Mortgage Backed Security Holders Avoid Direct Confrontation with Borrowers

You have to read between the lines. This getting really interesting. Investors are the ONLY people with a potential claim to being a holder in due course and who could then seek to enforce the note, mortgage or obligation. As predicted on these pages, they will not and have not filed any legal actions against borrowers. Any legal actions filed have been against intermediaries (servicers, administrators like Countrywide, MERS et al) claiming, of all things, FRAUD. Well if fraud was involved so be it — but that means there is NO holder in due course by definition. And remember if anyone succeeds in establishing themselves as the holder in due course, then they are by definition the “lender.” If they are the lender then they are liable for all damages, fines, penalties, treble damages, claims, affirmative defenses etc. of the borrower. Their potential liability exceeds their potential recovery.

So why are the intermediaries being allowed to foreclose even though they have no interest in the loan? The investors obviously KNOW that U.S. bank, Wells Fargo, MERS et al are filing foreclosures without having any legal standing to do so. It isn’t a secret. And why are they allowing these intermediaries (IMPOSTORS — pretender lenders) to KEEP the property? Only one possible answer comes to my mind: they have a deal: “If you can get these properties or the sale proceeds we will give you money as our collection agent, but you must agree that you are acting for us and not for yourselves.” This avoids the real lender (Investor) raising the deadly holder in due course issue. It continues to hide and shield the real investor’s identity. And as for those trillions in bailout, loans, purchases of preferred stock and common stock by the US Treasury, Federal Reserve, AIG et al, it conceals a scheme to defraud taxpayers, to wit: where the taxpayers have already paid for the loan, these intermediaries are getting the money AGAIN and splitting it….

Mortgage Bondholders Form Battle Lines Over Obama Housing Plan

By Jody Shenn

April 23 (Bloomberg) — The head of Greenwich Financial Services LLC warned bond investors in Washington last month that government efforts to reverse the housing slump are doing more harm than good by undermining debt contracts.

More than 30 money managers with stakes in the $6.7 trillion mortgage bond market that underpins the real-estate industry heard Bill Frey’s March 25 talk, according to a list of the attendees. Since then, a group of investors with home-loan bonds totaling more than $100 billion have hired Patton Boggs LLP, Washington’s biggest lobbying law firm, said Micah Green, a partner and former head of the Bond Market Association.

Bondholders are preparing for a fight over legislation approved last month by the House of Representatives that would shield companies that collect homeowners’ payments from lawsuits over modified mortgages, even if new terms harm investors. The government’s actions may increase borrowing costs because creditors would demand higher returns to compensate for the risk that once-sacrosanct investment terms can be changed, they say.

“Certainly some greater amount of loans should be restructured, but it is a fallacy to think that policymakers can selectively abrogate contracts without affecting future investor behavior,” said Frey, chief executive officer of Greenwich Financial, a mortgage-bond broker and investor in Connecticut. “We are actively exploring strategies with major investors to protect their rights,” he added in an e-mail.

Four Coalitions

Amherst Securities Group, an Austin, Texas-based firm that specializes in mortgage bonds, said it’s been asked to join four similar coalitions forming to fight the legislation or lobby against the details of President Barack Obama’s plan to cut borrowers’ payments.

Frey, 51, made his presentation at a bond investor conference with David Grais, a lawyer at Grais & Ellsworth LLP in New York, and Laurie Goodman, an analyst at Austin, Texas- based Amherst Securities and UBS AG’S former fixed income research chief. Attendees included representatives of Royal Bank of Canada’s Voyageur Asset Management Inc. and Thrivent Financial for Lutherans.

By “allocating losses to some place that’s not expecting it,” including state pension plans, college endowments and life insurers, those investors will demand more return to hold mortgage debt without government backing, if they buy at all, said Amherst Securities CEO Sean Dobson, whose firm trades home- loan bonds and advises clients about the securities. “Capital’s going to cost a lot more for a long time.”

Bonds Plummet

Prices of many mortgage bonds have plummeted in the past two years as delinquency rates on the underlying loans soared. Mounting losses from securities tied to subprime home-loans caused credit markets to seize up in August 2007, triggering a slowdown in the U.S. economy that spread around the world.

In the market for bonds backed by fixed-rate Alt-A loans, a category viewed as less risky than subprime mortgages, the safest securities typically traded at about 52 cents on the dollar last week, down from about 100 cents in mid-2007, according to a Barclays Capital report.

Fixing the mortgage market and stabilizing housing prices would help Obama end the worst U.S. recession since 1982.

The U.S. mortgage-finance system depends on bond investors. About 64 percent of the value of America’s home loans is bundled into bonds, a market that is 10 percent bigger than the sum of Treasuries outstanding. Mortgages account for 80 percent of consumer debt, and housing costs represent about 22 percent of the economy, Federal Reserve and Hoover Institution data show.

Jennifer Psaki, a White House spokeswoman, declined to comment on bondholder complaints about the government’s efforts.

