UPDATE 1-BlackRock fund to finance, securitize US mortgages

(Adds details, background)

By Al Yoon

NEW YORK Nov 4 (Reuters) - A BlackRock Inc (BLK.N) fund this month will begin financing U.S. home loans customized for a new breed of residential mortgage-backed securities that avoids the conflicts tainting many of today's private issues.

The $1 billion BlackRock Mortgage Investors Fund will provide capital for prime "jumbo" loans through lenders under strict underwriting guidelines, said Randy Robertson, a managing director and co-head of securitized products.

The loans will be earmarked for bonds akin to Wall Street's private-label RMBS that provided the majority of credit at the peak of the housing boom. But BlackRock says it is addressing the weaknesses of the old model that have frustrated investors, including sloppy loan documentation and potential conflicts when the same bank is originator and servicer.

"We're really designing this to alleviate many of those concerns," Robertson said. "We hope to achieve the bellwether non-agency prime securities, ultimately."

It's a new twist by a the world's largest money manager, which created the BMI fund to purchase distressed mortgage assets. The fund, part of BlackRock's $3.5 trillion under management, expects initially to support $100 million to $250 million a quarter as the housing slump and economy limit greater demand, Robertson said.

BlackRock and other investors for the past year have complained that their positions in RMBS have been treated unfairly as servicing companies have modified loans. Many servicers are units of banks that hold more than $400 billion in second-lien mortgages, and in lowering interest rates on the main mortgage, they have left the junior debt untouched.

First investors are perversely at "the back of the collection line," BlackRock Vice Chairman Barbara Novick wrote in an op-ed piece last month.

Investors at BlackRock and elsewhere have said unfair treatment of mortgage investors has been a factor in the lack of private capital entering the U.S. housing market, which is foundering in part due to lack of credit. Only one mortgage bond backed by new loans has been sold since the $1.5 trillion private-label market came to a screeching halt in 2008.

The government-supported market of Fannie Mae, Freddie Mac and Ginnie Mae "agency" mortgage bonds finances 90 percent of all U.S. home loans. But lawmakers and regulators hope to reduce the costly role of government in housing as they begin to overhaul the nation's mortgage finance system in 2011.

Instead of relying on others for creating sound mortgage assets, BlackRock is setting aside the traditional money manager role and is setting its own rules.

Among them, loans will be handed to a separate servicing firm to ensure independence when recording payments and working with borrowers. Originators cannot induce servicers to initiate fee-producing loan refinancings, which hurts investors if principal is returned at below-market levels.

Specialized investors, including PennyMac Mortgage Investment Trust, have also been developing so-called conduits for aggregating jumbo mortgages. But securitization of the loans has been next to nil as bank loan rates have been too low to ensure profits for issuers, analysts say.

BlackRock can easily vary its funding based on demand and profitability, Robertson said. Growth potential rises as economic growth picks up and it appears the bottom in housing is closer, he said.

Currently, jumbo lending is constrained as many borrowers do not qualify and lenders are wary of expensive properties when forecasts call for further price depreciation. Lenders must securitize or hold in portfolio loans with balances above a temporary cap of $729,750 on government-backed loans.

Once BlackRock reaches scale, it will decide on a public securitization or possibly create "participation certificates" with loans carved up for sale, Robertson said.

"It can take the form of a traditional securitization," he said. "But the challenges of a public securitization and regulatory hurdles have been well-publicized. That will evolve, and we'll evolve as it evolves." (Editing by Dan Grebler)