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Getting MBS Loans Put Back Not Easy

Some experts suggest that in disputes between investors and banks involving securitized residential mortgage product, investors have found it challenging to force banks to repurchase loans — a factor that could influence whether a huge settlement in this area pending at press time goes through.

 “There has been a lot of back and forth between the banks and private-label investors where private-label investors have been fighting against the banks in order to put back loans that have breached reps and warrants.

“So far we have seen very little success as far as banks repurchasing mortgages go,” Debashish Chatterjee, senior vice president, Moody’s Investors Service.

Chatterjee, the co-author of a report analyzing the implications of the multibillion-dollar settlement by Bank of America related to hundreds of billions of dollars worth of Countrywide-issued RMBS, stressed that his comments are based strictly on Moody’s experience in the securitized market.

“Until now we thought there’s a good chance that the banks could just dig in their heels and fight these investors off given that there are a lot of procedural hurdles for the investors to overcome in order to get the banks to buy back the loans,” added his colleague Yehudah Foster, vice president-senior credit officer at Moody’s, in an interview with ASR sister publication National Mortgage News.

The settlement shows that “the banks may be willing to give in and reach compromises,” Foster said.

The multibillion-dollar BofA settlement does not require buybacks of securitized loans, per se, but rather provides cash and other potential benefits to the securitized trusts involved in lieu of them in situations where there were either breaches of reps and warrants or breaches in proper servicing practices, among other things. It covers about 9% of the total expected losses from transactions covered by the settlement, Chatterjee said.

Foster did not want to comment at the time of the interview last week on whether the settlement would get final approval. However, he noted that it does have some flexibility.

“In the settlement itself there are provisions for certain trusts to be excluded from the settlement and yet the settlement could be still on with the other trusts,” Foster said.

“But the amount of excluded trusts is actually not specified...so we don’t know how many excluded trusts would rise to the level, would cancel the whole settlement.”

When asked by this publication about the likelihood of the settlement going through and setting a precedent in the industry, Anthony Michael Sabino of St. John’s University’s Peter J. Tobin College of Business, said, “Approaching this not just as a legal scholar, if I may, but as a lawyer with years of trial experience, settlement is almost always better than going to trial.”

Even if the settlement does not go through or some investors splinter off, the Moody’s analysts said the servicing improvements it calls for in terms of moving problem loans affected to qualified subservicing firms, requirements to meet certain industry loss mitigation and proof-of-title/documentation standards and make loan modifications more efficient may still proceed.

If the settlement goes through, the timing of the settlement payment will be a key determinant as to which bondholders see the most benefit, Moody’s said in its recent report.

Moody’s expects the payments will not flow through until some time next year and notes that the rate at which Bank of America has been liquidating loans has been slower than average.

One example of the industry benchmarks the settlement calls for the bank to meet, however, is a default servicing timeline, according to law firm Gibbs & Bruns, which represents 22 institutional investors involved.

This could affect the timing of the cash flows.

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