34 trusts, hundreds of millions, and a contract that never saw HAMP coming
A New York appeals court has settled a years-long fight over who pockets hundreds of millions in deferred mortgage payments from the mortgage crisis.
The Appellate Division, First Department unanimously affirmed on September 17 that principal payments on loans modified under the Home Affordable Modification Program should be treated as "Subsequent Recoveries" under the pooling and servicing agreements governing 34 residential mortgage-backed securities trusts. The money flows to subordinate certificateholders - not senior investors who argued they deserved priority.
Wells Fargo Bank, trustee for the Bear Stearns-created trusts established between 2005 and 2007, brought the proceeding seeking judicial instruction on distributing the payments.
Here is the backstory. When the US Treasury launched Home Affordable Modification Program (HAMP) in 2009, servicers modified underwater loans by deferring portions of borrowers' principal until maturity or payoff. Interest on deferred amounts stopped accruing. Servicers reported the deferred principal as realized losses, and Wells Fargo wrote down certificate balances - hundreds of millions of dollars, hitting subordinate certificates first. In many cases, write-downs zeroed out balances entirely.
Then the market recovered. Borrowers started repaying deferred amounts, and Wells Fargo faced a new question: how to allocate those payments.
The trustee argued the payments were Subsequent Recoveries, triggering write-ups to restore subordinate certificate balances. Senior certificateholders - including funds managed by Deer Park Road Management Company, Axonic Capital, and Pacific Investment Management Company - argued the payments should flow through the trusts' general waterfall instead.
The dispute reached court in 2021. On a prior appeal, the First Department found the Pooling and Servicing Agreements (PSAs) ambiguous and sent the case back. After a 17-day bench trial in 2025, Supreme Court Justice sided with the trustee.
The appellate court agreed, acknowledging the payments do not fit neatly within the contractual definition under most PSAs - only two of 34 trusts explicitly covered modified loans. But two factors proved decisive.
The drafters never anticipated HAMP, and expert testimony established Subsequent Recoveries were the only mechanism to write back up certificates previously written down. More importantly, Wells Fargo had consistently treated deferred principal payments as Subsequent Recoveries from the start - visible through monthly remittance reports, and no investor objected. The court called course of performance "the most persuasive evidence of the agreed intention of the parties."
For RMBS trustees and servicers managing legacy portfolios, the decision reinforces that years of unchallenged practice can harden into binding interpretation - even when the contract language does not squarely fit.
