Tuesday, February 14, 2012

Rest easy, MBS investors: You're protected in mortgage settlement

(Reporting by Alison Frankel)

Asking investors in mortgage-backed securities to trust the banks that issued them is like asking Charlie Brown to trust Lucy van Pelt. MBS noteholders are so convinced they've been duped by the folks that packaged and sold shoddy mortgage loans that it's little wonder the banks' $25 billion settlement with federal and state regulators has been greeted with a tsunami of skepticism. Sure, MBS investors understand that the settlement doesn't preclude them or regulators from suing over deficient securitizations. But their fear, in the absence of the actual settlement documents, is that the loan modifications the deal calls for will reduce the revenue stream to MBS trusts.

It's an understandable fear. The five banks that agreed to the settlement -- Bank of America, JPMorgan Chase, Citigroup, Wells Fargo, and Ally Financial -- carry some troubled mortgage loans on their own books. Others were bundled into MBS trusts, in which the banks transfer ownership of the mortgages and remain as servicers. MBS noteholders are supposed to receive a stream of income from the principal and interest payments on the underlying mortgage loans. So if a bank agrees to reduce the unpaid principal a homeowner owes on a mortgage that's been securitized, less money flows to the trust and into MBS investors' hands.
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