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Sprawled across front of NYT Business Day, w/headshots. Great first step in
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June 12, 2011
Two States Ask if Paperwork in Mortgage Bundling Was Complete By GRETCHEN
MORGENSON<http://topics.nytimes.com/top/reference/timestopics/people/m/gretchen_morgenson/index.html?inline=nyt-per>

Opening a new line of inquiry into the problems that have beset the mortgage
loan process, two state attorneys general are investigating Wall Street’s
bundling of these loans into securities to determine whether they were
properly documented and valid.

The investigation is being led by Eric T.
Schneiderman<http://topics.nytimes.com/top/reference/timestopics/people/s/eric_t_schneiderman/index.html?inline=nyt-per>,
the attorney general of New York, who has teamed with Joseph R. Biden III,
his counterpart from Delaware. Their effort centers on the back end of the
mortgage assembly lines — where big banks serve as trustees overseeing the
securities for investors — according to two people briefed on the inquiry
but who were not authorized to speak publicly about it.

The attorneys general have requested information from Bank of New York
Mellon<http://topics.nytimes.com/top/news/business/companies/bank_of_new_york_company/index.html?inline=nyt-org>and
Deutsche
Bank<http://topics.nytimes.com/top/news/business/companies/deutsche_bank_ag/index.html?inline=nyt-org>,
the two largest firms acting as trustees. Trustee banks have not been a
focus of other investigations because they are administrators of the
securities and did not originate the loans or service them. But as
administrators they were required to ensure that the documentation was
proper and complete.

Both attorneys general are investigating other practices that fueled the
mortgage boom and subsequent bust. The latest inquiry represents another
avenue of scrutiny of the inner workings of Wall Street’s mortgage
securitization machine, which transformed individual home loans into bundles
of loans that were then sold to investors.

It follows months of sharp criticism of the mortgage foreclosure process,
which produced an uproar last year over shoddy paperwork and possible
forgeries of legal documents by banks, other lenders or their
representatives.

The slipshod practices in foreclosures led to further questions about
whether all the necessary documents were delivered to the trusts and
properly administered by them.

Some of the nation’s biggest mortgage servicers are currently in
negotiations with a group of state attorneys general to settle an
investigation into foreclosure abuses. The new inquiry by New York and
Delaware indicates the big banks’ troubles may not end even if a settlement
is reached in the foreclosure matter.

The stakes are potentially high. If the trustees did not follow the rules
set out in the prospectus, they may be liable for breaching their duties to
investors who bought the securities. That could expose the banks to costly
civil litigation.

Spokesmen from Bank of New York and Deutsche Bank declined to comment about
the investigation, as did representatives from the offices of both attorneys
general.

A complex process that produced hundreds of billions of dollars in
securities during the lending boom, the issuance of mortgage securities
began with home loans, which were then bundled into investments and sold to
pension funds, mutual
funds<http://topics.nytimes.com/your-money/investments/mutual-funds-and-etfs/index.html?inline=nyt-classifier>,
big banks and other investors. The bundles were created as trusts overseen
by institutions such as Bank of New York and Deutsche Bank; they were
supposed to make sure the complete mortgage files for each loan were
delivered within a specified time and with the proper documentation.

After the securities were sold, the trustees disbursed interest and
principal payments to investors over the life of the trusts.

The trusts were governed by the laws of the states in which they were set
up. Roughly 80 percent of the trusts are governed by New York law with the
rest by Delaware law.

The rules governing the securitization process are labyrinthine, and there
are steps required if the investment is to comply with tax laws and promises
made by the issuer in its offering document. If the trusts did not comply
with tax laws, for example, the beneficial treatment given to investors
could be rescinded, causing taxes to be levied on the transactions.

The terms of these mortgage deals varied, but many of them required that the
trustee examine each of the loan files as soon as they came in from the Wall
Street firm or bank issuing the security. For a file to be complete, it
would typically have to include all of the information necessary to
establish a chain of ownership through the various steps of the bundling
process, as when the originator transferred it to the issuer of the security
who then moved it to the trustee.

Complete loan files were supposed to be delivered to the trusts within 90
days in most cases. If the trustee found any missing or defective documents,
it was supposed to notify the loan originator so that it could either cure
the deficiency or replace the loan. Such substitutions are typically allowed
only in the early years of the trust.

By asking for documents relating to this process, investigators are trying
to determine if the trustees fulfilled their obligations to the investors
who bought the mortgage deals, according to the people briefed on the
inquiry.


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Alexander Snyder-Mackler
(302) 598-867