Mortgage Security Holder Stands

This is a case where the little big guy stands up and fights back. From Mr. Mortgage.

In all of the recent events surrounding bailouts and loan modifications, one very prominent party in this whole mess has been missing - the mortgage security (MBS) holders. Not any longer. With $7 trillion in securitized mortgages out there, this could be the very first of a major story unfolding over the next year. One in which the MBS holders finally stand up and banks, investment banks and mortgage lenders become ultimately responsible for the loans that they made and eat their own trash.

It's not good for the good guy,but it won't do the stock market any good.


Mortgage Security Holder Stands Up-Up - Could Cost BofA $80 Billion


ust a few months after the Attorneys General of 15 states threw hundreds of thousands of Countrywide/Bank of America mortgagees under the bus with a piddly $8.4 billion settlement, someone is striking back. And Greenwich has the size, background and relationships to actually get somewhere.

In all of the recent events surrounding bailouts and loan modifications, one very prominent party in this whole mess has been missing - the mortgage security (MBS) holders. Not any longer. With $7 trillion in securitized mortgages out there, this could be the very first of a major story unfolding over the next year. One in which the MBS holders finally stand up and banks, investment banks and mortgage lenders become ultimately responsible for the loans that they made and eat their own trash.

Securitization massively expanded home ownership in recent years by allowing investors to price the risk of less credit-worthy borrowers. But investors in some of the prime securities are angry about having to foot the bill for reworking the most risky mortgages. The chief risk manager for a mortgage investment company, who spoke on condition of anonymity, said that BofA isn’t paying for the modifications out of its own pocket, but “out of the bondholders’ money. That’s pretty egregious

The legality of that structure—and the impact of any changes on bondholders—weren’t the top priorities of the attorneys general of California, Illinois, and at least five other states that last summer filed lawsuits accusing Countrywide of violating laws against predatory lending. Their complaints allege that Countrywide engaged in many deceptive sales practices, charged unlawful fees and interest rates, and made mortgage loans that Countrywide had no reasonable basis to think the borrowers could afford. All of that, the states claimed, was in violation of predatory lending laws.

Bank of America/Countrywide Slap on the Hand

The AG’s say their $8.4 billion ‘victory’ will help some 400k homeowners. When you do the math, the measly $21k per homeowner is barely enough to cover a few months back payments, penalties, modification fees and unpaid property taxes. How the AG’s could settle for something this small claiming ‘victory’ is beyond me. In CA where much of this ‘relief’ will go, the median home price is down from $484k in the summer of 2007 to $278k today. That is a lot of negative equity of which none was factored into this settlement.

I have been waiting for backlash over this Bank of America hand slap from either a mortgagee rights or securities owners group with all of the talk by the banks, regulators and lawmakers of a full court mortgage modification press and here it is. This is the first of what could be many. Remember, 80%+ of all mortgage loans originated during the ‘fake years’ were sold and securitized making it very difficult for a bank, servicer or even the FDIC to modify the loan.

Wide-Scale Mortgage Modification Efforts Impotent

As of now wide-scale mortgage modification efforts are more talk than reality because of the securitization challenges, borrowers ability to qualify, prohibitive present house values and borrowers willingness to stay leveraged to a massively depreciating asset vs. renting. American Banker recently put out a story highlighting that this issue. Other reports show that the after-modification recidivism rate is well over 50%. This is a lose/lose for MBS holders.

“For the most part, public discussion of modifications has focused on the ability and willingness of servicers and investors to make them. For several reasons, including the still undeveloped track record for modifications, less attention has been paid to the outcomes of those that have gotten done.

A handful of analysts and academics who have studied which types of loan modifications work have found that some of the most common changes — reducing or freezing the interest rate and allowing missed payments to be rolled into the balance — often fail to prevent the borrower from defaulting again. “

I have been one of the most outspoken mortgage modification supporters for over a year, but ONLY if done right. The problem is that none announced to date are structured properly with most relying on low teaser rates, 40-year terms or deferred interest and high debt-to-income ratios, which are the very things that got us here in the first place.

