Plaintiff is an investor in certain residential mortgage-backed securities. Plaintiff brings this action against Wells Fargo for breach of fiduciary duty, breach of contract, breach of the duty of good faith and fair dealing, negligence, and unjust enrichment arising in Wells Fargo’s multiple capacities as trustee and servicer.
2. The losses for which Plaintiff brings this action are a consequence of improper servicing by both Wells Fargo and its predecessor servicer, Washington Mutual, as well as the result of Wells Fargo’s failure to perform its trusteeship with due care and in violation of its fiduciary and other legal duties, including the duty to avoid conflicts of interest.
Overview of Residential Mortgage-Backed Securities
8. Plaintiff is an investor in certain securitized trusts holding mortgage loans, known as residential mortgage-backed securities or “RMBS.” A residential mortgage-backed security is a form of asset-backed security where cash-producing financial instruments, in this case mortgage notes—pursuant to which homeowners are required to make regular payments—and mortgages securing that obligation, are aggregated into pools and sold into trusts.
9. When people or institutions—like and including Plaintiff—invest in RMBS, they acquire the right to a portion of the homeowners’ mortgage payments and, as is relevant to this case, the proceeds from mortgage insurance policies that are triggered when homeowners fail to make those payments. That right is reflected in certificates issued to investors, which is why RMBS investors are often referred to as “certificateholders.” The payments—whether from homeowners or mortgage insurers—are passed through a series of one or more servicers to a trustee appointed to administer the trusts, and are then paid to investors according to a predetermined formula called the trust waterfall.
10. The term “trust waterfall” reflects the fact that RMBS trusts are typically stratified in a hierarchy of classes or “tranches” based on the trust’s capital structure. Higher rated classes are called “senior”; lower rated classes are called “junior.” The lowest class is unrated. The contracts governing mortgage-backed securities provide detailed rules for how the trust’s proceeds and losses are allocated among the classes. Typically, though, proceeds from homeowner payments, servicer advances thereof, and other monies coming into the trust are paid in descending order of seniority. Similarly, when the trusts suffer losses, for example, because homeowners stop making payments and either there are no insurance policies to cover them or the servicer fails to properly apply for insurance and therefore does not receive the insurance proceeds, those losses are also allocated according to the waterfall but in the opposite direction. Basically, payments are dumped into the top of the waterfall and trickle down while losses are absorbed from the bottom up. Thus, the amount and timing of any given investor’s payment or loss is determined by that investor’s position in the waterfall.
11. Essential to this process are trustees and servicers, who administer their respective aspects of the RMBS. Trustees are appointed by the RMBS issuer—the bank or similar financial institution that created the RMBS by pooling mortgage loans and selling them to the trust that then holds them for the benefit of investors. The trustee’s job is to oversee the trust and the servicers. Its specific duties are laid out in Pooling and Servicing Agreements (“PSAs”) but state fiduciary law also imposes certain duties on trustees. Servicers manage the relationship with homeowners, collect and remit payments, and take action to mitigate or minimize losses that occur when homeowners stop paying their mortgages. Servicers’ duties are also laid out in servicing agreements, which frequently, including in this case incorporate other guidelines and industry standards.
12. In many securitizations—including the two at issue here—where homeowners do not make their payments, the servicers advance those payments to the trusts and later reimburse themselves from the proceeds of their loss mitigation efforts, such as foreclosure and mortgage insurance proceeds. However, servicing agreements and standards place limitations on when and to what extent these advances should be made.
Wells Fargo’s conflict of interest continues to this day—more than five years later—despite its acknowledgment in July 2011 that it is presented with what it calls a potential conflict of interest and commitment to expedite the process of finding a successor trustee. Instead, Wells Fargo remains both the trustee for the two at-issue trusts and the servicer for many of the loans in those trusts.
92. In connection with Wells Fargo’s production of the less than 500 servicing files it had obtained from Chase, Plaintiff also learned for the first time that certain files could not be produced because they were either lost or destroyed by Wells Fargo.