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Growing threat hangs over legacy mortgage bonds


reuters.com | January 19, 2015

By Joy Wiltermuth

NEW YORK, Jan 16 (IFR) - Investors including US mortgage giant Fannie Mae holding decade-old residential mortgage bonds are fretting over potentially huge losses on securities where delayed foreclosures could lead to complete write-offs on defaulted loans.

Mortgage servicers, whose job is to ensure bondholders receive repayments on loans, have frequently failed to foreclose on delinquent debt in a timely manner, and therefore risk falling foul of legal deadlines which limit the time home-owners can be chased for payment.

"If a foreclosure runs afoul of the statute of limitations, it's a problem," said Bruce Bergman, a partner at Berkman Henoch Peterson Peddy & Fenchel, a New York law firm which represents lenders and loan servicing firms in mortgage foreclosure cases.

"If the court says the mortgage is gone because too much time has passed, it's gone. The loss, if it occurs, is catastrophic because it is complete."

Analysts are struggling to estimate the size of resulting losses in the US$820bn of private label RMBS sold before the financial crisis, and investors are just waking up to how big a problem it could become.

Fannie Mae's general counsel held a conference call just before the Christmas holidays - all of its retained law firms were required to participate - to ask how the government-run mortgage agency could alleviate such losses, a person with knowledge of the call told IFR.

"[Fannie Mae's] general counsel asked: 'How bad is it?'" the person said, adding that one of the lawyers on the call answered: "We can't even begin to tell you - there are so many loans."

A spokesperson for the agency declined to comment.

Alarm is increasing following a number of court cases across the US that have left mortgages voided even though borrowers have not paid a dime in years.

The statute of limitations varies between states, but in New York it is six years and in Florida five. These two jurisdictions, along with California, have the largest exposure to pre-crash RMBS loans, after some US$375.5bn in mortgages from the boom years were rolled into securities, according to data provider Intex.

Many of those loans hit trouble years ago.

The clock on the statute of limitations starts ticking as soon as a loan has been accelerated for full payment following a default.

Ashish Negandhi, a senior portfolio manager and RMBS investor at Angel Oak Capital Advisors, said: "Common sense says not that many people are going to get away scot-free with no payment."

Negandhi has contacted a number of Wall Street analysts to request data on how many loans could be voided and what that means for outstanding RMBS. He said the work entailed in finding answers was just beginning.

Ticking Clock

On the Fannie call, lawyers discussed a December court ruling in Florida about a 2006 default on a US$1.44m loan secured on a condominium in Miami Beach, Florida. The ruling upheld a decision that the foreclosure surpassed Florida's statute of limitations deadline. But whether the mortgage is actually "null and void" is still to be decided by a trial court.

That mortgage defaulted just seven months after it was rolled into a Deutsche Bank bond deal from 2006 called AHMS 2006-2. Lenders are watching the case closely to see what options they may have to avoid total losses on other defaulted mortgages.

Time also ran out on a 30-year US$649,000 adjustable-rate mortgage loan on 43 Irving Place in Brooklyn, New York. That loan was rolled into a 2005 CSFB private label RMBS called ARMT 2005-11.

Not only was the mortgage cancelled and cleared from the record - making it unavailable as an income stream for the US$1bn bond deal - the borrower was able to sell the property for US$500,000 after the statute of limitations expired, according to court and property records.

Incomplete Picture

Such problems often stem from poorly originated loans falling into the hands of non-bank mortgage servicers after banks offloaded battered portfolios in the aftermath of the crisis. The US$25bn robo-signing settlement that banks reached with regulators in 2012 hastened such transfers.

Regulators have since lashed out at servicers over their failure to properly handle such soured loans, while oversight by courts in the foreclosure process has become stricter.

Some servicers, unable to manage the volume of loans, have let defaults slip through the cracks. As a result, some trusts will be left empty-handed on collateral which was meant to pay off RMBS deals.

Finding accurate data on the loans, and exactly when the statute of limitations kicks in, is proving problematic.

Investors can comb through outstanding legacy RMBS mortgages coded as "in foreclosure" state by state, but in New York alone such loans stand at roughly US$14bn, according to Intex. And even that figure provides an incomplete picture because not all of what goes on with a loan is reported to investors as it happens.

To get proper detail, it is often necessary to sift through local court dockets to learn about specific properties in foreclosure, when loans have been accelerated and how much time is left before the statute of limitations expires.

"Usually, it is hard to find when the loan was actually accelerated," said David Berg, a founding partner of Berg & David, a Brooklyn-based law firm that worked on the New York mortgage case.

"Sometimes there is a letter sent home to the borrower. But other times the bank just takes action in court, and sometimes the borrower doesn't even know it."

(Reporting by Joy Wiltermuth; Editing by Natalie Harrison, Alex Chambers and Matthew Davies)


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