We help investors recover losses incurred because of the misconduct of structured finance product issuers and trustees and in proceedings relating to the interpretation and implementation of the agreements governing such products.
Our core area is litigation against RMBS trustees. We are litigating 11 actions against RMBS trustees relating to their failure to enforce trusts’ rights in New York Supreme Court asserting claims relating to 191 certificates (138 trusts). We also have been engaged by a growing group of clients to dispute the calculation of payments made when RMBS trusts were terminated and other waterfall computation issues. We are expanding our practice to disputes regarding CMBS, CLOs and other structured finance products as well as commercial loans that often underlie those products.
Where appropriate, we undertake representations for a contingency fee. We always are willing to discuss alternative funding arrangements.
We work together on a variety of initiatives with one of the industry’s leading mortgage litigation support firms. Synergy has become an overused buzzword in business marketing, but it nonetheless is the best word to describe what makes our close collaboration in the structured finance area of particular value to investors. We combine our skills and experiences across many disciplines to identify opportunities for our clients.
Our structured finance work includes:
A service that relates to many of the activities discussed below is portfolio monitoring. This service occurs in two steps. First, a vendor will evaluate your RMBS portfolio to develop an idea of whether your portfolio contains bonds that fall into the categories described below. Second, every month, the vendor will collect and evaluate the remittance reports and investor notices for the bonds in your portfolio to determine whether there has been an event such as a trust termination or trust instruction proceeding that could affect the value of your portfolio.
We have sought to distinguish ourselves by being focused on identifying whether you have been injured in one of the many ways discussed below.
Representing Investors Injured by a Trustee’s Failure Adequately to Manage Trust Assets
We have analyzed crisis-era trusts to identify trusts well suited for a claim related to the trustee’s failure to cure defects in a trust’s mortgage files. This may seem like a minor administrative issue, but trusts lost significant value because they left defective loans in their holdings rather than force their repurchase. As with event of default-based claims discussed below, we can identify classes of bonds issued by select trusts regarding which document defect claims are timely, economically viable and have a significant probability of success because of terms of PSAs governing them. More, we have an approach to litigating them that minimizes the client’s out-of-pocket litigation costs.
We already are executing this strategy for clients. We can assess your portfolio and identify whether you hold bonds that might have valuable litigation claims associated with them.
Representing Investors who were Defrauded by Issuers or Securities Underwriters
We are experienced in representing investors who were misled by structured finance issuers or securities underwriters. In the run-up to the great financial crisis, issuers and securitization underwriters were notorious for filling offering documents with representations regarding an RMBS trust’s collateral that was wildly inaccurate. Not everything has changed.
Disputes Over the Calculation of Trust Distributions
Trusts’ payment waterfalls can be complex and sometimes it is not clear to trustees and servicers how to account for and distribute funds, particularly during one-off events like the receipt of a settlement payment. And sometimes, trustees or servicers take advantage of ambiguities in trusts’ governing agreements in a way that works in their interest and against those of certificateholders. We represent certificateholders in disputes regarding the correct calculation of distributions to certificateholders.
Disputes Over the Calculation of Trust Termination Payments
It is becoming increasingly common that crisis era trusts are at a point where a party designated in the trusts’ governing documents—often the servicer—can purchase all of a trust’s assets and terminate the trust. We have seen evidence that servicers are accounting for loan forbearances and other actions they have taken in a way that allows them to underpay the trust (and thus certificateholders) when the trust is terminated. Every termination should be scrutinized to ensure that the servicer is not keeping value for themselves that should be passed on to certificateholders. In our experience, most of the terminations that we have audited have been underpaid in one way or another, in some cases by millions of dollars.
RMBS pooling and servicing agreements (PSAs) and indentures are all similar, but they are not the same. Thus, there is no substitute for examining the language of the PSA or indenture for each trust that has been terminated to determine how the servicer should have calculated the termination price. And, of course, once we know how the termination price should have been calculated, using remittance reports and other publicly available data to determine what the termination price should be.
That said, the main categories of errors we see in the calculation of termination prices involve the Servicer miscalculating (or many times ignoring) the PSA-defined terms used to detail the unpaid principal balance of each loan that should be paid at termination and impermissible loan modifications where the Servicer has applied realized losses to modified loans and reduced the loan interest rates when modifications are prohibited or restricted under the PSA, which affects both the unpaid principal balance of the loan at termination as well as the interest earned over the life of the loan in the trust post modification and prior to termination, after loan rates were slashed to as low as 2% seemingly indiscriminately throughout the trust.
Opposing Settlements That Fail Adequately to Compensate Trusts for Their Losses
Trustees routinely failed to sue loan originators who refused to buy back loans that were defective, whether because the mortgage file was defective or because the loan breached the representations and warranties made to the trust. Where trustees have brought these put-back actions, it generally has been because a certificateholder has directed the trustee to do so. The involvement of a certificateholder in the litigation creates skewed incentives when it comes to settlement. Put-back actions often are settled for too little because the directing certificateholder—typically a holder of senior certificates—directs the trustee to settle for an amount that meets the economic interests of the directing certificateholder but ignores the interests of other, more junior, certificateholders, even though it is those junior certificateholders who have suffered most of losses. We track proposed settlements and advise clients on how to oppose them, seeking a settlement that reflects the interests of all certificateholders, not just the directing certificateholder.
Certificateholder Payment Calculation
Many trustees have been sued for their failure to manage trusts. Often, trustees funded their defense from trust assets, even when a trust’s governing agreement prohibited them from using trust assets to indemnify themselves for their own misconduct. Indeed, some trustees have funded their defense from the trust even where a different player in the trust structure, such as the depositor or servicer, was responsible for indemnifying the trustee. Trustee defense fees are not huge in relation to the size of a typical trust, but for each affected trust, there is at least one class of certificates that was significantly affected by this misuse of trust funds. We can identify the trusts and classes affected and advise on the best approach to getting compensated for the trustee’s misuse of funds. We are litigating this issue for clients and have obtained court orders prohibiting trustees from reimbursing their litigation expenses from trusts.
An issue that soon will arise in trusts where distributions or underlying loan obligations are pegged to LIBOR that certificateholders should start considering now is the effect on revenue that will be created when LIBOR no longer is published. We can help with legal analysis and economic modeling of the various approaches trustees might choose to deal with LIBOR transition.
Clean-up calls are not the only circumstances where servicers have accounted for trust assets in a way that advantages them and harms certificateholders. Where a preliminary assessment of trust remittance reports indicates that such misconduct has occurred, for some holders, it is cost effective to seek to direct the trustee to conduct a servicer audit, seeking a readjustment of that flawed accounting. A servicer audit could focus on many different issues depending on your holdings and our economic analysis of them, but common issues are the accounting treatment of loan modifications, forbearances, servicing advances and HAMP incentives as well as the calculation and distribution of loan payments.