A group of mortgage-bond holders is organizing to force repurchases of soured loans by H&R Block Inc. (HRB)’s Option One Mortgage Corp. unit, according to a Dallas lawyer who is helping coordinate the effort.
Three investors that retained Talcott Franklin PC asked the firm to solicit other members of its RMBS Investor Clearing House to join in the action, Talcott Franklin, the firm’s head, said today in a telephone interview. Members of the clearing house may have influence because they have 25 percent of the voting rights of 64 mortgage-bond trusts holding Option One loans, he said.
“It’s a no-brainer,” Franklin said. “There’s an unaffiliated servicer. There are trustees that are generally proven to be cooperative. And there’s an entity with funds earmarked to pay for repurchases.”
The effort, announced in an e-mailed statement, represents the first bid by members of the clearing house to publicly organize their collective holdings, accounting for more than half of $1.3 trillion of outstanding home-loan bonds without government backing, he said. As investors with 25 percent of individual deals agree to take action, Talcott Franklin will lobby the servicer of the mortgages and bond trustees to review loan files and seek repurchases on their behalf, he said.
“At this point, H&R Block has not received any request and cannot comment on actions by outside parties,” Gene King, a spokesman for the Kansas City, Missouri-based company, said in an e-mail.
H&R Block, the biggest U.S. tax preparer, is being targeted by investors seeking so-called putbacks of loans that allegedly failed to match the sellers’ promised quality, which JPMorgan Chase & Co. bond analysts estimated in October may cost banks and lenders across the industry as much as $90 billion.
H&R Block may face a maximum liability of $12.8 billion from mortgage repurchases, RBS Securities Inc. analysts estimated in an October report, based on data about delinquency and loss rates on its loans.
Option One, which focused on subprime loans and is now known as Sand Canyon Corp., ceased originating mortgages in December 2007. In April 2008, the unit sold its contracts to service home loans and servicing operations.
The unit had reserved $155 million for mortgage obligations as of Jan. 31, including $24.2 million related to an indemnification agreement, H&R Block said in March. From May 1, 2008 through Jan. 31, Sand Canyon had received cumulative repurchase claims of $740 million in unpaid principal, H&R Block has said. Losses on loan repurchases, indemnification and settlement payments were about $88 million in the period.
Conflicts of Interest
Billionaire Wilbur Ross’s American Home Mortgage Servicing Inc. bought the unit’s servicing contracts in 2008. Loan servicers, which manage outstanding debt, face conflicts of interest in seeking loan repurchases when the mortgages they oversee were made by affiliates, according to Amherst Securities Group LP analyst Laurie Goodman.
American Home “will abide by its obligations under any applicable pooling and servicing agreement,” Philippa Brown, a spokeswoman for the Irving, Texas-based company, said in an e- mail.
Participants in Franklin’s clearing house have included BlackRock Inc., Pacific Investment Management Co., Fortress Investment Group LLC, Fannie Mae and Federal Home Loan Banks, people familiar with the matter said in September. Some of those investors are part of a separate group negotiating with Bank of America Corp. over $177 billion of bonds filled with loans made by Countrywide Financial Corp., which the bank bought in 2008.
In seeking to organize investors owning bonds backed by Option One mortgages, Franklin said in the statement that “as with many of these transactions, the damages may exceed the available funds for recovery, so we are encouraging investors to submit their holdings quickly so we can instruct the trust administrators as to their deals.”
Members of the clearing house have been generally using the directory like “a dating service” to quietly find other holders of the bonds they own with similar characteristics or viewpoints, in order to then jointly press trustees and servicers or file lawsuits, he said in the interview.
Mortgage-bond investors typically must rely on bond trustees and loan servicers to take action on their behalf over violations of so-called representations and warranties. When their holdings exceed certain thresholds, investors can 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.
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