Everyone is mad at the big mortgage servicers. Homeowners have filed innumerable lawsuits over faulty foreclosures and mangled modifications. Law enforcement officials in all 50 states—along with the U.S. Justice Department—have launched investigations that should eventually result in big monetary settlements with the servicers. But not to be forgotten are the investors that bought those infamous residential mortgage-securities (RMBS). They suffered along with homeowners as home prices plunged and defaults multiplied.
You may recall the $8.5 billion settlement announced between Bank of America and 22 RMBS investors last June. Meant to resolve BofA’s “buy back” liability while compensating those who lost money, it was reportedly the largest such settlement in history. Now, it may be matched by a similar action against JP Morgan Chase.
Gibbs and Bruns, LLP, the law firm that handled the suit against BofA, is targeting mortgage pools issued by Chase or its affiliates whose quality may have been misrepresented. The firm’s clients, representing at least 25 percent of the voting rights in the 243 RMBS trusts under scrutiny, have instructed BNY Mellon, US Bank, Wells Fargo, Citibank, and HSBC to “open investigations of ineligible mortgages” in mortgage pools over which they serve as Trustees. Clearly, this could be the precursor to another multi-billion-dollar suit.
As Bank of America was haunted by its purchase of Countrywide Financial, Chase’s problems concern legacy assets acquired in its purchase of Bear Stearns and Washington Mutual.
In the end, lots of money will change hands. Will any of it bring health back to the housing market? Will the mortgage servicers be able to survive these multiple assaults from all sides? What will happen if they go down? Will investors ever again have confidence in mortgage backed securities? Will anyone be willing to guarantee the quality of such investments? Will the government be forced to bail out the banking sector again?
For the answers to those questions, check back here in a year or two.