The Association of Mortgage Investors (AMI) has issued a note of congratulations to the newly elected State Attorneys General nationwide. AMI’s member firms are asset managers and fiduciaries for important constituents of the Attorneys General—state, county and local pension funds and retirement systems. AMI shares many of the same goals in finding effective alternatives to foreclosure and protecting the retirement funds of state citizens.
The 50-state investigation into foreclosure practices is another telling sign of the unresolved problems in the U.S. housing market. The timely resolution of the foreclosure crisis is in the best interests of our nation’s economy, banks, homeowners, tax payers and fixed income portfolio investors reliant upon monthly cash flows from mortgage-backed securities (MBS).
“This election was about the future of the U.S. economy, and a core and significant part of the U.S. economy is the housing industry,” said AMI Executive Director Chris Katopis. “Now the newly elected state AGs must continue the hard work of investigating and sorting out the housing finance market in an equitable fashion for responsible borrowers, distressed homeowners, mortgage servicers and the mortgage investors, who include state, county and local pension systems, each having an enormous stake in the settlement. The AG investigation will confirm that mortgage investors did not direct, consent, or agree to mortgage servicers’ improper foreclosure practices. Mortgage investors look forward to participating in the settlements and ensuring the responsible parties are held accountable.”
The numerous concerns regarding foreclosure practices are well-known. Another central issue with potentially even more risk for the originators of mortgages involves any false and misleading information documented during the origination of these mortgages. The likely outcome for tax payers is that they will be penalized twice as a result of banks improper origination and servicing practices. The first loss occurs when the improperly originated mortgage defaults and losses are suffered by state, city and local pension fund investments. The second loss results from the improper foreclosure process and resulting delays which lead to blighted neighborhoods.
“The banks that originated troubled mortgages are reluctant to share mortgage documentation with their investment customers for fear of recourse from those fighting to protect pension funds, endowments and other investments," said Katopis. "This lack of transparency is deeply concerning."
During the peak of the housing market in 2005-2007, banks originated mortgages and put them into pools (Residential Mortgage-Backed Securitizations or RMBS). These pools were sold to mortgage investors, namely retirees, government entities, state pension funds, retirement systems, universities, and charitable endowments. In order to facilitate this process and get mortgage investors comfortable with making these types of investments, the banks made promises (or reps and warranties) about these mortgage loans. These “reps and warranties” generally included a number of safeguards, including for example that the banks did not violate state laws including anti-predatory lending and unfair and deceptive marketing statutes. It has become evident that many of these representations were not true (such as verifying a borrower’s income, intent to occupy the property and determining the ability of a borrower to repay the mortgage). In order for the housing market to recover and for mortgage financing to expand, the banks responsible for writing the loan warranties must fulfill their contractual obligation and repurchase loans that are defective under the terms of these warranties.
Today, research confirms that the loans originated during 2005-2007 were often materially defective with respect to the reps and warranties:
►A complaint involving one of JPMorgan Chase & Company subsidiaries finds over 80 percent of the loans in certain deals breached representations.
►Fitch reviewed defaulting loans and found that the “result of the analysis was disconcerting at best, as there was the appearance of fraud or misrepresentation in almost every file.”
►Recovco, a mortgage consulting firm, has reviewed several thousand loan files and has found that over 50 percent of those files reviewed in the 2006-2007 vintage have material breaches of representations and warranties.
As the 50-state investigation continues, the state Attorneys General are expected to design a multi-state settlement in the next few months. “It is the greatest hope of mortgage investors that any settlement carefully consider the impact on the performance of state pension, retirement systems, life insurance, and medical savings plans,” said Katopis.
For more information, visit www.the-ami.org.
