(Reuters) – If there is any silver lining to the lingering black cloud of the mortgage crisis, it’s the incredibly creative legal theories devised by investors who lost hundreds of billions of dollars in overhyped mortgage-backed securities. In a decade of MBS litigation, investors figured out how to hold banks, mortgage issuers and even credit rating agencies accountable for misrepresenting the quality of the mortgages underlying the complex instruments they were peddling. It took ingenuity and persistence, but MBS investors, including hedge funds betting on the eventual success of the litigation, managed to get past contractual and procedural obstacles to recover tens of billions of dollars.
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On Monday, the trustees of a union pension fund that invested in MBS filed a prospective class action against the mortgage servicer Ocwen and related defendants, accusing them of breaching their duties to ERISA beneficiaries. And according to Brad Miller of Guttman Buschner & Brooks – a crusading former North Carolina congressman who is a leading architect of the new suit – mortgage servicers’ exposure to ERISA claims could be vast. The Ocwen suit is apparently the first of its kind, Miller told me in an email, but he is hoping it won’t be the last.
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According to the complaint, Ocwen and the other defendants were obligated, as MBS mortgage servicers, to work with homeowners to modify their mortgages rather than hurting investors by allowing homes to go into foreclosure. But the ERISA plan trustees claim Ocwen and the other defendants put their own interests ahead of the interests of MBS investors. The mortgage servicers, according to the complaint, “profited more from mortgages in default or foreclosure than from performing mortgages,” so they allegedly “sabotaged mortgage modifications and otherwise pushed struggling homeowners into needless default.”
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Miller, the ex-congressman, said he expects the defendants to contest the assertion that they have ERISA duties to pension funds that invested in mortgage-backed securities. “I can’t imagine that Ocwen and other servicers won’t contest that they have a fiduciary duty, because the stakes are too high — there’s no way to square their conduct with a fiduciary duty,” he said in an email. But he said he’s confident the fund’s reading will hold up because of the authority mortgage servicers wielded in managing the pooled investments.
“Servicers have a world of discretion over mortgages,” he said. “The governing documents give them the authority to do ‘anything and everything’ they see fit. And the statutory definition is functional – not what power the person had contractually, but what power the person exercised.”
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