Clash of the Titans: RMBS Edition


And so it begins. We're about to witness the main event in financial institution internecine warefare: investment funds (MBS buyers) vs. banks (MBS sellers). 

There have already been some opening skirmishes. The monoline bond insurers (MBIA, Syncora, FGIC, Ambac (and here), CIFG (and here), and--I haven't found any litigation with them on this, but there's gotta be some--ACA) have been litigating against some of the banks whose securitizations they insured for various fraud, negligent misrepresentation, and breach of warranty claims. Many of the Federal Home Loan Banks (Chicago, Indianapolis, Pittsburgh, San Francisco, Seattle, maybe others that I don't recall of the top of my head), which slurped up RMBS during the bubble, only to find them toxic, have brought (separate) suits mainly on securities fraud charges, but also on common law fraud and negligent misrepresentation claims. (See here for a totally dated, August 2010 estimation of the liabilities in these suits.)

Then last fall the financial world was shaken by the New York Fed, BlackRock, and PIMCO's demand letter to Bank of New York Mellon and Countrywide. That showed that A-list financial institutions were taking the range of problems with RMBS, from representation and warranty breaches to servicer malfeasance, seriously. (You can see the NY Fed, acting for the Maiden Lane LLCs, as really another representing AIG, essentially the mother of all monolines for these purposes.) But that wasn't litigation proper, just an angry growl, with a threat of litigation if things weren't resolved. (When you see the letterhead for the response, you'll see that BoA/CW is taking this mighty seriously. Despite the typo in that snippy letter, it didn't come cheap. These guys are lawyering up.)   

And now we have the first A-list litigation. We have TIAA-CREF, New York Life, and Dexia suing Countrywide (and assorted other defendants). And it alleges invalid chain of title--the mortgage-backed securities are actually non-mortgage backed securities!

The complaint only alleges chain of title problems based on Kemp v. Countrywide, really as a tag-on, and doesn't show a lot of thought on the issue, but that's enough for the genie to be out of the bottle. Yup. They went there.

As I've blogged previously, there are a variety of potential chain of title problems. Some relate to the mortgage, some to the note. Some are generic legal problems, while others are execution problems. What is alleged in this suit is an execution problem, albeit one that seems to be the case for all Countrywide deals.

I don't think we'll ever see the banks admit that there's a problem on chain of title until the whole thing blows up (and why would they admit to such a thing), but as this suit makes clear, it's not just wild-eyed law professors and consumer attorneys (and the Massachusetts Supreme Judicial Court) that think there's a problem. The Street is starting to think so too, and the momentum in this area is only like to pick up. 

[Update: it looks like the trustees see that it's checkmate once the investors get to the collective action threshold and are finally squeezing the servicers.  Wells Fargo, as trustee, has sued EMC (formerly Bear now JPM subsidiary) for failure to hand over loan files.  And Deutsche Bank, as trustee, is going after JPM and FDIC for failure to hand over WaMu loan files. This ain't gonna end pretty.]