RMBS Trustee Seeks Guidance on Forborne/Deferred Principal in Optional Terminations

The dispute revolves around the call price paid to the trust by PHH during the termination process as set forth in the Pooling and Servicing Agreements.[2] Deutsche Bank’s filings reveal the views of certificateholders and of PHH on several issues.  At a high level:

Deferred Principal:  Certificateholders assert that the formula for calculating the Call Price in the PSAs mandates that forborne/deferred principal is part of the principal balance of the mortgage loans and hence should be included in the termination price. On the other hand, PHH states that forborne/deferred principal is not part of the principal balance of mortgage loans, and hence should not be included in the termination price.

Deutsche Bank, for its part, observes that “housing values have generally recovered, so many mortgage loans that include Deferred Amounts are now well collateralized, and there are reasonable prospects of recovering related Deferred Amounts, at least in part, when all amounts owing on the loans come due.”

Interestingly, in the Confidential Offering Memorandum pursuant to which PHH was preparing to sell the loans (originally scheduled to be sold on October 27, two days after the call, until Deutsche Bank put a pause on the terminations), PHH does include the deferred principal in the definition of Unpaid Principal Balance, which is the balance that informs the price at which PHH will sell the loans.

Deferred Interest: Certificateholders assert that the termination price should include deferred and unpaid interest, pursuant to the PSAs. PHH does not respond to this assertion in its filings (and the Trustee does not comment on this topic in its petition).

Liquidated Mortgage Loans: Some certificateholders assert that by “each Mortgage Loan” the termination price should also include liquidated mortgage loans. PHH does not respond to this assertion in its filings (and the Trustee does not comment on this topic in its petition).

In its petition, the Trustee implies that the outcome of this proceeding could have a bearing on other trusts’ terminations, even those administered by other trustees. The Trustee writes “if not resolved by the Court, this issue will arise repeatedly in connection with its administration of other RMBS trusts after they become eligible for an optional termination, creating uncertainty, the risk of inaccurate payments, and risk to DBNTC and other trustees.”

PHH also notes that it has called 24 other trusts between September 2015 and July 2021 using this process. It is not clear what applicability this current proceeding will have on previously terminated transactions, but we do note that PHH’s exposure to the outcome of this proceeding is potentially larger than just these seven deals.[3]

Oakleaf Group provides investors full transparency into their RMBS investments with a unique combination of servicing analysis, proprietary bond administration models and cashflow analytics, loan-level collateral reviews, trustee surveillance and a comprehensive document library containing thousands of governing agreements and RMBS litigation histories.

Oakleaf Group helps investors identify and quantify underpayments due to termination price miscalculations in past optional terminations and is working (together with our law firm partners) to ensure certificateholders receive all cash they are entitled to as per their rights under the PSAs.

Oakleaf Group also helps investors quickly respond to upcoming terminations. We independently recalculate the termination price to determine whether the trustee’s noticed termination price is understated, and then we determine the impact on each class of certificates. Armed with this information, certificateholders can communicate with trustees to ensure they receive all cash they are entitled to.

If you are interested in learning more, please contact John St Martin.

[1] The case is 30-2021-01233435-PR-TR-CJC in Superior Court of Orange County, California

[2] The PSAs for the trusts at issue in this proceeding provide that Stated Principal Balance is used to calculate the termination price.  In these PSAs, Stated Principal Balance is defined as:

“As to any Mortgage Loan and Due Date, the unpaid principal balance of such Mortgage Loan as of such Due Date, as specified in the amortization schedule at the time relating thereto (before any adjustment to such amortization schedule by reason of any moratorium or similar waiver or grace period) after giving effect to the sum of: (i) the payment of principal due on such Due Date and irrespective of any delinquency in payment by the related Mortgagor and (ii) any Liquidation Proceeds allocable to principal received in the prior calendar month and any Principal Prepayments received through the last day of the related Prepayment Period, in each case, with respect to such Mortgage Loan and increased by any Deferred Interest added to the principal balance of that Mortgage Loan on or prior to such Due Date.”

[3] PHH’s 24 previously terminated deals are BOAA 2004-2, BOAA 2004-5, BOAA 2004-7, BOAA 2004-8, BOAA 2004-9, BOAA 2005-1, BOAA 2005-12, BOAA 2005-3, BOAA 2005-4, BOAA 2005-6, BOAA 2005-7, BOAA 2005-8, BOAMS 2004-11, BOAMS 2004-2, BOAMS 2004-3, BOAMS 2005-2, RALI 2004-QS12, RALI 2004-QS16, RALI 2005-QS1, RALI 2005-QS2, RALI 2005-QS3, RALI 2005-QS4, RALI 2005-QS6 and RALI 2005-QS9.