Nearly a decade later, fallout from the housing crash continues to dog big banks, including San Francisco lending giant Wells Fargo, which is facing a new lawsuit from an investor that took huge losses on mortgage-backed securities that went bust.
German finance firm Commerzbank last week sued Wells Fargo and three other major banks saying they failed to properly oversee mortgage-backed securities created during the peak of the housing bubble, resulting in hundreds of millions of dollars in losses.
The lawsuit was filed on Christmas Eve in a federal court in New York and seeks unspecified damages. It alleges that Commerzbank lost more than $100 million because of Wells Fargo's inaction.
"Investors were dependent upon ... Wells Fargo to police the deal and to protect their contractual and other legal rights," attorneys for Commerzbank wrote in their complaint. "Wells Fargo, however, abandoned its obligations to protect the rights of investors."
Through a spokesman, Wells Fargo declined to comment. Attorneys for Commerzbank did not return calls for comment.
Banks have already paid investors billions in settlements over mortgage-backed securities that went bad. In most cases, the banks making the payouts issued shoddy loans that led to the housing crisis or sold bonds backed by those loans.
Most notably, Bank of America paid $8.5 billion to investors who lost money after they bought securities backed by home loans from Countrywide, the Calabasas subprime mortgage giant acquired by Bank of America in 2008.
But Commerzbank's suit against Wells Fargo and similar cases filed last week against Deutsche Bank, BNY Mellon and HSBC take a different tack.
Those banks didn't make the shoddy loans. Rather, they acted as the trustee for the securities — to make sure that money paid by mortgage borrowers gets to investors.
Commerzbank alleges that Wells Fargo and the other trustees were also responsible for making sure the loans met certain standards, for forcing mortgage lenders to compensate investors for shoddy loans and for informing investors about loan defaults.
Commerzbank alleges that Wells Fargo did none of that — and failed to expose rampant problems across the mortgage industry.
The German firm invested more than $290 million in mortgage-backed securities for which Wells Fargo was the trustee and said it took losses of more than $100 million. Many of the securities were backed by mortgages from Irvine firm Option One, a major subprime lender formerly owned by tax firm H&R Block.
The claims against Wells Fargo mirror those made in suits filed last year by investment firms BlackRock and Newport Beach bond giant Pacific Investment Management Co. against Wells Fargo, Deutsche Bank and others.
In court documents, attorneys for Wells Fargo and Deutsche Bank argued that the investment firms with "some of the world's most sophisticated institutional investors" should have done more to protect themselves and should not have relied on trustees. The investors should have gone after the firms that issued the bad loans in the first place or that bundled those loans into securities, the attorneys said in court documents.
More broadly, attorneys in those earlier cases argue that trustees have a tiny role in the mortgage-backed securities market. That's a common defense in suits against trustees, said Mark Olthoff, a partner at law firm Polsinelli who often represents trustees in financial litigation but is not involved in any of the current Wells Fargo cases.
"Trustees have limited duties. For their role, they get a very small amount of money compared to the people who put a mortgage-backed securitization together," he said.
It's not clear how much Wells Fargo was paid to act as the trustee of the 19 separate mortgage-backed securities that Commerzbank invested in. Olthoff said compensation for trustees varies widely, but that the trustee of $100 million in assets might be paid just a few thousand dollars a year.
Still, Olthoff said it's not surprising that investors are now taking trustees of mortgage-backed securities to court.
"When investors went after the originators and issuers, that's the low-hanging fruit," he said. "This is a harder case to make."