Divided, PL MBS Investors Fall

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WE’RE HEARING investor attempts to get restitution for losses in alleged misrepresentations in private-label mortgage-backed securities drag on because securities and market structures continue to serve as hurdles to consensus.

The hearing this week for the proposed $8.5 billion Bank of America MBS settlement showed that.

Trustee Bank of New York Mellon reportedly called agreeing to the planned B of A mortgage-bond settlement an “easy decision” as it is larger than other proposed PL MBS investors settlements such as a JPMorgan’s.

Some investors like BlackRock and Pacific Investment Management Co. apparently agree with Bank of New York Mellon, but investors like American International Group objected to the size of the proposed Bank of America MBS settlement, characterizing it as “pennies on the dollar” compared to more than $100 billion in investor losses.

Government involvement can up the ante but it is unclear how much they help when it comes to PL MBS. JPMorgan Chase had agreed in principle to a $13 billion PL MBS settlement of government investigations. This reportedly would be the largest amount paid by a financial firm to the U.S.

This is still a far cry from $100-billion-plus, and it fails to compare to a PL MBS settlement because the government entities involved sound less divided and have more clout that private investors do.

Finger-pointing in the wake of this discrepancy between investor losses in PL MBS and the proposed settlement has focused recently, and in the past, on the question of whether the trustee adequately represented investors’ interests in the B of A mortgage bond settlement.

That is a fair point, but here is why I think the real source of PL MBS investors’ inability to get settlements more in line with their actual losses is the legal basis for their rights in securities and the way securitization are structured.

Investors’ rights to transparency in mortgage-backed securities are limited unless they can amass a certain amount of consensus. Also issuers structure MBS to reflect different risks and this can put investors’ interest in conflict with each other.

Investors on one hand like the availability of differing, risk-based tranches as they serve bond buyers’ differing needs, but it becomes a challenge to when it comes to amassing the consensus needed to have optimal access to information and leverage in litigation.

Even investors that hold similar securities can have differing needs.

Buyers should consider these realities when deciding whether to agree to any settlement or to buy any mortgage-backed securities. MBS investors have made some headway in banding together and can continue to advocate for more change that supports their rights, but for now, this is what they have to work with.

Bonnie Sinnock is managing editor of National Mortgage News and editor of Origination News. She has been covering the mortgage industry since 1995.