New York Court Rules on HAMP Deferred Principal in RMBS Trusts Appeals
In a significant legal development, McKool Smith has successfully received a unanimous appellate affirmation from the New York Appellate Court regarding the treatment of deferred principal payments in the context of residential mortgage-backed securities (RMBS) trusts. This landmark ruling addresses critical issues faced by junior bondholders, particularly LA Verdad Holdings, LLC, Robert Dechert, and 400 Capital Credit Opportunities Master Fund, involving 34 RMBS trusts and an estimated $400 million in principal recoveries.
The case centers around a controversy that emerged when servicers modified homeowners' loans under the U.S. Treasury’s Home Affordable Modification Program (HAMP), deferring the associated mortgage principal. These modifications were carried out under agreements that predated the enactment of HAMP, resulting in a lack of clarity regarding the treatment of the deferred principal payments. The servicers involved reported these deferrals as realized losses, which consequently led Wells Fargo, the trustee, to write down certificate balances in reverse order of seniority, often resulting in reductions to zero.
When homeowners later repaid the deferred principal, a legal question arose: how should those payments be accounted for? During the proceedings, Justice Andrew Borrok's July 2025 ruling favored McKool Smith's clients, asserting that payments should indeed be treated as subsequent recoveries under the agreements. The First Department of the Appellate Division emphasized that the agreements, while having ambiguities, indicated through their structure and the parties' longstanding practices that such repayments warranted adjustments in favor of subordinate certificates only.
McKool Smith's Principal Courtney Statfeld, who co-led the trial efforts alongside Principal Robert Scheef, highlighted the ramifications of this decision, stating that it resolves a longstanding uncertainty that has affected the RMBS market for several years. The ruling provides much-needed clarity for trustees, administrators, and investors alike concerning the repayment accounting for HAMP-deferred principal, ensuring that similar future cases are approached with this precedent.
"We are thrilled that the First Department recognized the diligent efforts of our clients, Wells Fargo, and the trial court in achieving this resolution," declared Mr. Scheef. The ruling not only affirms the previous findings but also reflects a series of victories that McKool Smith has garnered for clients tangled in the complexities of HAMP deferred principal treatment.
Earlier in August 2023, the firm also achieved a summary judgment in California for investors involved in trusts managed by Deutsche Bank National Trust Co., further solidifying their stance in similar litigations across different jurisdictions. Following the recent ruling, it is clear the First Department has established a robust framework for understanding and classifying the nuances of RMBS trust agreements, particularly in light of borrower modifications under HAMP.
This affirmative ruling was not a standalone effort; it was the result of a comprehensive legal strategy involving a team of adept attorneys within McKool Smith. The team included notable figures such as Principals Jennifer Truelove, Daniel Hendler, and David Schiefelbein, supported by Associates Hal Shimkoski and Lauren Simenauer.
The ruling is documented under the case Matter of Wells Fargo Bank, N.A. v. HBK Master Fund L.P., Case No. 2025-04773, which displays the intricacies surrounding deferred principal payments following loan modifications. With the affirmance by the First Department, junior bondholders can now approach their investments with renewed confidence and expectations of due consideration in the context of RMBS trusts.
McKool Smith stands as one of America’s prominent trial firms, boasting over 130 trial lawyers located in various cities across the country, including Austin, Dallas, and New York. With a proven track record of securing multi-million dollar verdicts, the firm represents a diverse array of clients engaged in complex litigation, thereby reinforcing its position as a leader in the legal domain.
The case centers around a controversy that emerged when servicers modified homeowners' loans under the U.S. Treasury’s Home Affordable Modification Program (HAMP), deferring the associated mortgage principal. These modifications were carried out under agreements that predated the enactment of HAMP, resulting in a lack of clarity regarding the treatment of the deferred principal payments. The servicers involved reported these deferrals as realized losses, which consequently led Wells Fargo, the trustee, to write down certificate balances in reverse order of seniority, often resulting in reductions to zero.
When homeowners later repaid the deferred principal, a legal question arose: how should those payments be accounted for? During the proceedings, Justice Andrew Borrok's July 2025 ruling favored McKool Smith's clients, asserting that payments should indeed be treated as subsequent recoveries under the agreements. The First Department of the Appellate Division emphasized that the agreements, while having ambiguities, indicated through their structure and the parties' longstanding practices that such repayments warranted adjustments in favor of subordinate certificates only.
McKool Smith's Principal Courtney Statfeld, who co-led the trial efforts alongside Principal Robert Scheef, highlighted the ramifications of this decision, stating that it resolves a longstanding uncertainty that has affected the RMBS market for several years. The ruling provides much-needed clarity for trustees, administrators, and investors alike concerning the repayment accounting for HAMP-deferred principal, ensuring that similar future cases are approached with this precedent.
"We are thrilled that the First Department recognized the diligent efforts of our clients, Wells Fargo, and the trial court in achieving this resolution," declared Mr. Scheef. The ruling not only affirms the previous findings but also reflects a series of victories that McKool Smith has garnered for clients tangled in the complexities of HAMP deferred principal treatment.
Earlier in August 2023, the firm also achieved a summary judgment in California for investors involved in trusts managed by Deutsche Bank National Trust Co., further solidifying their stance in similar litigations across different jurisdictions. Following the recent ruling, it is clear the First Department has established a robust framework for understanding and classifying the nuances of RMBS trust agreements, particularly in light of borrower modifications under HAMP.
This affirmative ruling was not a standalone effort; it was the result of a comprehensive legal strategy involving a team of adept attorneys within McKool Smith. The team included notable figures such as Principals Jennifer Truelove, Daniel Hendler, and David Schiefelbein, supported by Associates Hal Shimkoski and Lauren Simenauer.
The ruling is documented under the case Matter of Wells Fargo Bank, N.A. v. HBK Master Fund L.P., Case No. 2025-04773, which displays the intricacies surrounding deferred principal payments following loan modifications. With the affirmance by the First Department, junior bondholders can now approach their investments with renewed confidence and expectations of due consideration in the context of RMBS trusts.
McKool Smith stands as one of America’s prominent trial firms, boasting over 130 trial lawyers located in various cities across the country, including Austin, Dallas, and New York. With a proven track record of securing multi-million dollar verdicts, the firm represents a diverse array of clients engaged in complex litigation, thereby reinforcing its position as a leader in the legal domain.
Topics Financial Services & Investing）
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