January 5, 2012 / 10:11 PM / 7 years ago

Wells Fargo in the crosshairs of mortgage-bond investors

NEW YORK, Jan 5 (IFR) - A law firm representing large institutional investors who took steep losses on soured residential mortgage-backed securities (RMBS), including Pimco, the world’s largest bond fund, is now setting its sights on toxic mortgage bonds issued by Wells Fargo.

Houston-based Gibbs & Bruns LLP said Thursday that its clients have now issued instructions to trustees to open investigations into ineligible mortgages placed into $19 billion worth of mortgage securities issued by affiliates of Wells Fargo in the lead-up to the financial crisis. The clients hold more than 25% of the voting rights in the 48 trusts that issued these RMBS.

The firm, which represents at least 22 major institutional investors, has previously been successful in helping its clients move one step closer to extracting payments from Bank of America in a landmark US$8.5bn settlement announced last June.

However, the proposed settlement has been met by a groundswell of opposition from smaller investors that were not a party to the broad agreement crafted by Gibbs & Bruns, and has been hotly contested in state and federal court.

In mid-December, Gibbs & Bruns also announced that it was investigating deficiencies in 243 JP Morgan RMBS trusts on behalf of its clients. Now it has turned its attention to Wells Fargo.

“Our clients continue to seek a comprehensive solution to the problems of ineligible mortgages in RMBS pools and deficient servicing of those loans. Today’s action is another step toward achieving that goal,” said Kathy D. Patrick of Gibbs & Bruns in a statement.

Not all in the mortgage-bond litigation community support Patrick’s efforts.

“Every major bank has a systemic and massive problem that they are trying to come to grips with,” said Bill Frey, president of Greenwich Financial, who has been working for bond investor rights over the past four years and feels that smaller investors are getting shut out of an equitable payout.

Unfortunately Kathy Patrick’s investor clients involved in the BofA settlement are far from aggressive or objective.”

Politicians, including New York attorney general Eric Schneiderman and Delaware attorney general Beau Biden, have also objected to the BofA settlement, saying that it was not aggressive enough and may represent a sweetheart deal that could set a template for other large commercial banks, which are eager to put crisis-era mortgage liabilities behind them.

Many of Gibbs & Bruns’ investor clients maintain significant business relationships with Bank of America, JP Morgan, and Wells Fargo across the spectrum of financial services.

Schneiderman not only moved to block the settlement, but also launched a counter-suit against Bank of New York Mellon, which acted as trustee on many of the RMBS transactions in question, alleging fraud in how the bank represented the mortgage securities to investors.

Gibbs & Bruns did not return calls seeking comment. Wells Fargo spokesman Ancel Martinez declined comment.

Some legal observers studying today’s announcement from the law firm, which listed the specific Wells Fargo mortgage bonds being investigated, questioned whether this is a further attempt on the part of the firm to hammer out a broad-based, watered down agreement that the large commercial bank would be apt to sign on to.

In fact, several of the Wells Fargo RMBS transactions in today’s announcement actually have very few losses and delinquencies, according to Isaac Gradman, an attorney who advises investors in mortgage-bond litigation.

At least two of the transactions have delinquency rates under 1% and cumulative losses under 1.34%, raising the question of why these offerings are being included in the investigation.

“It’s possible that the law firm is getting pushed by some of its clients to start enforcing putbacks and get as broad of a deal as possible,” Gradman said. “If they wrap up their holdings into a comprehensive deal, it may attract banks such as Wells Fargo to settle with them.”

“The ongoing question is, are these clients truly seeking the most aggressive solution, or do they just want to put these issues behind them with a settlement?,” he said.

Reporting By IFR reporter Adam Tempkin in New York; Additional reporting by Reuters reporter Rick Rothacker in Charlotte; Editing by Ciara Linnane

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