Do You Know Your MBS-Toxic Asset Exposure?
By Reed R. Kathrein
The mortgage-backed securities (MBS) crisis is over, right? Wrong! Many public fund managers are just beginning to realize that they are holding toxic assets and are incurring actual losses on their investments. If you are a trustee or investment manager of a public or Taft-Hartley fund, you need to act now to recover damages, if you have not already.
Over the last few years, several class actions have been filed against the investment banks seeking to recover losses for fraudulent sales of MBS. Others have filed their own individual suits. Just last month, the Federal Housing Finance Agency, the regulator for Fannie Mae and Freddie Mac, filed lawsuits against 17 defendant banks over poor performing MBS issued during the recent real estate boom.
Specifically, the suits allege that the loans had different and more risky characteristics than the descriptions contained in the marketing and sales materials provided to the enterprises for those securities. The suits seek to recover billions of dollars in losses.
Settlements have been announced in still other suits. For instance, there are proceedings underway to hear objections to Bank of America’s attempt to settle a large number of suits against it for $8.5 billion. Public pension funds, including Maine, Vermont and others, are objecting, as is the FDIC, several home loan banks and the Attorneys General of the States of New York and Delaware. While the outcome of that settlement is unpredictable, at least the many affected funds are participating and protecting their interests.
As the class actions proceed through the courts, we are seeing a need for individual funds to wake up and review their portfolios. Many of the class actions filed against those who sold MBS are now being dismissed for lack of standing – the plaintiff seeking to represent the class did not buy the security for a particular tranche or offering. Accordingly, public funds that are paying attention are now initiating their own lawsuits or opting out of class actions to pursue individual recoveries.
Trustees and fund managers should review their MBS holdings and determine where they have losses or are likely to have losses and whether they are covered by a pre-existing class action or should be pursuing their own individual action.
Hagens Berman is currently advising several large institutional investors concerning litigation strategy to recover MBS losses.