BOA Settlement

Posted by kevin on July 9, 2011 under Foreclosure Blog | Comments are off for this article

About a week ago, financial news services reported that BAC, the BOA sub that bought out servicing rights on Countrywide loans, was entering into a $8B settlement of claims of investors for violations of the representations and warranties sections of various trust agreements.  At first blush, that looks good.  A trustee, picked by the syndicate that securitized the trust, is doing the right thing and fighting for the rights of the investor group.

NOT SO FAST.  This week, we see the other side of the story (as Paul Harvey used to say).  Various investors, known collectively as the Walnut Place investors, sued the trustee, Bank of New York, basically on the grounds that BONY was trying to shove the settlement down the throats of the investors.   According to legal papers, Walnut Place went to BONY to demand that BONY file suit against CW and BOA.  BONY refused.  Walnut Place then filed its own lawsuit.  BONY then went into secret negotiations with BOA and came up with this deal.  Notwithstanding that Walnut Place has a pending lawsuit, it would be stuck with the deal that BONY allegedly made in secret without the knowledge or input of Walnut Place.  Walnut  Place was forced to spend a whole lot of $ in legal and other fees to try to opt  out of the settlement.

Now, $8B is a whole lot of money.  But you cannot tell whether the settlement between BONY and BOA is a good deal.  If the total claims were $10B, then BONY did right by the investors.  However, if the total claims were $100B, sellout.

The inherent problem is that BONY, like almost all trustees in securitized trusts, has, in my opinion, an inherent conflict of interest.  The trust is set up by the Sponsor (usually an investment firm) months prior to the closing.  The various parties are picked by the investment firm (depositor, trustee, servicers) and not the investors.  The trustee in one deal usually turns out to be the trustee in tens if not hundreds of deals.  We are talking about millions and millions of dollars in fees to the trustee for little work based on its affiliation with the sponsor.  (In court, we routinely argue that the parties to the securitization are co-venturers and therefore cannot be holders in due course.)  So, who do you think that the trustee is going to side with?  Follow the money.