Investor Syndicate At Hundreds of Billions And Growing

Posted on June 16, 2010 by Isaac Gradman

Heard on this Street this week: the super-secret Syndicate of MBS Investors discussed previously is gaining momentum.  A confidential source has informed me that some of the largest institutional investors in mortgage-backed securities have now joined the group, bringing the amount under management to “hundreds of billions of dollars in MBS investments.”  The source further informed me that this number is expected to swell to a “jaw-dropping dollar figure.”

As discussed before, the Syndicate hopes to amass enough representation in enough securitizations throughout the country to take over those trusts pursuant to the terms of the respective Pooling and Servicing Agreements (PSAs).  These contracts often require 25% class ownership to petition the Trustee to take action and 50% ownership to fire the Trustee or Master Servicer.

Once the Syndicate has reached critical mass, it reportedly will approach the Trustees of a number of deals to present evidence of Servicer misconduct and request the Trustee to take action to remedy Servicer breaches (including firing the Servicer).  If the Trustee does not comply, the Syndicate plans to fire the Trustee and Servicer, and install friendly institutions in their place.
At that point, the Syndicate would likely pursue two major courses of action: 1) take over the servicing of the deals and begin servicing the loans in the trust in accordance with bondholder wishes (including liquidating or modifying loans in default, depending on which option makes the most economic sense over the long term) and 2) pursue remedies against originators for losses caused to the pool.  This second prong would involve pouring over loan files obtained from the prior servicer to look for breaches of reps and warranties in the origination and underwriting of the loans.  This will almost certainly lead to a jump in mortgage litigation seeking to compel originators to buy back or repurchase loans that were improperly originated (to the extent these originators are still solvent).
Again, loan files are critical, because they reveal the fundamental characteristics of each loan and the underwriting determinations made in the approval of such loans.  Though certain plaintiffs have recently made strides towards forcing servicers like Countrywide to turn over loan files (see also Order Granting Motion to Compel in Syncora v. Countrywide), the acquisition of these all-important documents remains a difficult proposition.  Investors are increasingly coming around to the idea that the only way they will be able to obtain these files is by force–namely, firing Servicers and taking over their duties and documents.
I will continue to provide updates on this fascinating development as they become available, and expect that we’ll begin to hear more about the Investor Syndicate in the mainstream media in the coming months.  Stay tuned…
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