Honor, Investor, Mortgage, bubble, currency, foreclosure, securities fraud | Tagged: CalPERS, conflict of itnerest, Donald Bradshaw, fiduciary, fraud, lawsuits against servicers, pooling and service agreement, PSA, securitization, servicers, syndicate, toxic mortgages