No wonder Bank of New York was so eager to roll the investors to whom it is nominally responsible and sign up for a settlement deal in which it effectively sold their interests out (and didn’t bother even going through the motions of advance notice, much the less consultation). Bank of America not only used the carrot of a very juicy indemnification, it had the stick of the amount of RMBS trustee business it has directed to Bank of New York and presumably could send elsewhere on future deals if it became displeased.
In a 2011 paper on mortgage servicing in the Yale Journal on Regulation, Adam Levitin and Tara Twomey present data that shows that over 3/5 of BoNY’s RMBS trustee business comes from BofA/Countrywide. From pages 60 and 61:
Additionally, there is often a very close relationship between the servicer and the trustee; many originators and servicers have a ―pet‖ or ―pocket‖ trustee that they use for most of their deals. For example, nearly two-thirds of Bank of New York Mellon‘s (―BNY Mellon‖) RMBS trusteeships are for Countrywide-Bank of America deals.228 This is hardly unique given the concentration in the trustee market, shown in Figures 13 and 14, with seven trustees making up around 90% of the market, and four trustees comprising around two-thirds of the market. This broader relationship has the potential to reduce monitoring of the servicer by the trustee. Because such a large portion of BNY Mellon‘s RMBS trustee business comes from one single depositor, BNY Mellon will inevitably have to be deferential to that depositor. And because the depositor frequently serves as the servicer, BNY Mellon as trustee will have a strong incentive to be deferential to Countrywide as servicer.
And a couple of pages later…
Corporate trustees can easily have oblique conflicts of interest like a business relationship dependency, such as the one between Countrywide and BNY Mellon. This oblique conflict further diminishes the trustee‘s already limited incentive to monitor the servicer, even within its limited duties.
So understand again how this worked: BofA and Countrywide, who Bank of New York is supposed to be monitoring, and directing to do certain things, like buy back bad loans on behalf of the investors, took a big bribe from BofA not to do so (see details in our earlier post). Sweet, no?