BlackRock Says JPMorgan Deal Undermining U.S. Market: Mortgages

JPMorgan Chase & Co.’s (JPM) record $13 billion deal to end mortgage bond probes has terms that undermine U.S. efforts to reduce taxpayer support of the market, according to BlackRock Inc., the world’s biggest money manager.

Washington has a public policy goal of reducing the role that the government plays in the housing-finance market, and at the same time we now have a series of settlements where no investors were at the table and where money toward the settlements may come from investors’ pockets,” said Barbara Novick, vice chairman of BlackRock. “It discourages the allocation of private capital to mortgage credit.”

JPMorgan struck the agreement this week to settle potential state and federal civil claims of misrepresentations in mortgage-bond sales by the lender and companies it acquired. The largest U.S. bank can earn credit toward meeting $4 billion of consumer relief required by the deal through reworking mortgages owned by investors in the securities, potentially harming holders, according to Novick.

BlackRock (BLK), which oversees $4.1 trillion, and other buyers of mortgage bonds without government backing have criticized multiple federal and local actions in the wake of the U.S. housing crash as unfair to investors, saying they deter participation in the $9.3 trillion home-mortgage market.

‘Best Interest’

With taxpayer-backed programs financing about 85 percent of new home loans, issuance of non-agency bonds is about 1 percent of the record level reached in 2005 and 2006. Sales of commercial-mortgage securities have recovered to 34 percent of a pre-crisis peak and loans to junk-rated companies are on pace to exceed $1 trillion this year, more than during the boom years.

“Loan modifications will be done only if they are in the best interest of the investor and in accordance with the bank’s agreements with the investors,” said Adora Andy Jenkins, Justice Department spokeswoman. “So when these modifications are made, it’s because they’re good for investors, consumers and neighborhoods across the country that are still recovering from the financial crisis.”

BlackRock’s Novick said, “that’s hard for us as investors to measure: We don’t get enough transparency into what’s going on.”

Amy Bonitatibus, a spokeswoman for New York-based JPMorgan, declined to comment.

Under the agreement, JPMorgan will receive partial credit for steps it takes on loans serviced for others, according to a settlement document on the Justice Department’s website. For instance, the bank typically will get a 50 cent credit for each dollar of principal reductions for homeowners whose debt it doesn’t own. The bank gets 100 percent for loans it owns.

Lobbying Justice

The Association of Mortgage Investors was among groups that lobbied the Justice Department to preclude the bank from getting credit for loans owned by investors to help fulfill its obligations, as occurred with 2012 agreements over foreclosure practices involving JPMorgan and four other banks.

About 32 percent of credit granted to JPMorgan under the earlier deal was tied to loans the bank serviced and didn’t hold, according to a court filing last month by the monitor for the settlement, which was sparked by allegations of “robo-signing.”

Graham Fisher & Co. analyst Joshua Rosner said that allowing any consumer aid that may harm bondholders to be part of the latest deal makes little sense.

‘Investors Misled’

“These were claims about investments where investors were misled,” Rosner said in a Nov. 19 interview on Bloomberg Television. “Why is money going to consumers?”

Homeowners also were harmed by shoddy securitization practices, according to a government official involved in the settlement. Giving JPMorgan credit for loans held within bonds will help more of the neediest get aid because many of the worst mortgages were packaged into securities, said the official, who asked not to be named because the discussions were private.

President Barack Obama, Democrat and Republican lawmakers and regulators including the Treasury Department and Federal Housing Finance Agency have all said they want more private capital in the home-loan market five years after the government rescued Fannie Mae and Freddie Mac.

Mortgage-bond investors are still wary of the market after record losses from the worst housing crash since the Great Depression.

JPMorgan, Bears Stearns Cos. and Washington Mutual Inc. home loans from 2005 through 2008 placed into non-agency bonds have experienced more than $76 billion of losses, and $30 billion of the remaining debt is at least 60 days delinquent, according to a Securities and Exchange Commission filing.

