MBS investors: HUD Secretary let us down in national deal

In a conference call on Feb. 14, Secretary Shaun Donovan of the Department of Housing and Urban Development promised about 90 mortgage-backed bondholders that the $25 billion national mortgage settlement would include a 15 percent cap on the number of investor-owned loans that the five settling banks would be permitted to modify, according to the three participants in the call.

Donovan made the promise in response to MBS investor concerns that banks would shift the cost of the settlement onto their shoulders by writing down the principal in securitized mortgages, rather than in the loans banks hold in their own portfolios. He had already said in a press conference that the settlement would provide incentives for the settling banks -- Bank of America, JPMorgan Chase, Citigroup, Wells Fargo, and Ally Financial -- to reduce the principal in their own portfolio loans, estimating that "a relatively small share, in the range of 15 percent" of the write-downs would be in investor-owned mortgages. In the Feb. 14 call with bondholders, according to the three participants, Donovan went a step farther, assuring MBS investors that the written settlement agreement would limit the percentage of investor-owned loans the banks were permitted to modify.

But on Monday, when the settlement documents were finally released, more than a month after the deal was first announced, there was no such cap. That's left a contingent of major mortgage-backed bondholders feeling betrayed -- and expecting the worst from the banks in the settlement. "If we've missed (documentation of the 15 percent cap), please Secretary Donovan, let us know where it is," said Vincent Fiorillo, a portfolio manager at DoubleLine Capital and president of the board of the Association of Mortgage Investors.

A spokesperson for Donovan, Derrick Plummer of HUD, said the MBS investors are not recalling the secretary's comments correctly. "I was on the call with the secretary and the AMI group," he said. "The secretary did not make the suggestion there would be a cap."

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