In their fight with banks over mortgage losses, investors get on borrowers' side

Jan. 10 (Bloomberg) -- Joshua Rosner, an analyst at Graham Fisher & Co., talks about the implications of a court ruling against U.S. Bancorp and Wells Fargo & Co. in a Massachusetts foreclosure case. The state Supreme Judicial Court upheld a judge's decision saying two foreclosures were invalid because the banks didn't prove they owned the mortgages, which he said were transferred into two mortgage-backed trusts without the recipients' being named. Rosner speaks with Deirdre Bolton on Bloomberg Television's "InsideTrack." (Source: Bloomberg)
Washington Post Staff Writers
Thursday, January 13, 2011; 10:54 AM

The fight between big banks and investors who lost a fortune on mortgage-backed securities is shifting from private litigation to the public arena.

The change in strategy comes as the number of foreclosures continues to skyrocket. Banks repossessed 1 million homes in 2010, and the number is expected to increase this year.

While the investors have been angry at the banks for several years for the losses, their legal efforts have not gotten far, mostly because of the difficulty of organizing enough peers for class-action lawsuits and of prying information from the lenders. But the recent uproar over the banks' foreclosure practices has given the investors a way to pressure lenders outside the courts.

As Congress begins discussing potential mortgage servicing legislation, and as the group of 50 state attorneys general investigating problems with foreclosures continues to hammer out details of a settlement with the banks, the investors find themselves fortuitously aligned with borrowers who are facing foreclosure and who have the sympathy of lawmakers.

The Association of Mortgage Investors, a Washington-based group that represents hedge funds, state pension funds, charitable endowments and other investors, on Wednesday fired the latest salvo by issuing a "white paper" that delineated its views on what would constitute an acceptable settlement between the banks and the state attorneys general. The investor group is calling for improvements to servicing and transparency that the banks have resisted in the past.

"We're focused on developing real solutions to sort out the housing finance market and broken servicing model in an equitable fashion for responsible borrowers, distressed homeowners, mortgage servicers and the mortgage investors," said Chris Katopis, executive director of the group.

The team leading the 50-state investigation has been meeting with the country's major servicers in recent weeks and with stakeholders such as the investors. The negotiations seem to be leading to separate but similar deals with each big mortgage firm, according to industry and state sources. A final settlement may be a few months away. Iowa Assistant Attorney General Patrick Madigan declined to comment on the details of the talks but said, "We continue to work hard on this complicated issue, but there is no imminent settlement at this time."

In Congress, lawmakers such as Rep. Brad Miller (D-N.C.) have been in close contact with consumer groups that represent borrowers and with the investors, because of their shared interest in mortgage reform. "Some unlikely allies are now talking and working more together to fix the problems," he said.

Miller said he plans to reintroduce legislation that could force banks to spin off their mortgage servicing operations, but he added that he's not overly optimistic it will pass, given the new Republican majority in the House. He said he is putting more hope in pushing regulators to use their new powers under the Dodd-Frank financial regulatory law to bring changes to bank foreclosure practices.

Investors represent what may be the biggest risk to banks that initiated questionable foreclosures. While homeowners may succeed at getting individual foreclosures delayed or even overturned because of paperwork mistakes and other errors, the money at stake in such cases is minuscule compared with the billions in bad mortgages that banks could be forced to buy back if investor lawsuits are successful. One estimate by J.P. Morgan Chase put the price tag at $120 billion.

The pressure from mortgage investors comes just weeks before the release of two key federal reports about the mortgage industry - a multi-agency report on the foreclosure problems and another by the Treasury Department on Fannie Mae and Freddie Mac.

Meanwhile, home foreclosure filings dropped 26 percent in December from the same time a year ago, the biggest annual drop since RealtyTrac started tracking the figures in January 2005.

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