The government has sued The Bank of New York Mellon Corp. over losses tied to sour mortgage securities it managed for financial institutions that sold them to a now-defunct Texas bank, highlighting how federal regulators are casting a wide net in holding banks accountable since the financial crisis of 2008.
Regulators have punished banks for making shoddy housing loans or packaging them as securities sold to investors, but the case against BNY Mellon involved work as a trustee and not as an originator of these financial instruments.
In a complaint filed Wednesday in Manhattan federal court, the Federal Deposit Insurance Corp. said it lost more than $440 million when it sold off a $2 billion portfolio that was owned by the former Guaranty Bank in Austin, Texas. The bank failed in 2009, and the FDIC, which was overseeing its liquidation, was trying to recover money from the sale of its assets.
BNY Mellon, as a trust bank, was acting as an agent for the institutions that bundled mortgage loans into securities and sold them as investments to Guaranty Bank.
The lawsuit named Countrywide Home Loans Inc. and Bear Stearns’ EMC Mortgage Corp. as the companies that generated the securities. Countrywide was purchased by Bank of America Corp. in 2008, and JPMorgan Chase & Co. bought Bear Stearns in the same year.
BNY Mellon “shirked its duty” to ensure that the loan documents were not defective when it oversaw 12 trusts that owned those bad mortgage loans, the FDIC said.
Regulators said BNY Mellon “stood idly for years” while defective mortgage loans remained in the trusts and servicers reaped excessive fees for servicing defaulted loans.
BNY Mellon spokesman Kevin Heine said the bank believes the suit is without merit.
“We are confident that we have performed our duties as trustee appropriately,” Heine said.
Trust banks typically seek contracts that gives them as little responsibility and liability as possible, making lawsuits against them difficult to win, said Erik Gerding, a professor at University of Colorado Law School. The FDIC, which insures bank customers’ deposits, may have another motivation in bringing this case, he said.
“The FDIC has two roles. One is to try and recover as much as they can because they’re safeguarding an insurance fund, but they’re also a regulator,” Gerding said.
“It’s possible that the FDIC is trying to send a message to trustees. Even if they try to contractually limit their liability, they can’t just stick their head in the sand.”
The FDIC does not comment on pending litigation, spokesman David Barr said.
The agency, which filed a similar lawsuit Wednesday against US Bancorp, reached a settlement with J.P. Morgan for $515.5 million over mortgage securities sold to Guaranty Bank and other investors. BofA settled for $1 billion.
The lawsuit against BNY Mellon occurs amid a regulatory crackdown on mortgage practices that were blamed for the housing crisis. Wall Street banks that repackaged and sold mortgages to investors have claimed that they did nothing wrong. Yet the government has collected billions of dollars in settlements from some of them.
On Thursday, the FDIC announced another $1 billion settlement with BofA and other banks involving misrepresentations in the offering documents for 155 mortgage-backed securities.
BNY Mellon has had other problems that have prompted nearly $1 billion in settlements this year, mostly over its foreign exchange business.
On Tuesday, regulators said the bank would pay $14.8 million to settle allegations that it tried to win business managing investments for a Middle Eastern country by giving internships to family members of government officials.
About the Writer
Chris Fleisher is a staff writer for Trib Total Media.
