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July 07, 2017  

Wells Places Spotlight on Trustees

Mortgage-bond buyers are reexamining their exposures to trustees in the wake of Wells Fargo’s move last week to withhold $94 million from investors in 20 deals.

Wells’ action applied to 20 securitizations issued by Bank of America in 2004 and 2005, with a combined face value of $540 million. Wells’ justification: It needs the money to defend itself against a lawsuit from bondholders including BlackRock and Pimco that lost money on those deals and others.

That action, filed in New York Supreme Court in 2014, alleges that Wells failed to protect the inventors’ interests in its role as trustee by insisting the issuers buy back faulty collateral loans.

The capital that Wells withheld, meanwhile, was to be distributed to investors after Fortress Investment unit New Residential Investment recently exercised call options on the deals. To that end, sources described the bank’s maneuver as a last-ditch effort to capture the funds before they were paid out.

Now, some investors are concerned that other trustees will follow the same strategy — and that the practice eventually could spread to the routine principal and interest payments due to bondholders each month. Indeed, similar actions are pending in state and federal courts against trustees Citigroup, BNY Mellon, Deutsche Bank, HSBC and U.S. Bank.

The upshot could be a major slowdown in mortgage-bond trading as buysiders evaluate how their current and potential positions might be affected should Wells or other trustees freeze payments on more deals. Consider that some investors in the BofA transactions had picked up those securities in the past few weeks out of anticipation that they would be repaid at par as New Residential’s cleanup call was carried out.

Instead, at least temporarily, they have been wiped out.

For its part, Wells noted that it was holding the money in reserve and might not necessarily need all of it. Given the complexity of the lawsuit, however, it could be years before any remaining capital is distributed. “Buysiders are furious, and sell-side guys think it’s just silly,” one bond salesman said. “It’s very frustrating. Now, even more money will be wasted.”

The terms of mortgage-bond transactions give trustees the right to siphon off capital for legal expenses. But investors typically have viewed such measures as intended to pay for actions conducted on their behalves, not against them.

In fact, one source suggested Wells’ action could be intended to force BlackRock and Pimco to back down. “It feels like the trustee is doing this to get back at the investors and try to get them to drop their suits,” one bondholder said. “It’s saying, ‘If you proceed, any victory you achieve will be a Pyrrhic one.’ “

In Wells’ case, the bank withheld roughly 17% of the collateral balance in the affected deals, or $3,000 per loan.

As for rival trustees, some could point to the matter in pitching their services to clients. “There is no question they have angered people with this action,” one said. “The sales guys will use it as a club, but the risk guys will be watching the reaction closely to see if they should follow suit. All the major trustees are in the same boat.”

New Residential could be forced to reevaluate its strategy as well. The operation typically buys mezzanine positions in mortgage deals, with a focus on gathering the bonds’ accompanying call rights. It then “collapses” the transactions and resecuritizes the underlying loans.

The New York REIT owns an estimated 30-50% of call rights attached to pre-crisis mortgage bonds — a universe of deals totaling some $500 billion. It has completed 13 mortgage-bond sales totaling $5.8 billion since 2014, along with 12 servicer-advance securitizations for $4.7 billion.