Mortgage Investors With $500 Billion Urge End of Practices, Lawyer Says

Investors owning about a third of U.S. mortgage securities without government backing are urging bond trustees to help end practices that damage their holdings, according to Dallas lawyer Talcott Franklin.

Bondholders want more bad loans to be repurchased by lenders and seek changes in how troubled debt is dealt with, said Franklin, whose firm sent letters to trustees on the group’s behalf this week detailing the size of its holdings and explaining investor concerns.

“We’re telling them, ‘Hey, we’re here,’ and we’re offering to cooperate with them,” Franklin, 45, a former partner at Washington-based Patton Boggs LLP, said yesterday in a telephone interview. “We’re hoping it’s a fresh start for everybody. If you want to help, now’s the time to do it.”

The letters show investors in the $1.5 trillion market, who have yet to recover from the credit crisis, are escalating efforts to minimize their losses. BlackRock Inc., the world’s largest asset manager, and Fortress Investment Group Inc., the buyout and hedge-fund investment firm co-founded by Wesley Edens, are among investors that have complained about the handling of loans backing mortgage securities during conferences, congressional testimony and interviews.

“This is a turning point in favor of investors,” said Josh Rosner, an analyst at independent research firm Graham Fisher & Co. in New York who predicted the collapse of the market in 2007. “The trustees and servicers probably never expected 25 percent of deals to come together.”

Passing Payments

Government-supported Fannie Mae said in its annual report that it “was working to enforce investor rights” on its holdings of so-called non-agency mortgage securities.

Mortgage securities have been among the largest sources of the $1.8 trillion of writedowns and credit losses suffered by the world’s biggest financial companies since the start of 2007, according to data compiled by Bloomberg.

Mortgage-bond trustees are responsible for passing payments collected from borrowers to investors, handling suggested amendments to transaction terms and overseeing loan servicers, which manage the underlying loans.

Franklin declined to identify the trustees or members of his group which is using what he calls an RMBS Investor Clearing House. The vehicle allows investors to pool holdings to protect their interests without disclosing their holdings to each other, he said.

Reuters reported on the letters earlier this week.

Loan servicers are requiring too few home loans to be repurchased, partly because their companies would be taking back the debt, according to the letters. Lenders can be required to buy back securitized mortgages if there were misrepresentations about their quality.

Sufficient Resources

“It’s widely known in the industry that reps and warranties have not been well-enforced by servicers or trustees,” said Scott Simon, the head of mortgage bonds at Newport Beach, California-based Pacific Investment Management Co., manager of the world’s biggest bond fund. He declined to say if Pimco is part of Franklin’s group.

The bondholders also are concerned that lenders may not be devoting sufficient resources toward renegotiating debt for troubled borrowers, the letters said. New York-based BlackRock and Pimco have also complained about conflicts of interest related to banks owning home-equity loans on properties that have first mortgages held by securities they service.

Investors who are sharing information and coordinating through Talcott Franklin PC own pieces of 6,000 home-loan securities transactions, the lawyer said. They own bonds giving them 25 percent of “voting rights” in about 2,300 deals, 50 percent in more than 900, and 66 percent in more than 450, Franklin said.

Force Actions

Those levels exceed thresholds that allow investors to force actions such as declaring loan servicers in default of their contracts, requiring them to share loan files, creating changes to deal terms and replacing trustees, with the details varying by the deal, Franklin said.

U.S. Bancorp, Deutsche Bank AG and Bank of New York Mellon Corp. signed on as trustees for the most new U.S. securitized debt in 2005 and 2006 as sales of home-loan securities without government-backed guarantees peaked at $1.2 trillion each year, according to newsletters Asset-Backed Alert and Inside Mortgage Finance.

Deutsche Bank’s trustee business hasn’t received a letter, John Gallagher, a spokesman for the Frankfurt-based company, said, declining to comment further. Kevin Heine, a spokesman for Bank of New York, declined to comment. Steve Dale, a spokesman for Minneapolis-based U.S. Bancorp, didn’t return an e-mail message requesting comment.

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Bank of America Corp., Wells Fargo & Co., JPMorgan Chase & Co., and Citigroup Inc. are the biggest U.S. home-mortgage servicers, managing almost 70 percent of outstanding loans, according to newsletter National Mortgage News.

Spokesmen for the banks, which have said they have been acting in investors’ best interests as required by their contracts, either declined to immediately comment or didn’t return e-mail messages. Spokesmen for BlackRock, Washington- based Fannie Mae and Fortress of New York either declined to immediately comment or didn’t return e-mail messages.

‘Servicer Conflicts’

Franklin, co-author of the “Mortgage and Asset-Backed Securities Litigation Handbook,” started his firm earlier this year, after resigning as a partner at Patton Boggs, Washington’s biggest lobbying law firm. His firm has been allowing investors to retain other lawyers, he said.

“Tal and I worked very closely together on the investor issues when the Mortgage Investors Coalition was formed last year to focus on the public policy issues on Capitol Hill,” said Micah Green, a Patton Boggs partner and former head of the Bond Market Association.

That group was started to lobby against a legal “safe harbor” that Congress created for servicers changing debt under a federal program’s guidelines, and then tried to influence the modification plan’s form.

Franklin said “a common sentiment” among investors has been that trustees haven’t been helpful in protecting their interests. The group’s letter said trustees had duties under their contracts, and could be liable where actions, such as inappropriate foreclosures, were performed in their names.

“Whether they’ll take us up on this, I don’t know,” Franklin said. “We’ve got a lot of options at our disposal and we are serious about seeing improvements and we’ll go shelf by shelf and deal by deal to exercise those options.”

To contact the reporter on this story: Jody Shenn in New York at jshenn@bloomberg.net

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