Mortgage-backed securities investors who are convinced that banks intend to shift the cost of the $25 billion national mortgage settlement onto their shoulders are "evaluating their legal options," according to Chris Katopis, executive director of the Association of Mortgage Investors (and a former clerk on the Federal Circuit Court of Appeals). The private investors, as I've reported, are outraged at the terms of the settlement, which sets no limit on the percentage of securitized mortgages the settling banks -- Bank of America, JPMorgan Chase, Citigroup, Wells Fargo, and Ally Financial -- are permitted to modify to reach their $17 billion target for reducing the principal balance owed by struggling borrowers. Mortgage-backed noteholders believe the deal terms encourage banks to write down investor-owned first liens, rather than second lien mortgages in bank-owned portfolios. That incentive, they say, shifts the cost of the deal from the banks to mortgage-backed bondholders.
Their argument is gaining traction. The New York Timeseditorialized Sunday on the bank-friendly details of the national settlement, and both Zero Hedge and The American Bankerhave picked up on the MBS investors' cost-shifting theme. The U.S. Department of Housing and Urban Development, which has denied assertions that Secretary Shaun Donovan promised MBS investors a cap on modification of securitized mortgages, has been put on the defensive, issuing a "Myth vs. Fact" blog post to present its case for the settlement. The bond investors are doing a great job of whipping up outrage about the deal, which must be approved by a U.S. District Judge in federal court in Washington.
Unfortunately for the bond investors, outrage is not a cause of action.
Katopis told me he doesn't want to give away any clues about the strategy MBS investors may pursue. There are certainly some very smart, creative lawyers who've counseled mortgage-backed noteholders over the last three years, including David Frederick of Kellogg, Huber, Hansen, Todd, Evans & Figel, who represents the National Credit Union Administration in MBS securities suitsand also happens to be one of the most prominent U.S. Supreme Court litigators around. (I tried to reach Frederick but he was arguing a case in Chicago and unavailable.)
As best I can determine, bondholders have two potential grounds on which to attempt to block the deal (aside from an amicus brief outlining their concerns with the terms of the settlement). They could argue that the settlement interferes with their contractual relationships with the banks that sponsored mortgage-backed securities, or they could make a way-out-of-the-box argument that the proposed settlement violates the Fifth Amendment's takings clause, which prohibits the government from snatching private property without just compensation.