Yves Smith has liberated Beau Biden’s brief to a New York court asking for intervention in the Bank of America mortgage settlement. She finds Delaware Attorney General Biden talking along the same lines as New York AG Eric Schneiderman. Biden’s main objection is that he “does not have sufficient information to evaluate the reasonableness of the proposal.” But he goes further to say that his preliminary investigation into the mortgage backed securities business of the mid-2000s has turned up some problems. In the below excerpt, BNYM represents Bank of New York Mellon:

The acts and practices ofBNYM alleged herein may have violated 6 Del. C. § 7303(2), in that BNYM may have made untrue statements of material fact and/or omitted to state material facts in order to make the statements made, in light of the circumstances under which they were made, not misleading. BNYM’s conduct as described above may have violated the Delaware Securities Act insofar as the Trust PSA requires the Trust annually to certify the following “servicing criteria”:

• “Collateral or security on mortgage loans is maintained as required by the transaction agreements or related mortgage loan documents.”
• “Mortgage loan and related documents are safeguarded as required by the transaction agreements;” and
• “Any addition, removals or substitutions to the asset pool are made, reviewed and approved in accordance with any conditions or requirements in the transaction agreements.” [See generally, Trust PSA, [Ex W to NY Petition]].

The Delaware investors in the Trusts may have been misled by BNYM into believing that BNYM would review the loan files for the mortgages securing their investment, and that any deficiencies would be cured.

This is a long way of saying that BNYM didn’t do their job as a trustee, by failing to convey mortgages properly to the trusts. This would represent a violation of statute and also pretty much nullify the MBS, because it would mean it wasn’t created correctly.

Yves writes:

Because those agreements had strict cut off dates as to when those transfers had to be completed, and governing law for the overwhelming majority of the trusts (New York law) is unforgiving on this matter (New York trusts are not permitted to deviate from their written directives) the failure to perform as stipulated cannot be remedied. Securitization expert and Georgetown Law professor Adam Levitin has described securitization agreements as “immutable contracts”. Hence the widespread use of document fabrication to get around this mess.

Biden is also intervening because at least two of the 530 trusts in the settlement were created under Delaware, not New York, trust law. That law is more forgiving than New York’s, as they typically did not include the requirement that the mortgage files had to be conveyed to the trusts. This makes it a more difficult argument, but Biden is basically biding his time, seeking more information on the trusts, as well as protecting Delaware investors.

The Schneiderman and Biden interventions have led to an explosion of cases against Bank of America, in particular; AIG’s $10 billion lawsuit on $28 billion worth of MBS – around 35% of face value – shows that the three cents on the dollar in this settlement just isn’t going to fly. But if BofA gets off with just having to pay more, they’ll be lucky. And the contagion is spreading: yesterday the National Credit Union Association, a federal regulator, sued Goldman Sachs for $491 million over representations and warrants on mortgage backed securities. This is a real problem for the industry. As Yves says:

It is encouraging to see the old saw, “The wheels of justice grind slowly, but the grind exceedingly fine,” proves true now and again. The fact that the rule of law is not completely dead in the US is looking increasingly likely to provide a very costly lesson to some very large banks and their asleep at the wheel regulators.

P.S.: Yves had a good overview of BofA’s troubles in a post for Glenn Greenwald’s site at Salon.