Nationstar Suit Questions Servicer’s Authority to Sell Mortgage Notes

Nationstar Suit Questions Servicer’s Authority to Sell Mortgage Notes



A justice for New York’s Supreme Court has ordered Nationstar to stop the auction of some of its mortgage notes through

KIRP LLC, a major investor in six residential mortgage-backed security trusts sponsored by Residential Accredit Loans, filed a complaint against Nationstar over its selling of non-performing loans backing securities.

Nationstar held two two-day auctions on February 19 and March 4. A third was scheduled for March 11, but Justice Eileen Bransten authorized a temporary restraining order to stop the final sale and transfer of loans and to prevent further auctions.

In its filing for a restraining order, KIRP argues that as master servicer, Nationstar has the authority to foreclose or modify the loans, not to sell them.

The memorandum goes on to note that the loans auctioned off were sold at steep discounts, causing financial harm to investors.

“It appears from the prices posted on the website that the bulk auction sales, not surprisingly, resulted in sales of the loans at significant discounts,” the filing reads. “Plainly, Nationstar’s dumping of Trust assets in bulk at fire sale prices through a two-day internet auction is not an act taken “in the best interests of the Certificate holders.”

An analysis of the case by Barclays holds that although most servicing agreements list alternatives to foreclosure on non-performing loans, it isn’t always clear whether or not those lists are exhaustive—in other words, engaging in an unlisted alternative (such as a sale) may or may not be allowed.

“There are two parts to the allegations made under the lawsuit. First, that the lawsuit alleges that note sale is not an option available to the servicer, and second, that the sale is harmful to the interests of the investors in the trust relative to other alternatives,” Barclays said. “While it is clear that a violation on the second part would seem to go against the duties of a servicer, it is less clear whether the sale is an option available to the servicer or not.

“It is also unclear what the courts will decide and if the decision could be applicable across the board, given the wide variation in the language of the servicing agreements. … We will continue to follow this case to look for more guidance from the courts.”

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