“The analysis I would expect the courts to follow is, 'The trustee could have done something about those claims right up to the date that the statute of limitations ran,'" said Don Hawthorne, a financial litigator at Axinn Veltrop & Harkrider.
"The analysis I would expect the courts to follow is, 'The trustee could have done something about those claims right up to the date that the statute of limitations ran,'" said Don Hawthorne, a financial litigator at Axinn Veltrop & Harkrider.

The number of new claims related to sellers of legacy mortgage-backed securities from the financial crisis may have peaked, but lawsuits against trustees and servicers may linger for at least a few more years.

A 2015 New York Court of Appeals decision in a lawsuit, ACE Securities Corp. v. DB Structured Products, upheld previous rulings that the contractual statute of limitations that governs loan and securitization sellers' roles runs its course six years after issuance. This more or less put an end to the flood of rep and warrant-based suits related to underperforming 2005-2007 securities, because New York is a financial center, and most are governed by the state's law.

"Until that case came down there were many of us who argued that because of the way these contracts were written, the sponsors and originators had an ongoing obligation to repurchase defective loans when they were identified to them by a trustee or investor," said Don Hawthorne, a financial litigator from Axinn Veltrop & Harkrider.  "ACE Securities said, 'No it's a six-year limitation period from the time of the securitization.'"

But there hasn't been a similarly clear decision to date on the statute of limitations as it applies to claims against other parties like trustees, said Mark Adelson, a veteran bond market executive and researcher known for his early warnings about mortgage securitization risks.

"One thing that has been left for people to sue over are these trustee claims," said Adelson, chief strategy officer at BondFactor in New York, a startup venture that intends to insure municipal bonds.

It appears plaintiffs could continue to file new contract claims against these entities through at least 2020.

“The analysis I would expect the courts to follow is, 'The trustee could have done something about those claims right up to the date that the statute of limitations ran,'" said Hawthorne. "So you get another six years added onfrom when the statute of limitations ranon bringing claims against the mortgage originators or sponsors."

Unlike a securities seller or lender which may have some say in what types of loans are put into deals, trustees only must fulfill responsibilities related to the securitized trust that holds the loans, and there has been some legal disagreement over where their responsibilities end and servicers' or other parties’ start.

“There's a difference of opinion, and varying allegations, as to what trustees are or were required or responsible to do," said Eric Kaplan, managing partner, structured finance at Ranieri Strategies. There also is interest in better defining those responsibilities in new private-label RMBS, he said.

Some claims against trustees have been denied, but so far the courts have been allowing the central ones to proceed.

"They have passed some early benchmarks. Most of them have survived motions to dismiss. The core claims of breach of contract have survived," Hawthorne said.

More of the private litigation to date has been filed against trustees than servicers and it is unclear why, he said. One theory is that because many servicers have been under some financial strain due to their compliance burden, they aren't seen as having as deep pockets as trustees.

Lawsuits related to legacy RMBS might be running up against some limits in the private market, but government actions could be a different story.

While servicers, for example, have had less to worry about than trustees when it comes to private litigation, they are at least as susceptible to regulatory censure.

"I think on the regulatory front, we will continue to see significant attention paid to the actions of servicers," Hawthorne said.

Subscribe Now

Access to a full range of industry content, analysis and expert commentary.

30-Day Free Trial

No credit card required. Access coverage of the securitization marketplace, including breaking news updated throughout the day.