Congressional Panel

An administration official who helped craft Obama’s plan said it only allows loan modifications that are permitted by the terms of the bonds the mortgages back and that are in debt holders’ best interests. The official spoke on the condition of anonymity because he isn’t authorized to discuss the issue publicly.

A congressionally appointed panel overseeing the U.S.’s $700 billion finance-industry bailout said in a March 6 report that government action is needed to encourage loan modifications because soaring foreclosures “injure both the investor and the homeowner.”

Mortgage delinquencies increased to a seasonally adjusted 7.88 percent of all loans in the fourth quarter, the highest in records going back to 1972, the Mortgage Bankers Association in Washington said March 2. Loans in foreclosure rose to 3.30 percent, also a record and up from 2.04 percent a year earlier.

Obama’s Plan

Obama’s $75 billion plan to reduce foreclosures by modifying mortgages targets as many as 4 million homeowners. Foreclosed properties helped drive down home prices in 20 U.S. cities by an average of 19 percent in January from a year earlier, the fastest decline on record, according to an S&P/Case-Shiller index.

The program, announced Feb. 18, is part of Obama’s efforts to shore up companies from General Motors Corp. to Citigroup Inc. and financial markets amid the first global recession since World War II. U.S. gross domestic product shrank 6.3 percent in the fourth quarter. Last month, the World Bank predicted the global economy would contract 1.7 percent this year.

The mortgage initiative offers subsidies to lenders, including bond investors, to help lower borrowers’ housing payments to 31 percent of their income. What troubles bondholders are the incentives for loan servicers, the industry middlemen who decide which loans will be reworked.

Servicer Fees

Servicers can get $1,000 for each modified loan under the plan, an additional $500 for every loan changed before borrowers fall more than two months behind and $1,000 annually for as many as three years of on-time payments.

At least six servicers have signed up to participate, including New York-based JPMorgan Chase & Co. and Wells Fargo & Co. in San Francisco. Government payments to those companies may total $9.9 billion, according Treasury data released April 15.

Guidelines on the Treasury’s Web site tell servicers they can rework a loan only after they verify through financial models that new terms for the homeowner would be better for investors than an immediate foreclosure.

Bondholders still fret that some homeowners who don’t need help will be allowed to rework loans and that calculations to measure the impact will be skewed against bondholders, said Sean Kirk, a trader at New York-based Seaport Group LLC.

Part of the concern is that the four largest servicers, including Charlotte, North Carolina-based Bank of America Corp. and JPMorgan, own almost $450 billion in home-equity loans, many tied to the same properties as the mortgages they service, Amherst’s Goodman said.

‘Financial Incentive’

“They have a large financial incentive through the program to modify, and they’ll also benefit from putting more losses onto the first-lien holders because of their large second-lien positions,” said John Huber, who oversees about $30 billion in Minneapolis as chief investment officer of fixed income at Royal Bank of Canada’s Voyageur unit.

“What’s probably most troubling from a bigger picture perspective is what this means for the sanctity of contract law that has historically differentiated the U.S. as the gold standard of markets,” he added.

Responding to complaints that American International Group Inc. was excessive in awarding bonuses and paying off banks after accepting $182.5 billion in bailout funds, National Economic Council Director Lawrence Summers said March 15 on ABC’s “This Week” that “we are a nation of law, where there are contracts” and “the government cannot just abrogate contracts.”

‘Respect the Laws’

“If we don’t respect the laws on which people reasonably relied, the potential chaos, disruption, lack of credit and resulting unemployment will be that much greater,” he said.

The legislation opposed by bondholders passed in the House 234-191 on March 6. The measure, which also would allow bankruptcy judges to lower mortgage amounts through so-called cram-downs, is now before the Senate.

“I don’t think it’s Congress’s intent to damage the sanctity of contract law and the U.S. capital markets, but there is a risk of that happening,” said Michael Swendsen, a senior money manager in Minneapolis at Thrivent Financial, which oversees $61 billion of assets.

Resistance to loan modifications by Greenwich Financial’s Frey has prompted protesters from the Neighborhood Assistance Corp. of America consumer group to gather outside his Greenwich, Connecticut home, and has spawned a legal tussle with Bank of America.

Legal Tussle

In October, the bank reached a settlement with state attorneys general investigating whether Countrywide Financial Corp. tricked homebuyers into mortgages they couldn’t afford before Bank of America acquired the company last year. The deal, which more than 30 states have signed, will save homeowners $8.4 billion, the bank said.

Greenwich Financial sued Bank of America, alleging that much of the cost will be borne by bondholders. Frey’s firm is seeking class action status for the suit.

Barbara Desoer, Bank of America’s mortgage chief, said in an interview that her company isn’t modifying loans without bondholders’ permission, either in existing bond terms or in newly negotiated agreements.

The bank isn’t “going to do anything to put a contract at risk,” Desoer said. “But, at the same time, we’re thrilled that there’s a standard, and we have a head start because of the AG settlement.”

TCW Group Inc., a Los Angeles-based money manager that oversees more than $100 billion, is lobbying the Treasury for changes to the government’s plan.

