BlackRock Lawyer Criticizes Government Mortgage-Loan Settlements

To revive the U.S. mortgage-bond market, investors need more protections to restore their confidence, according to a lawyer who works on behalf of BlackRock Inc. (BLK) and Pacific Investment Management Co.

Underscoring why bond buyers are concerned that they may be disadvantaged, home-loan servicers have been able to settle U.S. government probes of their practices by agreeing to rework mortgages backing securities owned by investors to offer better terms for borrowers, Kathy Patrick, a partner at Gibbs & Bruns LLP, said yesterday at an industry conference in Las Vegas.

“In any other universe, if a service provider did something wrong and then turned around and used somebody else’s money to pay for it, people would be astonished,” she said. “But the government has taken that approach in a number of settlements and part of the reason for that is investors have real barriers for protecting themselves.”

BlackRock, the world’s largest money manager, and Pimco, which oversees the biggest bond fund, are among investors that have criticized regulatory mortgage settlements on similar grounds. After record defaults fueled a global financial crisis in 2008 and froze issuance of home-loan securities without government backing, sales tied to new mortgages rose to less than $14 billion last year, compared with a peak of $1.2 trillion in both 2005 and 2006, according to data compiled by Bloomberg. U.S.-backed programs finance about 85 percent of new loans.

Bondholder Groups

Patrick represented bondholder groups including Pimco and BlackRock that reached a potential $8.5 billion accord with Bank of America Corp. (BAC) over bad mortgages in 2011, and proposed a $4.5 billion settlement with JPMorgan Chase & Co. (JPM) in November.

Also in November, BlackRock chastized the government for allowing JPMorgan in a separate deal to use $4 billion of consumer relief, including on investor-owned loans, to settle charges of misrepresentations in mortgage-bond sales. Pimco in 2012 called a U.S. settlement with five banks over foreclosure practices costly for bond investors including pension funds.

At the Structured Finance Industry Group conference in Las Vegas, Patrick cited Ocwen Financial Corp.’s agreement last month to provide $2 billion of principal forgiveness to homeowners to resolve claims of abuses in its handling of outstanding mortgages. Investors’ interests would be better protected if mortgage-bond trustees had fiduciary duties and if rules giving tax advantages to the trusts didn’t create hurdles to investors’ asserting their rights, she said.

Investors’ Complaints

For the private mortgage-bond market to revive as government programs get scaled back, the industry must come together to address investors’ complaints about loan servicing and the process by which sellers can be forced to buy back bad loans that fail to match their promised quality, said Eric Kaplan, a managing director at Shellpoint Partners LLC, the lender backed by mortgage-bond pioneer Lewis Ranieri.

“No voice can be left out, especially if we want a return of private capital in a meaningful size,” Kaplan said, speaking on a panel with Patrick. “The question is how do we button this up so that if you’re a bondholder you only suffer the losses that you contractually signed up to suffer?”

Patrick declined to comment further on the Ocwen (OCN) accord in an interview, except to say “it’s on my radar screen.”

She separately said that trustees last week elected to extend by 60 days a period in which they must decide whether to agree to the JPMorgan accord proposed by her clients. Hedge fund Fir Tree Partners said today in a statement distributed by PR Newswire that it was seeking to buy some of the securities covered by the agreement and would seek to continue litigation over them.

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

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net

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