Bloomberg News

Wall Street Split as Money Managers Fault Bank Foreclosure Deal

February 14, 2012

Feb. 3 (Bloomberg) -- Wall Street’s biggest lobbying group is split over a proposed settlement of state and federal foreclosure probes, after a committee of money managers signaled it opposes terms letting banks push some costs onto bondholders.

The Securities Industry and Financial Markets Association’s Asset Management Group planned to release a statement last week urging government negotiators to protect innocent investors, amid reports that banks will get credit for lowering the balances of mortgages packaged into bonds, three people familiar with the matter said. Sifma’s leadership said no. The panel’s members oversee $20 trillion and include BlackRock Inc. and Pacific Investment Management Co.

Sifma elected not to issue the statement “because the settlement surrounds potential legal issues involving the commercial interests of many of our members,” said Cheryl Crispen, a spokeswoman for the group in New York. “Sifma generally does not intervene in such matters and remains focused on matters of policy and advocacy.”

The rift within Sifma follows investor advocates’ complaints that bondholder interests are often trumped by those of the biggest banks when government officials act to address the fallout from the U.S. housing slump. Language similar to the planned statement was included in a Jan. 31 release by the Association of Mortgage Investors, a smaller trade group for bondholders that unlike Sifma doesn’t also lobby on behalf of firms that issue, underwrite, service and trade debt.

Deadline

All 50 states announced an investigation into foreclosure practices in 2010 following disclosures that servicers were using flawed documents in seizing homes. A group of state attorneys general and federal officials has since negotiated terms of a proposed settlement.

Under the agreement, which would total about $25 billion if California joins, banks would provide a minimum amount of principal reductions on first- and second-lien loans, a person familiar with the matter said.

States have until Feb. 6 to decide whether to sign on to the deal with five firms including Bank of America Corp. and JPMorgan Chase & Co., after delays as officials debated liability releases and other terms. U.S. Senator Sherrod Brown, an Ohio Democrat, and the Washington-based Association of Mortgage Investors, whose members oversee $300 billion in bonds, also earlier criticized the potential inclusion of modifications on investor-owned loans.

“If the money managers don’t have a seat at the table, going public is one way to blow the whistle,” said James Post, a management professor at Boston University.

Reaction in E-mail

Sifma’s comment letters to regulators often explain its constituencies’ differing views on proposed rules. It also has issued press releases expressing the asset management group’s specific opinions. The panel’s members include BlackRock, the world’s largest money manager, and Pimco, which runs the biggest bond fund, as well as AllianceBernstein LP, whose executives have led the group and testified to Congress on its behalf.

Mark Porterfield, a spokesman for Newport Beach, California-based Pimco, declined to comment, as did Lauren Trengrove of New York-based BlackRock and John Meyers at AllianceBernstein in New York.

Leaders of the panel told other participants in an e-mail last week that Sifma won’t let the AMG’s voice be heard, according to one of the people, who declined to be identified because they weren’t authorized to comment. The panel’s press release, which would have specified it represented the asset- management group’s views, said bondholders oppose any agreement that makes investors, including pensions and Main Street mutual funds, pay for banks’ wrongdoing.

Flawed Documents

Their inability to put out the statement “demonstrates, as many of us have been saying for a very long time, that Sifma is ultimately a sell-side organization that claims to be representative of both,” said Joshua Rosner, an analyst at research firm Graham Fisher & Co. “It’s why there has been so little done to fix the underlying problems.” Sell-side refers to firms that sell securities to investors and funds.

Under the proposed settlement, banks would receive credit for cuts to mortgages they hold directly and those within securities without government backing, said the person, who wasn’t authorized to speak publicly about the matter. They would earn about twice as much for their own loans. The settlement wouldn’t require servicers to break contracts that say loans should only be reworked if that’s better for bondholders than a foreclosure, the person said.

While investors welcome modifications that reduce losses, they’re concerned that banks will be tempted to skew calculations to expand the pool of eligible debts and avoid the costs themselves, said two of the people who knew of the planned asset-manager statement.

Servicer Protection

In March, Sifma expressed concern in a statement about the initial proposed terms. Changes to servicing standards were being discussed in a “closed process” and extended foreclosure timelines could create greater losses for investors, it said.

In 2009, Sifma’s lobbyists pushed for legislation offering protection to mortgage servicers against lawsuits from investors if they reworked loans in certain ways, and Congress eventually passed a bill in a weakened form, according to “Way Too Big to Fail,” a book last year by Bill Frey, head of Greenwich Financial Services LLC in Greenwich, Connecticut.

“Sifma doesn’t represent investors, they represent a handful of banks,” said Frey, who sued Bank of America after its 2008 settlement with states over Countrywide Financial Corp.’s practices. “Policy makers are trying to prop up the banks, and in doing so, they are willing to raid the pensions of this country.”

‘Meaningful’ Relief

Brown, who heads the Senate’s Banking Subcommittee on Financial Institutions and Consumer Protection, told Iowa Attorney General Tom Miller and leaders of U.S. agencies including the Department of Housing and Urban Development that, while he wants “meaningful, widespread relief” for homeowners, investors such as the state’s pension funds shouldn’t pay.

“Teachers, first responders, law enforcement, and other pensioners and retirees should not be penalized for wrongdoing by Wall Street,” Brown wrote in a Jan. 19 letter.

HUD Secretary Shaun Donovan declined to comment on the details of settlement talks at a Feb. 1 press conference, saying “we are making good progress.” Officials expect that a majority of the loan modifications will occur on loans owned by banks, said Geoff Greenwood, a spokesman for Miller, who’s helping to lead negotiations.

“We expect that banks will modify loans only when it’s better for investors in the long run,” Greenwood said in an interview.

Tom Kelly, a Chicago-based spokesman for JPMorgan, and Dan Frahm at Bank of America declined to comment.

Countrywide Settlement

The Sifma Asset Management Group’s leaders said in the e- mail last week they may seek to release their statement through the American Securitization Forum, a trade group with both bank and investor members that split from Sifma in 2010, the people said. Jon Teall, an ASF spokesman, declined to comment.

The Association of Mortgage Investors grew out of a coalition that formed in 2008 as a result of bondholders’ displeasure over the settlement that year between state attorneys general and Bank of America’s Countrywide unit, said Chris Katopis, AMI’s executive director. It became a formal trade group the next year. Doubleline Capital LP and Angelo Gordon & Co. executives have testified to Congress on its behalf.

“What AMI offers is an unconflicted voice for mortgage investors,” Katopis said in a telephone interview, declining to name its members. He said some of those firms, which can overlap with Sifma’s, contribute language used in its statements and that he hadn’t seen the proposed Sifma press release.

‘Legal Challenge’

Frey, in his proposed class action suit against Bank of America, said bondholders were unfairly penalized by the firm’s agreement to modify loans to settle charges of fraudulent lending by Countrywide. His Greenwich Financial invests in, creates and trades mortgage bonds, and advises bondholders.

That suit was dismissed in 2010, with a New York state judge saying Frey didn’t own enough of the deals to have standing. As the pending settlement develops, he said some investors are eyeing the legal remedies available to bar the government from taking private assets without fair compensation.

“If the attorneys general want to do something like this, they are creating the possibility of a legal challenge,” Frey said.

--With assistance from David McLaughlin in New York and Lorraine Woellert in Washington. Editor: Steve Dickson, David Scheer, Peter Eichenbaum

To contact the reporters on this story: Jody Shenn in New York at jshenn@bloomberg.net; Bradley Keoun in New York at bkeoun@bloomberg.net

To contact the editors responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net; David Scheer at dscheer@bloomberg.net


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