Servicer Duties

Obama’s program encourages servicers to “abrogate their duty,” said Chief Investment Officer Jeffrey Gundlach, who oversees $52 billion of mortgage securities, on a conference call with clients March 18. “Servicers’ No. 1 duty is to us, the investor.”

While billed as beneficial to mortgage investors, Obama’s plan will mostly be ineffective in cutting losses because it focuses on lowering payments rather than reducing homeowner debt, said John Geanakoplos, an economics professor at Yale University in New Haven, Connecticut. Many borrowers with “negative equity” will choose to default anyway, he said.

“It’s a lot better situation when contracts are broken in a way that makes everybody better off,” said Geanakoplos, who is also a partner at Michael Vranos’ Ellington Management Group LLC, a hedge-fund firm in Old Greenwich, Connecticut. Geanakoplos has advocated breaking contracts by putting the power to modify loan terms into the hands of independent arbiters.

Program Retool

Scott Simon, Pacific Investment Management Co.’s mortgage bond chief, said retooling the Federal Housing Administration’s Hope for Homeowners program would be best for all parties.

Bond investors sustain losses equal to the amount needed to reduce a loan to 87 percent of a home’s current value under that strategy. In return, the remaining debt is refinanced with government-insured loans, preventing further investor losses. The congressionally approved program was designed to help 400,000 borrowers when it started in October; 51 of the loans have closed, said Lemar Wooley, an FHA spokesman.

“It was a great idea, but there was horse-trading to get the bill passed, creating subtle little things that made it unusable,” said Simon, whose Newport Beach, California-based firm manages the world’s biggest bond fund.

‘Elephant in the Room’

The FHA program “addresses the elephant in the room,” he added, referring to how many borrowers have “negative equity.” Almost one in six U.S. homeowners with mortgages owed more than their homes’ worth after the market lost $3.3 trillion in value last year, according to a Feb. 3 report.

Don Brownstein, CEO of Structured Portfolio Management LLC, said another Obama administration mortgage program announced Feb. 18 also represents the government acting “extra-legally.”

Under that plan, as many as 5 million additional Fannie Mae and Freddie Mac mortgagees with less than 20 percent in equity will be able to refinance without buying or paying for mortgage insurance. The two government-sponsored companies’ charters typically require insurance for loans with debt-to-value ratios of more than 80 percent.

The new program was created without congressional approval. Federal Housing Finance Agency Director James Lockhart, who oversees the two companies, said it didn’t require legislation because the refinancing is akin to permitted loan modifications, even though some bondholders incur losses if their securities’ underlying loans are paid off faster than expected.

Mistreating “customers, the ones who ultimately lend to the homeowners, is not good a business practice,” said Brownstein, whose hedge-fund firm is based in Stamford, Connecticut.

To contact the reporter on this story: Jody Shenn in New York at

Last Updated: April 23, 2009 00:01 EDT

6 Responses

  1. Yeah, I think it’s better to avoid this. It may help us. Thanks.

  2. thank Sal for your thoughts really appreciate it. but here’s my argument

    1.when we buy or refinance our property we open escrow in the title company which the borrowers paid for the the escrow fees and title fees. when the escrow closed, the title company is the actual “trustee” between the lenders and the borrowers. the title companies such as fidility national title, chicago title and etc.
    were the actual “trustee” after deed of trust has been recorded, if the beneficiary
    substitute a new trustee are they supposed to ask permission from the borrowers since the borrowers paid for those fees ? i think this is also a good argument to consider. erlinda

  3. On the subject of investors, they really need to stop their whining and lobbying efforts to enhance their rights as debt holders. if they have enough extra money to be buying debt and throw 100 mill lobby deals away to try and screw homeowners then they need to realize that it was a gamble and they lost plain and simple get over it. plus these foreign creeps are too chicken shit to reveal their identities so they hide behind these crooked ass loan servicers that do their dirty work for them. how about we do to them what they did to us make it legal to play keep away with the title to the property, change ownership without their consent, and withold who has possession of it making it impossible to foreclose with no paper trail to keep track of who they should sue, sound like fun?

  4. Who brought the Complaint forward? If they don’t have physical possession of the note then they are not the injured party. Is it a judicial foreclosure state?

  5. Hi Erlinda, from what I have learned, the Trustee on a Deed of Trust is not the same as what we normally think of as a Trustee. Their only function is to sell the property when instructed to do so by the Beneficiary due to a default in payment. That is the extent of their duties so it would be hard to prove a conflict when they have such a limited participation in the matter.

  6. i was helping my friend doing some research on a company that foreclosing her property. her lender is under GMAC, and the foreclosing company, ETS Services, LLC s also owned by GMAC. so do you think there is a conflict of interest on this matter? since the trustee whose function should be neutral for both lender and borrower . the fiduciary duties of a trustee is ineffective. is there a laws that you could challenge that? what about FRAUD for not disclosing the real relationship between the lender and the trustee? need help for to clear the confusion. thanks linda

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