Put-back litigation continues to be a fight for information. Trustees might know that loans within the securitization pool are in breach, the question is whether they are willing to provide the information to investors who need it.
There are different ways to get that information. One way is the CoreLogic approach where investors basically use the firm's database to create comparisons to discover probable breaches. This approach does not give investors access to the loan files, but only provides a composite view of the files. In other words, having the composite data has allowed investors to go to the trustee and ask the trustee to look at the files to verify if there are any breaches. If the trustee refuses, then investors have ground to file a suit.
The second way is to try and actually work with the trustee and the master servicers to access the loan files, but it's an arduous process that takes a lot of time and does not always end in success.
The more direct route of litigation is another alternative that investors can take to get the information they seek. In July 2010, an investor syndicate sent letters to numerous MBS requesting that they enforce servicing breaches related to improperly originated loans.
The group was formed to cobble enough representation to exceed the required 25% or 50% thresholds sometimes needed to take action against the servicer.
Statements from the syndicate's attorneys have indicated that they have 25% voting rights for over 2,300 deals, 50% in over 900 deals, and 66% in more than 450 deals. The group is represented by Talcott Franklin, a law firm that almost exclusively represents investors in ABS.
In an attempt to obtain information regarding Bank of America's servicing practices, the firm filed an action against the Bank of New York Mellon (BNYM) as the trustee of two trusts in Knights of Columbus vs. Bank of New York Mellon. In that case, BNYM never contested that Knights was entitled to an "accounting", but the case changed when BNYM claimed it had settled the servicing claims as part of its $8.5 billion settlement agreement with BofA.
According to the Knights' Amended Complaint and subsequent filings, the settlement agreement sparked a second round of litigation because it "demonstrates that [BNYM] simply failed to receive and retain possession of the Mortgage Files."
"As a consequence," the Amended Complaint stated, the Knights "did not acquire residential mortgage-backed securities, but instead acquired securities backed by nothing at all." Among other things, the Amended Complaint seeks a return of investment and damages based on breach of contract, failure of consideration, breach of fiduciary duty, negligence, recklessness, and unfair trade practices.
Some market players believe that BNYM suffers an enormous conflict of interest. The Knights have claimed that their Amended Complaint "alleges significant conflicts of interest" including that "when Bank of America, one of the world's largest financial institutions that BNYM is 'dedicated to helping' took over all Countrywide's repurchase liability and servicing obligations, BNYM was in a situation in which its personal interest possibly conflicts with the interest of those owed a fiduciary duty." The amended complaint notes that BNYM "failed to provide prompt notice to other parties to the PSA when [BNYM] discovered breaches of representations and warranties" and failed "to investigate and remedy numerous defaults by the Master Servicer."
Franklin does not view all trustees the same, however. "Some of the trustees at this point are overtly hostile to investors and other Trustees are helpful so you work with those that will work with you and the others you just sue," said Franklin. "Because it is futile to even talk to them."