Foreclosure Probe Talks Expanded to Include Investors Urging Resolution

Mortgage-backed securities holders are pushing for a resolution of a 50-state probe of foreclosure practices, attorneys general in Iowa and Arizona said as talks with lenders and servicers expand to include investors.

“The mortgage backed securities are worth pennies on the dollar, so any kind of recovery would be better,” Arizona Attorney General Terry Goddard said in an interview. Owners of mortgage-backed securities are “one of the players urging a resolution,” he said. State officials have begun informal talks with some investors, Iowa Attorney General Tom Miller said.

All 50 U.S. states are investigating whether banks and loan servicers used false documents and signatures to justify hundreds of thousands of foreclosures. The probe, announced Oct. 13, came after JPMorgan Chase & Co. and Ally Financial Inc.’s GMAC mortgage unit said they would stop repossessions in 23 states where courts supervise home seizures and Bank of America Corp., the largest U.S. lender, froze foreclosures nationwide.

The probe has since widened to include other mortgage practices, with attorneys general suggesting any potential resolution should include improving the loan modification process, barring foreclosures when people are modifying loans and creating a general fund to compensate homeowners who may have been victims of wrongful foreclosures.

“Robosigning was the straw that broke the camel’s back,” Goddard said, referring to the practice of loan servicer employees signing thousands of documents without determining if they were accurate. “It was proof positive that it wasn’t just in one state and virtually every financial institution was complicit.”

Expand Their Talks

Miller, the leader of the 50 attorneys general in the investigation, said Nov. 23 that the states plan to expand their talks with investors to face-to-face meetings.

“They are an important part of the resolution,” he said in an interview.

Dallas attorney Talcott Franklin and Houston lawyer Kathy Patrick, who represent investors in mortgage-backed securities, didn’t return calls or emails seeking comment.

A group of investors coordinating through Franklin’s RMBS Investor Clearing House owns at least 25 percent of voting rights in more than 3,000 mortgage securitizations, he said Nov. 12. Patrick represents bond investors including the Federal Reserve Bank of New York and BlackRock Inc., which are seeking to force Bank of America to buy back bad home loans.

No Quick Accord

A quick settlement is unlikely, Miller said.

Reports of a quick resolution are “totally wrong,” the Iowa official said. “It’s going to take a little longer.”

The interests of some investors are one obstacle to a quick settlement, said Miller.

Pooling and servicing agreements may dictate rights on loan modifications, and there are restrictions on gaining approval for adjustments on portfolios owned by government sponsored enterprises, such as Freddie Mac and Ginnie Mae.

“We’re working with our federal partners” to resolve this, Miller said.

Laurie Goodman, an Amherst Securities Group LP analyst, said at a conference in October that investors owning mortgage- backed securities fear any settlement with the attorneys general will involve “a large scale modification effort” that hurts bondholders. This reluctance isn’t universal, Miller said.

“Some of them tell us they’re not opposed to modifications,” he said.

Payment Beats Foreclosure

Investors are realizing that “foreclosure takes them out of the picture,” said Arizona Attorney General Goddard. “It’s far better to have someone pay, even if it’s a reduced value.”

Banks have suggested the securities owners may block a settlement that includes loan modifications, said Chris Katopis, executive director of the Association of Mortgage Investors.

“The servicers are painting us as a convenient patsy,” he said. “We find it absolutely inaccurate that we’re holding up the modification process.”

The mortgage investors oppose eliminating the so-called dual track, in which homeowners can be facing foreclosure while being considered for a loan modification, Katopis said.

“The dual track is a tool for avoiding foreclosures,” he said in a phone interview. “You have to hold people’s feet to the fire somehow.”

Iowa’s Miller rejected that argument, saying “dual track is fundamentally a bad practice. It creates great anxiety and uncertainty for the homeowner. The problems in modifications have not been to get homeowners to agree.”

No Global Accord

Miller has said that there wouldn’t be a global settlement of the 50-state investigation.

“It would be one bank at a time,” he said on Nov. 8.

A universal settlement is unlikely because the banks and servicers have been “all over the board” about whether they have a problem with their foreclosure procedures or whether they’ve done anything wrong, said Mark Kaufman, the Maryland Commissioner of Financial Regulation.

While the 50-state group has begun talking to banks as part of its investigation, individual attorneys general are continuing with separate probes.

Illinois Attorney General Lisa Madigan is reviewing information provided by mortgage companies, spokeswoman Robyn Ziegler said. The office demanded information from 26 companies, including Wells Fargo & Co. She declined to comment about which companies have provided information or about any meetings with them.

“We’re reviewing information they provided to us, and we’re in discussions with them,” Ziegler said.

Florida Talks

Florida Attorney General Bill McCollum’s office has spoken with representatives of Bank of America, JPMorgan, Detroit-based Ally, PNC Financial Services Group Inc. and Goldman Sachs Group Inc.’s Litton Loan Servicing, according to his spokeswoman, Sandi Copes. McCollum asked to meet with the companies in October to discuss their foreclosure practices.

The office had follow-up discussions with Bank of America, New York-based JPMorgan and Litton.

“We have had constructive meetings with attorneys general and a number of positive steps have been discussed,” Jumana Bauwens, a Bank of American spokeswoman said in an e-mail. She declined to elaborate.

Donna Marie Jendritza, a spokeswoman for Litton, declined to comment immediately. Thomas Kelly, a JPMorgan spokesman, declined to comment.

McCollum also is seeking to meet with San Francisco-based Wells Fargo. The request came after the bank said that it found problems with foreclosure affidavits, Copes said

Talks ‘Will Continue’

“I think the conversations will continue for the foreseeable future,” Copes said. “It’s too early to determine what resolutions will be pursued.”

Vickee Adams, a spokeswoman for Wells Fargo, didn’t return a phone call seeking comment.

If banks fail to reach an agreement with the attorneys general group, “they could be facing 50 separate pieces of litigation,” Arizona’s Goddard said.

While the states have recently begun talks with investors, negotiations with banks and mortgage services continue, said Richard Blumenthal, Connecticut’s attorney general.

“Loan servicers and lenders are cooperating with our investigation, which has expanded beyond robosigning. Ongoing discussions with lenders and servicers include reforming the loan modification process and greater foreclosure relief for homeowners,” Blumenthal, who was elected U.S. senator for Connecticut this month, said in a statement.

“We will explore all options, including possible legal action, if discussions fail to produce a settlement assuring the rule of law, property rights and fair treatment,” he said.

To contact the reporters on this story: Margaret Cronin Fisk in Southfield, Michigan, at mcfisk@bloomberg.net and; David McLaughlin in New York at dmclaughlin9@bloomberg.net.

To contact the editor responsible for this story: David E. Rovella at drovella@bloomberg.net.

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