Legacy RMBS question answered in lawsuit ruling

The New York Supreme Court has weighed in on a contractual dilemma Wells Fargo has reportedly faced as a residential mortgage-backed securities trustee with a responsibility to oversee investor payment distributions impacted by unforeseen policy changes.

A judge has ruled on how trustees and servicers should handle forborne principal from loans in the now-defunct Home Affordable Modification Program, according to McCool Smith, a law firm involved in the case, and court documents.

The decision, which could redirect around $400 million of losses, addresses a dilemma common for many legacy private-label securitizations and points to potential concern for investors from a slew of more recent servicing policy changes emerging from the pandemic.

“The ruling has sweeping implications for the…