Monday, August 26, 2019

Investment Insights

Lessons learned from the Wells Fargo 

RMBS trustee litigation

Since the financial crisis of 2007-2008, we have seen a flurry of securities class actions settlements involving residential mortgage-back securities, also known as RMBS. Most recently, Financial Recovery Technologies filed over 1,600 claims for the Wells Fargo RMBS Trustee Litigation on behalf of some of the largest asset managers and hedge funds in the world.

For context, in the aftermath of the financial crisis, the investment world responded by implementing additional oversight and regulation to the management of RMBS, and as a result we have seen fewer settlements related to these securities in recent times. That being said, such cases have not been entirely eliminated. Even today, in the event of alleged misconduct by the trustees overseeing residential mortgage-back securities, substantial settlements can still arise.

Most importantly, settlements relating to the security involve additional complexity in terms of successfully producing and filing acceptable claims. That’s why firms are turning to companies like Financial Recovery Technology to assist in the recovery process. Here are a couple lessons learned that may be relevant for future residential mortgage-backed security cases: 

  • Investors were overwhelmed with the volume of securities included in the case: There were over 4,500 unique securities that were relevant to this settlement, each of which was associated with multiple security identifiers (e.g. CUSIPs, ISINs, and SEDOLs).
    • Unlike most securities litigation where the class includes holders of relatively few equities or debt instruments, RMBS cases tend to include hundreds or even thousands of securities. Financial Recovery Technologies developed scalable, specialized software designed to identify eligibility across many securities to efficiently assemble claims. 
  • Data for the claim was not standard: Over the past several years, claims administrators have refined the specifications defining what they need from each claimant to determine the value of the claims they receive for RMBS cases. However, there is still some variability in terms of how historical transactions in residential mortgage-backed securities need to be presented to claims administrators to submit a claim that will be understood and accepted. 
    • Financial Recovery Technologies queries for (or assist clients in querying) the transactions required to file for the Wells Fargo Trustee Litigation (or any RMBS cases). For the Wells Fargo Trustee Litigation, Financial Recovery Technologies leveraged previously-developed proprietary software to handle the conversions between original and current face values, enabling easy and successful claim filing. We complement the technology with an operational team, trained to understand the necessary cash flows patterns from residential mortgage-backed securities, and capable of identifying and rectifying gaps. Members of this team are available for consultation with clients about best-practices for obtaining data, and possess the know-how required to successfully file RMBS claims. 

The views expressed herein do not constitute research, investment advice or trade recommendations, do not necessarily represent the views of Financial Recovery Technologies nor TEXPERS, and are subject to revision over time.

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