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SEC zones in on MBS trustees for enforcement actions

By Ryan Bolger
22 Sep 2014

The Securities & Exchange Commission is looking into the viability of enforcement action against trustees, as other targets of litigation related to the 2008 mortgage-backed securities crisis dry up.

Statutes of limitations and the Trust Indenture Act could stop the regulator from targeting trustees for breaching their obligations to protect payments to bondholders, said SEC representatives during a panel discussion at ABS East in Miami on Sunday.

No enforcement actions have been brought by the SEC under the Trust Indenture Act since it was passed, in 1939, according to the SEC's complex financial instruments acting chief, Reid Muoio. “We’ve just begun to put some thought around that," he said.

The SEC's guidance to market participants is that RMBS deals are not subject to the Trust Indenture Act. But case law on how the Act applies to RMBS is still being shaped and could cause the SEC to reconsider its stance.

A federal court in Manhattan ruled at the end of 2012 that pension funds could sue Bank of America and US Bancorp for failing to protect investors while acting as MBS trustees. That case is on appeal in the Second Circuit.

Trustees are the last viable RMBS litigation targets to follow the financial crisis, said Zach Rosenbaum, a buy-side litigator at Lowenstein Sandler.

“Everyone has brought their fraud suits – everyone’s brought their put-back suits – where do you go next and last?” he said, before adding that trustees were a “massively deep pocket".


An attendee of the discussion from the SEC’s Office of Credit Rating Agencies commented on the difficulty the SEC has in overseeing credit rating agencies.

The SEC is not authorised to regulate the agencies’ criteria, but at the same time must make certain that such criteria are not being influenced by “commercial decisions versus analytical” ones, the attendee said.

“The question is, are the rating agencies catering to those [corporate] interests? It’s very, very challenging,” noted the SEC staffer. “You’re reading about these transactions that have multiple tranches and rating agencies are rating some but not all of the tranches because the rating agency won’t give them the rating they want.”

The next MBS?

Subprime auto ABS has been proposed as a potential bubble, bolstered by triple-A ratings. Daniel Nigro, complex financial instruments senior specialised examiner at the SEC, noted that Standard & Poor’s failed to downgrade a single subprime auto ABS tranche during the entire financial crisis.

“I’m not saying [subprime auto ABS] is necessarily going to be clean for the future, but [the asset class] has a pretty strong history,” Nigro said. “That doesn’t mean there aren’t issues regarding predatory lending.”

Smaller subprime auto lenders and ABS originators lacking the institutional backing of a bank or large auto company could be especially prone to poor underwriting, he said.

“For any entity that is dependent upon securitization only and has limited access to the credit markets, you have to be concerned about their liquidity and the challenges that might create for their credit underwriting,” Nigro said.

By Ryan Bolger
22 Sep 2014