Bond investors lobby Hill on mortgage settlement

Thu Mar 1, 2012 5:26pm EST

* Bond investor association meets with U.S. lawmakers

* Bond investors don't want to bear burden of deal

* Details of $25 billion settlement still a mystery

By Matthew Goldstein and Jennifer Ablan

NEW YORK, March 1 (Reuters) - An association of mortgage bond investors is working Capitol Hill in an effort to have its interests considered in the final details of a $25 billion mortgage settlement and in any future deals that aim to fix the nation's ailing housing market.

Earlier this week, representatives of the Association of Mortgage Investors met with a number federal lawmakers to press the point that investors in mortgage-backed securities should not be penalized in the settlement state and federal authorities reached last month with five big banks.

The private meetings with lawmakers come two weeks after the same association held a conference call with Housing and Urban Development Secretary Shaun Donovan to air its concerns over the deal that emerged following over a year of closed-door negotiations.

Vincent Fiorillo, a portfolio manager with Jeffrey Gundlach's $28 billion DoubleLine Capital, said the mortgage investor association is concerned the settlement will force bondholders to incur too great of a loss in the value of their investments.

"No one is trying to scuttle this," said Fiorillo, president of the association's board. "We want to make clear to all what the investor wants."

The proposed settlement would provide some relief to about 1 million struggling homeowners in the form of refinancings and principal reductions on loans. The deal was hammered out three weeks ago and announced with great fanfare by the Obama administration, but the fine print has yet to be made public.

Chris Katopis, the executive director for the mortgage association, said the group is concerned about how the settlement will be enforced and wants to make sure that lawmakers and regulators are aware of how mortgage investors feel before negotiating future deals.

Even though the expectation is a final settlement will be filed in federal court within the next few days, Katopis said the association has been told by lawmakers that Congressional hearings into the deal are likely.

"Congress can be persuasive in terms of oversight and what happens next," said Katopis. "It is all about the continuing impact on bondholders and borrowers."

Under the deal, the banks must spend $17 billion to help homeowners, of which around $10 billion must go towards principal reduction and loan modifications for borrowers who are at risk of foreclosure. The deal would also include $3 billion to help borrowers who are current on their mortgage payments but unable to refinance because they owe more than their homes are worth.

For their part, mortgage bond investors are worried that the settlement will force too great of a reduction in the value of a homeowner's primary mortgage, while leaving a so-called second lien on those properties relatively unscathed. Many bond investors contend second liens should be reduced by as much, if not an even greater proportional sum than a primary mortgage.

Primary mortgages are packaged in the bonds that tend to be held by private investors like DoubleLine. Home equity loans and second liens are generally held on the balance sheet of the banks such as, Wells Fargo, JPMorgan Chase and Bank of America, which have agreed to the proposed settlement.

Donovan, in earlier statements, has tried to calm the nerves of bond investors by saying principal reductions will be dealt with fairly and not unduly impair bond values. A HUD spokesman did not immediately respond to a request for comment.

Bond investors said they are skeptical until they see the fine print of the deal.

"Investors have never refused to give modifications or principal reductions where it was in the best interset of the consumer," said Fiorillo. "But if you are going to use private label securities to pay the fine, we look to see a cap put on that."

A private label mortgage-backed security is one packaged by a bank or another financial institution that is not a government sponsored entity like Fannie Mae or Freddie Mac.

The 20 members of the Association of Mortgage Investors, include hedge funds like Angelo Gordon & Co. and money managers like AllianceBernstein, and oversee $350 billion in assets under management. Ever since the settlement, Katopis said the group has been getting inquiries from other asset management firms about potentially joining the association.

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