The Association of Mortgage Investors (AMI) has publicly commended the Obama Administration on the release of its white paper, Reforming America’s Housing Finance Market. AMI acknowledges that it presents a series of important reforms to bring back the country’s housing opportunities. At this week's House Financial Services Subcommittee hearing, the Administration witnesses state important goals:
►“The return of private capital is particularly important given that today, Fannie Mae, Freddie Mac and Ginnie Mae collectively insure or guarantee more than nine out of every 10 new mortgages ..."
►“We must revive the PLS market [Private Label Securities] ..."
AMI does see a number of omissions which will frustrate its goals and ultimate success of returning private capital to the market. Accordingly, AMI and its members are ready and willing to engage policy-makers to create a truly viable plan that offers long-term, sustainable, and effective solutions. The timely resolution of the foreclosure crisis is in the best interests of homeowners and fixed income portfolio investors reliant upon returns from mortgage-backed securities (MBS).
“The future and revitalization of the housing finance market is tied to the past legacy of what happened to precipitate the crisis,” said AMI Executive Director Chris Katopis. “Any truly viable solution must address the defective mortgage loans (many of which are a direct result predatory lending practices) which still reside in pools and trusts across the country and plague investors.”
During the peak of the housing market in 2005-2007, banks originated mortgages and put them into pools (also referred to as Residential Mortgage-Backed Securities 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 "representations and warranties") about these mortgage loans. These “reps and warranties” may include a number of safeguards, including for example that the banks did not violate state laws including anti-predatory lending and unfair and deceptive marketing statues. It has become evident that many of these representations were not true (such as verifying a borrower’s income 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.
According to AMI, ample 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 & Co subsidiaries finds more than 80 percent of the loans in certain deals breached representations.[i]
►Fitch reviewed 45 early 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 more than half of those files reviewed in the 2006-2007 vintage have material breaches of representations and warranties.
Part of the problem is that the entities holding the evidence of breaches, or the mortgage files, have been unwilling to follow their contractual obligations and release documents to trustees and beneficiaries. This is evident in two recent lawsuits where trustees are suing a major servicer to access mortgage loan documentation that trustees are entitled.
“Promises made must be promises kept. When parties ignore their contractual obligations and worse, block the sharing of documentation, mortgage investors can only assume the nation’s consumers and state institutions face a significant problem. Sunlight is the greatest disinfectant; let’s get the documents and have the facts,” said Katopis.
As Congress reviews the proposed Administration plan and other recommendations, the issue of defective loan put backs must remain high on the agenda, as it impacts a range of our institutions back home, such as state entities.
“It is the greatest hope of mortgage investors that any GSE Reform plan carefully consider the impact on the soundness of state pension, retirement systems, life insurance, and medical savings plans,” said Katopis.
For more information, visit www.the-ami.org.