Bad: When a newspaper ridicules your bank's chief executive for wrongful foreclosures.
Worse: When the foreclosure was initiated by another company.
Maddening: When even top executives at the bank don't realize that — and blame your department.
That's the situation Lee Mitau, U.S. Bancorp's general counsel and an executive vice president, found himself in last month. After a Massachusetts court excoriated his company, along with Wells Fargo & Co., for bungling documentation of foreclosures, the New York Post published photos of the banks' CEOs with dunce caps superimposed on their heads. Neither bank had made the decision to foreclose on the two borrower plaintiffs; with both loans, that was American Home Mortgage Servicing Inc.'s call. But as trustees for the securitizations, Wells Fargo and U.S. Bancorp appeared on all legal documents as the foreclosing party — and so became the objects of the judge's admonishments and media ridicule.
"Senior executives here at the bank, on our managing committee, thought I'd lost that case," Mitau said. "Most people just don't understand it, the separation of the trustee and the servicer."
The misunderstanding, he said, is understandable. "You'd think if someone is out there using our name, we would have control," Mitau said. "When a servicer forecloses, they do it in our name, which is a very weird and dangerous situation. And the judges write opinions where they say 'U.S. Bank breached its promise,' U.S. Bank didn't breach any promise because we didn't foreclose."
Throughout the mortgage crisis, trustees have said they have little contractual ability to monitor servicers. Rather, they are limited to administrative duties such as transmitting funds to bond investors and providing performance statements based on data supplied by the servicers themselves. Typically, trustees are only given foreclosure statistics after a foreclosure has already occurred.
But with the flood of foreclosures has come a flood of litigation, and with that, higher costs and reputational risks for trustees as judges and media outlets routinely call out these custodial agents for the actions of servicers.
"I don't think anyone likes having their name put in the media when someone other than themselves failed to take appropriate action," said Brian Bartlett, head of Wells Fargo's corporate trust services.
The sheer volume of foreclosures and litigation has slowly changed trustees' attitudes. Now, they are actively taking steps to have a dialogue with servicers while explaining their jobs to consumers, reporters and public officials.
Bartlett said Wells plans to take a more active role by talking to servicers and servicers' lawyers, hopefully before specific court cases go awry and garner national media attention.
"We've had ongoing discussions with servicers and that engagement is going to become much more interactive," Bartlett said. "There may be some resistance, but at the end of the day they — servicers — are obligated to foreclose for the benefit of the trust and if they are going to foreclose and do so in our name, we have some authority and responsibility in that process."
U.S. Bancorp set up an 800 number for borrowers to call and get connected with their servicer.
Bryan R. Calder, its president of corporate trust services, estimated he now spends 30% to 40% of his time on servicer issues.
"It's not fun being the head of corporate trust right now," he said. "But we can't bury our head in the sand and expect this to go away."
About 20% of U.S. Bancorp's structured finance research staff of 150 are involved in some way in dealing with servicer issues, Calder said. "It is raising the cost of doing business, but we don't know of another option other than being proactive and recognizing that we're limited to what we can do because we are the trustee."
In November, when servicers were caught in the robo-signing scandal in which back-office employees signed thousands of affidavits in foreclosure cases without examining the loan files, Deutsche Bank AG's trustee arm took the unusual step of demanding that servicers indemnify the bank for any liability from alleged foreclosure deficiencies.
Jim Della Sala, a Deutsche Bank managing director and head of corporate trust, said trustees cannot do anything that would jeopardize investors' interests.
"We don't hire the servicer, we don't pay them and typically we can't fire them," Della Sala said. "Our role is really an investor-protection role."
Deutsche Bank and U.S. Bancorp even explored whether they could change their names on foreclosure filings. But both dismissed that option. U.S. Bancorp, Calder said, deemed it impractical because of the difficulty and cost of refiling documents for millions of loans in so many different jurisdictions.
Paul Collier, a Cambridge, Mass., lawyer who represented the homeowners in the Massachusetts case, disputes trustees' arguments that they have no authority.
"The trustee indeed has the power to control the servicer and the trustee can refuse to permit the servicer to take an action in which the trustee does not agree," Collier said. "They simply choose not to exercise that authority because they're worried about their own liability to the investors."
He went on, "You can't throw up your hands and say you're shocked that the servicer does something that you allowed to happen."
"I find the most macabre thing about the securitization industry is everyone says they're not the one making the decisions," Collier said. "They do play a limited role by choice, and this is their way of waving their finger at somebody else."
Cris Naser, senior counsel at the Center for Securities, Trust and Investments at the American Bankers Association, said the problem is complicated even further because some of the largest trustees are also servicers.
"There is a mixed feeling among the trustees because so many of them are large banks. Regardless of the role they played in the financial meltdown, they are all deemed to be 'Wall Street,' " Naser said. "Do they try to correct it or are they just pouring more fuel on the fire? Some people feel we should just let sleeping dogs lie."
Residential mortgage-backed securities are unique in that the trustee holds the collateral to the underlying property on behalf of bond investors. The reasoning behind the structure, Naser said, was to make the investors' assets "bankruptcy remote" in the event a securities issuer faltered. Though issuance is still essentially dead in the private-label securitization market, trustees are hoping that changes could be made to shield them from being identified with the bad actions of servicers. "There are a lot of people looking at the RMBS market and how it will be fixed and restarted, and hopefully this link to the trustees is one of the issues," Della Sala said.
Citigroup Inc., U.S. Bancorp and Wells have perhaps more at stake as trustees because of their large retail branch presence compared with purely custodial banks like Bank of New York Mellon.
"The reputational risk really depends on the bank," Naser said.
