Land O Lakes Real Estate News - JLS Investment Realty

Bondholders Criticize $25 Billion Mortgage Settlement
February 13th, 2012 3:34 PM

By Al Yoon and Nick Timiraos

A group of residential mortgage-backed bondholders railed against the $25 billion foreclosure-practices settlement with major U.S. mortgage servicing banks, as analysts said it may encourage the firms to pay for their mistakes with private investor dollars.

The Association of Mortgage Investors held a call with more than 50 investors on Thursday to discuss the impact of the settlement that paves the way for cuts in loan principal for homeowners behind on their payments, said Vincent Fiorillo, a portfolio manager with DoubleLine Capital, the $25 billion Los Angeles fund management firm run by bond veteran Jeffrey Gundlach.

Bondholders are worried that servicing firms may have incentives to be aggressive on principal cuts on investor loans—in addition to bank-owned loans—to meet settlement goals. It could direct losses away from the banks whose foreclosure flaws triggered the yearlong investigation by 50 state attorneys general, they said.

Jonathan Lieberman, managing director of New York investment firm Angelo, Gordon & Co., which oversees $22 billion, said the government was picking winners and losers, and doing long-term damage to the mortgage market where bond investors provide much of the funding for U.S. housing.

“I see a continued erosion of responsibility, community, standards of care, moral values, and fiduciary standards,” Lieberman said in remarks prepared for the AMI’s conference call. “There is no penalty.”

Under the settlement, banks must spend $17 billion to help homeowners, receiving different “credits” depending on the relief. Around $10 billion of that amount must go towards writing down loan balances for borrowers who are at risk of foreclosure. Banks receive $1 of credit for each $1 they write down in loans that they own, and around 45 cents of credit for writing down loans held by investors.

Officials pushed back against investors’ concerns when unveiling the settlement Thursday with Ally Financial Inc., Bank of America Corp., Citigroup Inc., J.P. Morgan Chase & Co. and Wells Fargo & Co.

Nothing in the agreement would require trustees or servicers to reduce principal where it isn’t already permitted under the contracts that govern those deals, said Shaun Donovan, the secretary of U.S. Department of Housing and Urban Development.

“The misunderstanding somehow that the investors will be paying the banks’ share is just false,” he said on Thursday. He said such write-downs would probably account for no more than 15% of all principal reduction in the settlement, a “relatively small share.”

Donovan said said write-downs would be mostly limited loans bundled into securities by Countrywide Financial, which Bank of America acquired in 2008.

Bank of America has a pending legal agreement with those bondholders that would offer more flexibility in how it manages those loans. “Our expectation is that the vast majority of private-label security loans that are reduced in principal as a result of this would be the old Countrywide loans,” he said.

Investors including BlackRock Inc. have previously claimed they have already taken losses unfairly from banks that have modified mortgages backing their bonds ahead of bank-owned subordinated loans. Investors in private mortgages, versus loans guaranteed by government entities Fannie Mae and Freddie Mac, have registered more than $350 billion in losses since January 2007, the AMI said.

Chris Katopis, executive director of the AMI, said the final terms of how the settlement would be implemented weren’t yet made available to investors, and worried about transparency. “Investors were fleeced,” he said.

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Posted by Jennifer Stepanek on February 13th, 2012 3:34 PMPost a Comment

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