The foreclosure document debacle, a huge embarrassment and liability for mortgage servicers, could soon also ensnare the banks that act as trustees for securitizations.
Deutsche Bank AG, the second-largest trustee of asset-backed securities in the U.S., recently demanded that the servicers of its deals indemnify the German bank, and the investors it represents, against any "liability, loss, cost and expense of any kind" from "alleged foreclosure deficiencies or from any other alleged acts or omissions of the servicer."
The Financial Crisis Inquiry Commission is also investigating trustees' role in the foreclosure mess, according to several people with knowledge of the body's work.
The commission, which was created last year and has held a number of hearings, has no real teeth, but it plans to issue a report Dec. 15 on its findings about the causes of the financial crisis. The report is expected to include some discussion of trustees in securitizations, the people said.
In an Oct. 8 letter, Deutsche cautioned the major mortgage servicers that had halted foreclosures to examine their processes — including Ally Financial Inc. and JPMorgan Chase & Co. — of the need to ensure ownership of loans was properly transferred to trusts when securitizations were formed.
Deutsche Bank told the servicers to "comply with all applicable laws relating to foreclosures," and requested additional information about alleged loan defects and any actions taken by servicers to fix them.
Thomas Hiner, a partner at Hunton & Williams LLP, said Deutsche Bank, which forwarded the servicer warning to investors on Oct. 25, was trying to appear proactive. "They are attempting to show a good face to the bondholders, that they are in front of the issue and they're telling the servicers to comply with the law and the documents," Hiner said.
He also said Deutsche bank was trying "to disclaim responsibility for" servicers' paperwork blunders.
