BofA Deal Could Break Mortgage Market Logjam, BlackRock Says
July 07 2011 - 9:37AM
Dow Jones News
Bank of America Corp.'s (BAC) plan to resolve investor
complaints about how it treats troubled homeowners and foreclosed
properties is the most significant move yet to reconcile the
conflicting interests that have stymied efforts to fix delinquent
home loans, said a BlackRock Inc. (BLK) money manager.
In addition to paying $8.5 billion under the agreement with 22
investors, including BlackRock, Bank of America last week agreed to
send some of its highest-risk mortgages to so-called special
servicers--experts who specialize in assisting troubled
borrowers.
The new approach adjusts financial incentives to encourage
special servicers to find out how much borrowers can afford to pay
on loans, or to hasten foreclosures if they can't reach a deal. It
could lead banks to cut principal amounts on more loans to stop
borrowers from abandoning properties and handing banks and
investors bigger losses.
The government has encouraged principal reductions, but banks
have been reluctant to adopt them.
The new approach, which is intended to balance the interests of
borrowers, investors and servicers, will apply to about 300,000
delinquent loans owned by the parties to this particular agreement,
but it could be a model for resolving others.
Lender Processing Services estimates there are about 4 million
delinquent home loans and foreclosure properties in the U.S., where
housing is one of the biggest drags on the economic recovery.
"The logjam is still there, but this will address that," said
Randy Robertson, co-head of structured products at BlackRock in New
York. "The timing and execution is complicated, but ultimately, if
you had this process prior to what we experienced, it would have
been a lot smoother."
Investors and Bank of America will choose eight to 10 special
servicers by August. Robertson said he expected to see results by
the end of this year.
"Loans in 40- to 60-day delinquency should see traction almost
immediately," he said. "We hope to see the early stage going down,
and modifications rates and successes going up. The severely
delinquent loans will take a while."
Fannie Mae (FNMA) and Freddie Mac (FMCC), government agencies
that are the largest providers of U.S. mortgage funding, also have
hired special servicers to fix loans they guarantee, as have hedge
funds that own portfolios of distressed loans.
Mortgage investor Walter Investment Management Corp. (WAC) in
March paid $1 billion for closely held servicer Green Tree Credit,
anticipating that its specialty mortgage services would see greater
demand.
Other firms that focus on distressed loans include International
Business Machines Corp.'s (IBM) Wilshire Credit Corp. and Fortress
Investment Group LLC's (FIG) Nationstar Mortgage unit.
Poor performing servicers have hurt investors who spent years
trying to break through legal hurdles posed by bond contracts,
trustees and servicers to assert their rights. As the housing
crisis dragged on, investors' costs rose as modifications failed,
and as the foreclosure and liquidation process kept growing.
On prime loans, the time from foreclosure to liquidation for
Bank of America was 21 months as of May, according to monthly bond
data and CoreLogic. The timeline for SPS, a special servicer owned
by Credit Suisse Group (CS, CSGN.VX), averaged only 15 months, and
Robertson said it is "reasonable" to expect that others of its kind
could achieve similar results.
Robertson called the servicing mandate a "self-controlling
mechanism" that ensures high-risk loans are treated by specialists
sooner, eliminating the need for time-consuming legal action.
Investors by themselves have little recourse, and when they can
grab attention of trustees they may have to declare technical
default on a servicer to change the way loans are handled.
"There were terrible legal obstacles that would have been
comical if they weren't so tragic," said Sue Allon, chief executive
officer of Allonhill, a Denver-based firm that assesses
mortgage-loan quality.
The investor group would make servicing changes "front and
center" should it approach another bank, Robertson said.
-By Al Yoon, Dow Jones Newswires; 212-416-3216;
albert.yoon@dowjones.com