Promised Quality

Investors, insurers and regulators have said in lawsuits against JPMorgan that reviews of soured loans showed in some cases that more than 80 percent failed to match their promised quality. The bank bought Washington Mutual’s banking assets and Bear Stearns in 2008.

BlackRock, which is JPMorgan’s biggest shareholder, and other investors have also opposed efforts by local governments to use their eminent domain powers to seize and rework mortgages held within bonds. The asset manager, which joined in August with competitors to seek a court order to block Richmond, California’s efforts to advance such a plan, contends it will depress private lending.

Municipalities in about 11 states from California and Washington to Ohio, New York, New Jersey are still at least looking into the idea, according toRobert Hockett, a Cornell University professor who’s advised the local governments.

“The servicer settlement and the eminent domain proposals all discourage private capital,” Novick said in a telephone interview. “If you don’t know what your rights are as an investor, why would you allocate capital?”

Investors’ Ire

Investors’ ire has built since a 2008 settlement between Bank of America Corp.’s Countrywide Financial unit and state attorneys general in which claims of predatory lending yielded a deal that called for mostly investor-owned loans to be revised.

Since then, state and federal governments have taken a series of steps to temporarily freeze or slow foreclosures. Congress passed a law protecting servicers from certain investor suits and the federal Home Affordable Modification Program was structured in a way that aids banks, mortgage investors have said.

In JPMorgan’s latest deal, the bank can get credit for extinguishing second mortgages a day before a foreclosure in which the debt will be wiped out, saidLaurie Goodman, director of Urban Institute’s housing finance policy center. The bank gets 40 percent credit for non-performing second loans, up from as little as 10 percent in the earlier deal in which observers questioned the credit, she said.

Principal Forgiveness

“There is a role for giving credit for principal forgiveness on second liens but the 40 cents on the dollar seems miscalibrated,” said Goodman, a former mortgage-bond analyst at firms including UBS AG and Amherst Securities Group LP.

Credit is also available for refinancing Fannie Mae (FNMA) and Freddie Mac mortgages serviced by others under the federal Home Affordable Refinance Program, which JPMorgan “might be doing anyway,” she said.

The bank’s costs from the consumer relief are already accounted for in its provisions, Chief Financial Officer Marianne Lakesaid on a Nov. 19 conference call.

Giving JPMorgan partial credit on investor-owned loans hurts rather than helps bondholders because it means the lender has to write down more mortgages to get the same amount, said Chris Ames, a senior portfolio manager at Schroder Investment Management North America Inc.

Judgment Call

“The decision by a servicer to write off debt is a judgment call,” Ames said in an e-mail. The type of settlement creates “perverse incentives, and the servicing of private label securities isn’t transparent enough for investors to evaluate the decision-making.”

The perceived harm to bondholders would be even less likely if a separate agreement reached last week between JPMorgan and 21 institutional investors including BlackRock is finalized, according to the government official.

Under that proposed settlement of mortgage-bond holders’ own claims of misrepresentations, JPMorgan would allow servicing on certain loans to be transferred along with paying $4.5 billion. The agreement doesn’t cover Washington Mutual debt.

Trustees representing all investors in the deals have as many as 120 days to accept the proposal. Certain investors may seek to resist the accord, according to Nomura Securities International analysts Paul Nikodem andPratik Gupta.

Nomura Estimate

The 7 percent payout relative to past and projected losses on the loans is lower than the about 10 percent seen in a $8.5 billion proposed deal reached in 2011 by Bank of America still being fought over in court, according to Nomura.

Novick declined to comment on that settlement, whileKathy Patrick, a partner at Gibbs & Bruns LLP representing the investor group, didn’t return an e-mail seeking comment.

While Novick said BlackRock isn’t opposed to borrowers getting their balances lowered, the firm “stands by” its view that the step should mainly occur under a mediation process in which borrowers’ unsecured debt such as credit-card borrowing and second mortgages are extinguished first.

“We’re in favor of the rule of law, and the forgiveness of debt in the order it should be under contract law,” she said.

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

To contact the editor responsible for this story: Rob Urban at robprag@bloomberg.net

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