Bad: When a newspaper ridicules your CEO for wrongful foreclosures.
Worse: When the foreclosure was initiated by another company.
Maddening: When even top executives at the bank don't realize that—and blame your department.
That's the situation Lee Mitau, U.S. Bancorp's general counsel and an executive vice president, found himself in last month. After a Massachusetts court excoriated his company, along with Wells Fargo, for bungling documentation of foreclosures, the New York Post published photos of the banks' CEOs with dunce caps superimposed on their heads.
Neither bank had made the decision to foreclose on the two borrower plaintiffs; with both loans, that was American Home Mortgage Servicing's call. But as trustees for the securitizations, Wells and U.S. Bancorp appeared on all legal documents as the foreclosing party—and so became the objects of the judge's admonishments and media ridicule.
The misunderstanding, he acknowledged, is understandable. "You'd think if someone is out there using our name, we would have control," Mitau said. "When a servicer forecloses, they do it in our name, which is a very weird and dangerous situation. And the judges write opinions where they say 'U.S. Bank breached its promise.'"
Throughout the mortgage crisis, trustees have said they have little contractual ability to monitor servicers. Rather, they are limited to ministerial duties such as transmitting funds to bond investors and providing performance statements based on data supplied by the servicers themselves.
But with the flood of foreclosures has come a flood of litigation, and with that, higher costs and reputational risks for trustees as judges and media outlets routinely call out these custodial agents for the actions of servicers. The sheer volume of foreclosures and litigation has slowly changed trustees' attitudes. Now, they are actively taking steps to have a dialogue with servicers while explaining their jobs to consumers, reporters and public officials.
The head of Wells Fargo's corporate trust services said the firm plans to take a more active role by talking to servicers and servicers' lawyers, hopefully before specific court cases go awry and garner national media attention. Also, U.S. Bancorp set up an 800 number for borrowers to call and get connected with their servicer.
In November, when servicers were caught in the robo-signing scandal in which back-office employees signed thousands of affidavits in foreclosure cases without examining the loan files, Deutsche Bank's trustee arm took the unusual step of demanding that servicers indemnify the German bank for any liability from alleged foreclosure deficiencies.
Paul Collier, a Cambridge, Mass., lawyer who represented the homeowners in the Massachusetts case, Ibanez vs. U.S. Bank, disputes trustees' arguments that they have no authority.
"The trustee indeed has the power to control the servicer and the trustee can refuse to permit the servicer to take an action in which the trustee does not agree," Collier said. "They simply choose not to exercise that authority because they're worried about their own liability to the investors."
The problem is complicated even further because some of the largest trustees are also servicers. RMBS are unique in that the trustee holds the collateral to the underlying property on behalf of bond investors. Though issuance is still essentially dead in the private-label securitization market, trustees are hoping that changes could be made in the future to shield them from being identified with the bad actions of servicers.