August 27, 2015

On August 19, 2015, the Federal Deposit Insurance Corporation (“the FDIC”), the U.S. banking regulator, sued Bank of New York Mellon (“BNY”), alleging that the bank failed to protect investors in mortgage-backed securities purchased by Texas-based Guaranty Bank. The FDIC alleged that Guaranty Bank suffered over $440 million in losses on its $2.06 billion investment in mortgage-backed securities when it sold the securities in March 2010.  Guaranty Bank failed in 2009 and the FDIC became the bank’s receiver.  The FDIC sued in its capacity as receiver of the failed bank.

The FDIC sued BNY IN BNY’S capacity as trustee of 12 mortgage-backed trusts.  Eight of the trusts were CWALT trusts (Countrywide Alternative Loan Trusts) and four were SAMI trusts (Structured Asset Mortgage Investments II, Inc. Trusts). Countrywide Home Loans, Inc. was the sponsor/seller of the CWALT Trusts and EMC Mortgage Corporation was the sponsor/seller of the SAMI Trusts. All of the trusts were made in 2005 and 2006. EMC Mortgage Corporation was a division of Bear Stearns Companies. JPMorgan Chase & Company bought Bear Stearns in 2008. Bank of America bought Countrywide Home Loans in 2008. The CWALT trusts named in the lawsuit are series 2005-38, 2005-41, 2005-51, 2005-58, 2005-62, 2005-76, 2005-81 and 2006-OA2. The SAMI trusts named are series 2005-AR4, 2005-AR7, 2005-AR8 and 2006-AR3.

The FDIC alleges that BNY breached its contractual and statutory duties and abdicated its fundamental duties to certificate holders (investors), including Guaranty Bank:

“BNY Mellon was essentially Plaintiff’s sole source of protection against breaches of the governing agreements by the other parties to those agreements, including the sponsors that sold the loans to the Covered Trusts and the servicers tasked with servicing the mortgage loans. BNY Mellon, however, shirked its duty to exercise its powers to protect Plaintiff and instead attempted to shorn itself of the responsibilities that trusteeship imports. While BNY Mellon stood idly for years, the sponsors kept defective mortgage loans in the Covered Trusts, servicers reaped excessive fees for servicing the defaulted loans from the Covered Trusts, and Plaintiff was left to suffer enormous losses.”

The lawsuit alleges that BNY breached its duties in five different ways. The first breach identified was a failure to properly obtain the critical loan documents and keep these documents secure as required by Item 1121 of SEC Regulation AB. The FDIC alleges in paragraph 10 of the Complaint:

“First, to ensure that the rights, title, and interest in the mortgage loans were perfected and properly conveyed to BNY Mellon, the PSAs imposed on BNY Mellon a duty to ensure that key documents for the loans were included in the mortgage files and to create an exception report identifying incomplete mortgage loan files. BNY Mellon, however, systematically disregarded these contractual and statutory duties to enforce these rights on behalf of certificateholders. If BNY Mellon had met its contractual and statutory duties with respect to the non-compliant loans whose defects were not cured during the limited cure period, the relevant Sponsor (or other obligated party) would have been required to substitute compliant loans for the loans with incomplete files, or repurchase the loans instead of having them remain in the Covered Trusts causing Plaintiff to incur significant losses.

As trustee, BNY regularly submitted certification and remittance reports to the Securities and Exchange Commission (“the SEC”) swearing to the SEC and to investors that the loan documents were properly safeguarded.  The loan documents included the properly endorsed promissory notes and mortgage assignments in recordable form showing a complete chain of assignments from the originators to the trusts.

There is abundant evidence to support the FDIC’s allegations in the county land records, the court records in foreclosure cases and the U.S. bankruptcy court records because BNY and its servicers regularly filed mortgage assignments shoddily created by document mills and also regularly filed unendorsed promissory notes.

In Florida, the mortgage assignments filed in the CWALT cases were prepared primarily in the law offices of David Stern, the now disbarred and discredited owner of one of the largest foreclosure mills in the country. Stern’s law office manager, Cheryl Samons, signed hundreds of CWALT assignments.  On these assignments, Samons claimed to be an Assistant Secretary of Mortgage Electronic Registration Systems.  These CWALT assignments were made from 2008 to 2010, for trusts that had closed years before, in 2005 and 2006. The law offices of David Stern usually manufactured and filed these assignments in the same month that they filed a foreclosure action, often trying to make the effective date retroactive to the signing date.  Many CWALT assignments were similarly created by the employees of Lender Processing Services in Dakota County, Minnesota and BAC Home Loans Servicing (formerly, Countrywide Home Loans Servicing) in Plano, Texas, long after the trusts were closed.

The FDIC, as receiver of Guaranty Bank, also sued Citibank and US Bank.  In the Citibank lawsuit, the FDIC alleged that Guaranty Bank lost over $200 million. In the US Bank case, the FDIC alleged that Guaranty Bank lost more than $55 million.

The FDIC sued Citibank as Trustee for SAMI 2007-AR6. As in the BNY lawsuit, the FDIC alleged that the trustee failed to obtain and safeguard complete mortgage files from loan originator American Home Mortgage. EMC Mortgage was the sponsor of this trust.

The FDIC sued US Bank as Trustee for Harborview Mortgage Loan Trust 2005-8 and Harborview Mortgage Loan Trust 2006-16. Greenwich Capital Financial Products was the sponsor for the Harborview trusts.

As in the case of BNY, Citibank and US Bank, as trustees for these named trusts, filed mortgage assignments made years after the trust closings, made by its own law firms and by discredited document mills, to pursue foreclosures.  In hundreds of cases, these three banks also filed foreclosure lawsuits seeking to re-establish the notes claiming that the actual original notes had been lost.  These lost note cases, and document-mill assignments, support the FDIC’s allegations that the trustees failed to secure and safeguard the critical loan documents.

In these lawsuits, the FDIC makes the same claims that homeowners in foreclosure have been making since 2008: critical mortgage documents are missing from the trusts.