Mortgage bond holders get legal edge; buybacks seen

By Al Yoon

NEW YORK, July 21 (BestGrowthStock) – U.S. mortgage bond investors
have quietly banded together to gain the long-sought power
needed to challenge loan servicers over losses the investors
claim resulted from violations in securities contracts.

A group holding a third of the $1.5 trillion mortgage bond
market has topped the key 25 percent threshold for voting
rights on 2,300 “private-label” mortgage bonds, said Talcott
Franklin, a Dallas-based lawyer who is shepherding the effort.

Reaching that threshold gives holders the means to identify
misrepresentations in loans, and possibly force repurchases by
banks, Franklin said.

Banks are already grappling with repurchase demands from
Fannie Mae and Freddie Mac, the U.S.-backed mortgage finance

The investors, which include some of the largest in the
nation, claim they have been unfairly taking losses as the
housing market crumbled and defaulted loans hammered their
bonds. Requests to servicers that collect and distribute
payments — which include big banks — to investigate loans are
often referred to clauses that prohibit action by individuals,
investors have said.

Since loan servicers, lenders and loan sellers sometimes
are affiliated, there are conflicts of interest when asking the
companies to ferret out the loans that destined their private
mortgage bonds for losses, Franklin said in a July 20 letter to
trustees, who act on behalf of bondholders.

“There’s a lot of smoke out there about whether these loans
were properly written, and about whether the servicing is
appropriate and whether recoveries are maximized” for
bondholders, Franklin said in an interview.

He wouldn’t disclose his clients, but said they represent
more than $500 billion in securities managed for pension funds,
401(k) plans, endowments, and governments. The securities are
private mortgage bonds issued by Wall Street firms that helped
trigger the worst financial crisis since the 1930s.

Franklin’s effort, using a clearinghouse model to aggregate
positions, is a milestone for investors who have been unable to
organize. Some have wanted to fire servicers but couldn’t
gather the necessary voting rights.

“Investors have finally reached a mechanism whereby they
can act collectively to enforce their contractual rights,” said
one portfolio manager involved in the effort, who declined to
be named. “The trustees, the people that made representations
and warranties to the trust, and the servicers have taken
advantage of a very fractured asset management industry to
perpetuate a circle of silence around these securities.”

Laurie Goodman, a senior managing director at Amherst
Securities Group in New York, said at an industry conference
last week, “Reps and warranties are not enforced.”

Increased pressure from bondholders comes as Fannie Mae and
Freddie Mac have been collecting billions of dollars from
lender repurchases of loans in government-backed securities.
With Fannie and Freddie also big buyers of Wall Street mortgage
bonds, their regulator this month used its subpoena power to
seek documents and see if it could recoup losses for the two
companies, which have received tens of billions in
taxpayer-funded bailouts.

Some U.S. Federal Home Loan banks and at least one hedge
fund are looking to force repurchases or collect for losses.

Investors are eager to scrutinize loans against reps and
warranties in ways haven’t been able to before. Where 50
percent voting rights are required for an action, the investors
in the clearinghouse have power in more than 900 deals.

Franklin said the investors are hoping for a cooperative
effort with servicers and trustees. While he did not disclose
recipients of the letter, some of the biggest trustees include
Bank of New York, US Bank and Deutsche Bank.

A Bank of New York spokesman declined to say if the firm
received the trustee letter. US Bancorp and Deutsche Bank
spokesmen did not immediately return calls.

“You have a trustee surrounded by smoke, steadfastly
claiming there is no fire, and what the letter gets to is there
is fire,” the portfolio manager said. “And we are now directing
you … to take these steps to put out the fire and to do so by
investigating and putting loans back to the seller.”

Servicers are most likely to spot a breach of a bond’s
warranty, Franklin said in the letter.

Violations could be substantial, he said. In an Ambac
Assurance Corp review of 695 defaulted subprime loans sold to a
mortgage trust by a servicer, nearly 80 percent broke one or
more warranties, he said in the letter, citing an Ambac lawsuit
against EMC Mortgage Corp.

The investors are also now empowered to scrutinize how
servicers decide on either modifying a loan for a troubled
borrower, or proceed with foreclosure, Franklin said. Improper
foreclosures may be done to save costs of creating a loan
modification, he asserted.

Investment Basics
(Editing by Leslie Adler)

Mortgage bond holders get legal edge; buybacks seen