There has been a lot of talk about government protecting mortgage investors in the wake of the downturn, but Tal Franklin, an attorney whose law firm represents a clearinghouse of private-label residential mortgage-backed securities investors, says it depends.
When light is shone on transactions, it is "probably" better for investors, he told National Mortgage News.
But there is on the other hand concern about government investigations where "the government will allow the wrongdoer to settle with the money of investors, which isn't fair."
"I'm not going to cite an example," he added. "Pointing fingers won't help."
Franklin stresses that, generally, in such investigations, those conducting them "should try to understand how these instruments work and who is the ultimate beneficiary of them."
The Dallas law firm Talcott Franklin PC said it has grown to the point where it represents about one-third of the $1.5 trillion of outstanding securities in the market. It said its clients have holdings in over 6,000 private-label residential mortgage-backed securities deals, and own greater than 25% of the securities in over 2,300 deals, greater than 50% of the securities in over 900 deals and greater than 66% of the securities in over 450 deals.
The group's collective power is aimed at giving them more rights in deals.
Investors have sought this because "historically, when investors have approached the trustees about taking some kind of action...some of them have some have said [things like] 'there's a 25% requirement, come back when you have 25%,'" Franklin told National Mortgage News.
It has been a challenge for investors to get these percentages, he said. "We had ways, but it was really difficult," Franklin said.
Investors "would come to us for legal advice about their collective action rights" for advice as to what they hold, and then "with their consent we match their holdings with other clients." He said the law firm has been using a proprietary computer program to do this.
"We let clients know that their holdings combined with others hit certain triggers like 25%, 51%, etc., in any particular deal and that, in turn, gives them certain rights."
Now that the clearinghouse has met the requirements of many of these triggers, it is sending letters to trustees calling for better communication and resolving issues it feels will improve the "dismal" performance of residential mortgage-backed securities.
There has been talk since this spring some headway was being made in legal barriers preventing effective workouts of securitized residential mortgages but Franklin said whether this occurs still remains to be seen.
"This is really the first step," he said. "We're going to see who is willing to cooperate with us and we're hoping that everyone is."
If they don't the investors have "a range of options" to reach their goal "based on the law and the terms of pooling and servicing agreements," Franklin said.
The clearinghouse is asking for trustees to work cooperatively with investors on problems it says are damaging to both those parties as well as borrowers.
It sees four major issues in this area:
• servicing failures that increase defaults and reduce recoveries,
• conflicts of interest that prevent loans from being serviced and administered in the best interests of borrowers and investors,
• failure to hold loan sellers accountable for violations of their promises regarding loan quality, characteristics and performance, and
• a lack of transparency in the administration of the trusts.
