May 9, 2011 / 3:09 PM / in 8 years

Mortgage investors zeroing in on subprime lender

NEW YORK/WILMINGTON, Delaware (Reuters) - A group of mortgage bond investors is reaching out for help in a novel bid to force H&R Block Inc’s defunct subprime lending unit to buy back billions of dollars in soured mortgages, the group’s lawyer said on Monday.

The plea to other bond investors may hasten the laborious task of gathering the numbers needed to demand accountability for faulty loans pooled into investments — mortgage-related securities that plummeted in value and helped trigger the worst financial crisis since the 1930s.

The investors, in a new tactic, are issuing a general call to others holding securities backed by loans originated by Option One Mortgage, a top 10 subprime lender during the housing boom, said Talcott Franklin, the Dallas-based lawyer spearheading the effort.

H&R Block sold the servicing assets of Option One in 2008 but retained some liability of the company, now known as Sand Canyon Corp (SCC), including some loan repurchase obligations.

The investors — whom Franklin declined to name — hope to amass 25 percent of many of the bonds, which will give them the contractual right to make demands on the trustee, and ultimately the lender, he said.

It follows a high-profile $1.6 billion settlement between Bank of America Corp and Assured Guaranty Ltd, which insured the bank’s mortgage bonds.

That settlement helped legitimize the claims of mortgage bonds investors in the eyes of some observers. That said, investors have to organize quickly, Franklin said.

“A number of investors have acted, and are continuing to do so now,” Franklin said in an interview. “Those who haven’t acted to date may be realizing that someday, the train will leave the station.”


Faulty mortgages in bonds packaged by Wall Street banks and other non-government entities could cost lenders as much as $100 billion, according to some analysts, although to date there have been few settlements.

Most deals to resolve claims relating to shoddy loans have been wrested by U.S. mortgage finance companies Fannie Mae and Freddie Mac, but private investors are making headway.

Franklin’s investor clients currently hold 25 percent of voting rights on at least 64 securities containing loans made by Option One, which stopped lending in December 2007. Unless investors can show they own a quarter of a deal, they cannot force a trustee or loan servicer to investigate suspected violations in underwriting.

Option One, the sixth-biggest subprime lender at the peak of the market in 2006, became SCC after H&R Block’s plans to sell the company in 2008 failed. The loan servicing business was sold to American Home Mortgage Servicing.

Losses on Option One’s securitized loans could top $12 billion, based on those already registered and loans that are delinquent or in foreclosure, according to a source close to the group. That dwarfs the $740 million in claims registered with SCC through January 31, according to an H&R Block regulatory filing.

Losses to SCC based on repurchases and settlements have grown to $88 million for the period between May 2008 and January 2011, the filing showed. An H&R Block spokesman declined immediate comment.

The “representations and warranties” on the loans are subject some statutes of limitation, according to its filing.

As in many cases, “the damages may exceed the available funds for recovery, so we are encouraging investors to submit their holdings quickly,” Franklin said in a statement.

Franklin has typically favored behind-the-scenes negotiations when advocating for investors in his “RMBS Clearing House” to aggregate holdings of investors. Those investors have ownership in more than half the $1.2 trillion private mortgage bond market, and voting rights on at least 2,600 mortgage deals.

He said he is hoping for a “model of cooperation” between investors, the trustee, the servicer and Option One.

Editing by Padraic Cassidy

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