I am in firm belief that the only successful mortgage modification is one where the loan is re-underwritten / restructured using a market-rate 30-year fixed mortgage at 28/36% debt-to-income ratios. To get there, a principal balance reduction will likely be necessary in most cases. But the process will allow home-owners to operate at leverage ratios that greatly reduce the chances of walking away due to negative-equity permanently solving the problem. Please see my most recent report on mortgage modifications:

• The Great Mortgage Modification Pump - GOD SAVE US ALL! (248)
  Posted on November 19, 2008 12:01 PM

Bank of America / Countrywide Could Pay $80 BILLION!

Greenwich Financial Services, a very large fund that has been a leader in the mortgage securitization arena is raising a stink - don’t they deserve a bailout too? Why should the banks get bailed out from all of their bad decisions over the past decade and the mortgage securities holders that never signed up for buying a bunch of bad loans, get left holding the bag? They may not if Greenwich is successful.

In the proposed class action, or group lawsuit, the Greenwich, Connecticut-based fund demands a declaration that “Countrywide must purchase at par every mortgage loan that it sold to any of the 374 securitization trusts,” David Grais, a lawyer for the fund said today in an e-mailed statement. Grais said Countrywide could owe $80 billion to the trusts.

Countrywide plans not to absorb the $8.4 billion reduction in mortgage payments itself, even though it was Countrywide’s own conduct of which the attorneys general complained,” the fund said in the complaint filed today in New York State Supreme Court in Manhattan. Under the settlement, the mortgage lender would “pass most or all of that reduction on to the trusts that purchased mortgage loans from Countrywide,” the fund said in the complaint.

“We believe that the average unpaid principal balance of these loans is approximately $200,000. If so, and if the court grants the declaration we seek in this complaint, then Countrywide (and its parent Bank of America) would be liable to pay the trusts approximately $80 billion for the loans it modifies,” he said.

MBS Holders Have Been Left in the Lurch

The mortgage securities holders being left to fend for themselves over the past year and a half of the mortgage implosion is one of the reasons that the private label sector has never come back. If left going the way it presently is, the mortgage finance and housing sectors may stay depressed indefinitely.

While those loan adjustments may help to keep struggling borrowers in their homes today, Frey says those alterations run the risk of permanently damaging the secondary market for housing finance.

“I am an advocate for investors’ contractual rights,” says Frey, 50, in an interview. He has publicly argued since March that loan modifications (BusinessWeek, 11/26/08) are against contract law, and has threatened to sue banks—despite, he says, receiving pressure to back down from Washington. “Investors’ voices have been muted in this debate because they speak of an inconvenient truth: Current solutions sacrifice the long-term viability of this nation’s housing finance system for short-term political gain. No matter how noble the intent, it is not in the interest of the United States now, or in the future, to tell its citizens and the world at large that U.S. contract rights may be bent with the political winds.”

MBS Litigation Floodgates

If Greenwich has even reasonable success it will open the litigation floodgates. The end result could look like something that I have been noodling for a couple of years…that in the end the bank, investment bank, lender etc eats their own trash.

Frey says a more reasonable, albeit unpopular, solution would be for the government—that is, taxpayers—to ante up another $500 billion to buy all of the troubled loans from mortgage-backed securities pools in order to keep the public market for financing mortgages viable. (There have been roughly $7 trillion in mortgages financed by global public markets since 2002, according to ThomsonReuters. Of course, not all of those loans are troubled.)

While he’s so far the only member of the proposed class against the Charlotte (N.C.)-based BofA, Frey says he’s on a crusade on behalf of all large investors who bought Triple A-rated mortgage bonds, and not just those who bought bonds backed by Countrywide mortgages. The suit alleges that modifications favor bondholders who bought the riskiest pieces. Normally those investors should suffer losses first, but that’s not what’s happening in the current wave of workouts, according to the suit.

Stay tuned because this story is only getting started. -Best Mr Mortgage