More Heat For Banksters As NY, Delaware AGs Begin Sniffing Around For Faulty Securitizations

The New York Times reports:

• 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, 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 and Deutsche Bank, 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.

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• 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.

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• 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 If the trusts did not comply with tax laws, for example, the beneficial treatment given to investors could be rescinded, causing taxes to be levied on the transactions.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.

For the story, see Two States Ask if Paperwork in Mortgage Bundling Was Complete.

See also, The Dylan Ratigan Show: Attorneys-General Look Into Bank Behavior In Mortgage Mess.