Mortgage Bond Holders Are Looking for a Refund

Just over three years ago, the housing market started to come crumbling down. Ever since, lenders have had to stand on very shaky ground, fending off accusations of funding bad mortgages. It seems however, that lenders may have not seen anything yet. As the housing market continues to tumble, investors who purchased bonds that were backed by piling up bad mortgages, are starting to feel their losses. Investors are looking for answers and a refund.

The issue at hand is there are billions of dollars in losses due to mortgage defaults that were written in the housing boom and someone needs to pay. The question is who?

Investors are legally challenging lenders and demanding refunds. They are concentrating their battle on documents that offered warranties and assurances that certain criteria would be met for loan underwriting. They are claiming that underwriting at times during the housing market boom was lacking and as a result there were inflated appraisals and falsely reported high incomes. Even worse, many loans got through underwriting that were classified as the borrower’s primary residence, when they were actually investment properties. Bond holders are particularly fighting this one.

If you tell my bondholders that this is an owner-occupied property and it’s not owner-occupied, that’s an incorrect fact,” said Kathy Patrick, a Houston-based attorney representing investors who want Bank of America to buy back bad mortgages. “And an owner of occupied property has very different credit qualities than an investment property where somebody has 20 properties and may default strategically.”

On the flip side, “If you think about people who come back and say, ‘I bought a Chevy Vega but I want it to be a Mercedes with a 12-cylinder,’ we’re not putting up with that,” said Bank of America CEO Brian Moynihan in a conference call last month. “We’re protecting the shareholders’ money.”

Lenders are fighting back against claims, saying that every investment has a risk and those investors who bought mortgage backed bonds were well aware that the purchases carried some risk. Lenders say that investors should not have any expectation of receiving a refund.

Attorneys who are taking on the banks and represent the mortgage bond holders are responding to Moynihan’s statement.

That argument is just dead wrong,” said Alcott Franklin, a Texas attorney who is helping investors take on lenders. “These are warranty claims. Whether we bought a Vega or a Mercedes, it was under a warranty. And they violated the warranty.”

With home prices continuing to go down and foreclosures continuing to rise, more investors will continue to feel the financial loss. Only time will tell who ends up losing in the end.


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on November 9th 2010 in Mortgage News

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