Last week HousingWire
and a few other news outlets picked up a press release from the Association of Mortgage Investors
, announcing they’d released a white paper to Congress and regulators containing guideline principles
for reforming the asset-backed securities (ABS) market.
I was writing my column for the May HousingWire
magazine on new disclosure rules from the Federal Deposit Insurance Corp. (FDIC)
and the Securities and Exchange Commission (SEC) (out Wednesday) when the story came over, so I jumped to get the press release and white paper.
I wanted to see who — exactly which mortgage investors — were calling for “loan-level information that investors, rating agencies and regulators can use to evaluate collateral and its expected economic performance, both at pool underwriting and continuously over the life of a securitization.”
Why? Because ratings were based on loan level data and loan level data was readily available on the preponderance of non-Ginnie Mae
or -government-sponsored enterprise (GSE) mortgage backed securities (MBS) deals out there. Analysts on both the buy and sell side as well as many regulators subscribe to the loan level deal data aggregated from servicers by First American CoreLogic
’s Loan Performance division. They have for years. It’s the basis of the detailed MBS default and modification research from large MBS trading firms that we at HousingWire
have been sharing with readers from the start.
I was dying to know who would assert that “investors have learned during the current crisis they have little access to critical information about their mortgage securities investments and even less influence over the management of those investments, which is clearly not appropriate given their fiduciary responsibilities managing the investments of pension funds, insurance companies, and others.”
I hate grandstanding statements like these. They malign by implication, creating a smoke screen of insinuation. What critical information is missing? Loan level information reveals everything about the loan itself, including property type, loan purpose and degree of documentation. It also reveals the zip code, original debt-to-income and loan-to-value ratios, borrower FICO, and any secondary financing disclosed to the primary lender. What critical data don’t investors have? Borrowers’ names and addresses, access to current credit report data, including unknown liens on the same property, other debt and how they service it?
(Actually, its possible to match original mortgage amount and zip code to credit bureau data and tease a lot of that out. See my “Who in the End Will Strategically Default”
There is valuable stuff — pooling and servicing agreements (PSA), representations and warrantees, the trust indenture - that you can’t find on the SEC’s Edgar site, despite the fact that many are referred to in the prospectus. That is a problem - though I don’t think anyone is any more likely to read those documents than they are to read the prospectus! And EDGAR is hard to navigate. (Far easier to retrieve what you want if you pay for a third-party vendor’s “EDGAR” service.)
But this information is available. For instance, how many studies of private MBS PSAs designed to ascertain the variety, extent and wording of servicers’ powers to modify loans have been done since the crisis began? It may take time and effort (and phone calls) to track it down, but firms that can pay for K Street lobbyists can afford to devote someone to the task.
And control? What investor in this sector did not understand that the pool is not “managed” in the conventional sense of the word?
A structure that satisfies legal and (pre-FAS 166/167) accounting true sale requirements, bankruptcy requirements, and REMIC tax treatment requirements cannot be managed but instead must distribute the “administrative” activities to servicer, master servicer and trustee. What investor did not understand this “foundational principal” of US asset-backed securities before they invested? Who did not understand that investors powers are limited to such steps as calling and liquidating a deal or transfering servicing (and then only certain classes might have those rights)?
Who wanted a press release that put such a glossy and superficial and misleading spin on investments they apparently now regret?
Behind the Curtain
The press release quotes Micah Green, who represents the association and is a partner at Patton Boggs
. Patton Boggs is a “public policy law firm” that describes itself as “among the first law firms to recognize that all three branches of government could serve as forums in which to achieve client goals.”
Sadly, the press release doesn’t indicate who the investors are. I searched the Internet. Lita Epstein at Housingwatch.com also tried to identify the association members
, but Patton Boggs did not return her calls.
Luckily, there’s a note about the Mortgage Investors Coalition
, at The Hill
. The coalition, says The Hill, is a “group of big-league financial players .... looking to protect $100 billion they had invested in the housing market.”
According to The Hill, the group has been pushing for principal reduction and prodding the administration to grapple with the problem second liens present for modifications. On the question of bankruptcy, “cramdown” legislation, the group never reached a formal position.
But they are no longer “a loose group”. The coalition “has transformed itself into the formal Association of Mortgage Investors
, which wants a seat at the table in Washington a good while longer.”
The hedge funds and money managers battling “their way onto the scene in classic Washington style” include the Fortress Investment Group
[stock FIG][/stock]. The Hill doesn’t mention any other members, so I searched again. In February, covering the groups push for principal reduction modification programs, DSNews
noted that the group included ICP Capital
, and HBK Capital Management
These are hedge fund and private equity firms.
Rather than mention the coalition-association members, The Hill goes into some detail about lobbying efforts Fortress has conducted on its own through another firm, the Podesta Group, “with close ties to Democratic leaders.” My guess is, Fortress is the driving force behind the association. And a big force behind Fortress is Wes Edens, former head of the Lehman Brothers
Non-Agency Mortgage Trading Desk (April 1987 to October 1993). He was also president at Capstead Mortgage Corporation
(April 2000 to July 2003), CEO and chairman of Impac Commercial Holdings
(May 1999 to November 2000).
My point? At least one of the players behind the Association of Mortgage Investors has been on both sides of the non-agency MBS trade. If there were mines out there, material issues not disclosed in offering documents, he should have known (or hired fund managers who did). He’s the last guy I would expect to buy a security he couldn’t analyze or not know who was kidding who.
Edens and four other principals sold Fortress to the public on February 9, 2007. The stock, according to Bethany McLean writing at Vanity Fair
, was priced at $18.50
, shot to $35 when trading opened the next morning. It’s trading inside $5 as I write. According to Forbes
, the company hasn’t paid a dividend
in nearly two years.
Of the FIG’s trading range, Smallcapnetwork.com
says “the noose has really been tied around this small cap’s neck over the last two months.”
With a noose around my net worth and a swarm of peeved investors, I’d claim the game was rigged.
How Right Can They Be?
Says The Hill, “The group cheered the Obama Administration’s decision last week to provide greater incentives for mortgage modifications and refinancings.” And presumably the program to deal with the second lien issue announced earlier.
If so, the association must be looking like heroes after the SEC announced its ABS rule overhaul Wednesday. The association’s white paper was made public just a week earlier and it too calls for loan level information at offering, and expanded time to evaluate securities during the offering period.
One point pushed in the association’s press release - calling for government to directly address conflicts of interest of servicers that have “economic interests adverse to those of investors” - is probably beyond the SEC’s reach. But it may have had willing listeners in Reps. Bard Miller (D-NC) and Keith Ellison (D-MN). They introduced legislation last week that would require mortgage servicers to separate certain holdings of secondary mortgages
from their servicing operations.
Heroes. Mind readers. Or, consummate Washington insiders?
The White Paper
The white paper is perplexing. Like the press release, it sounds strong, but based on a reality I never experienced, complaints I never heard at the time. It claims “investors provide the capital that make the securitization markets work yet have been ignored in market structure discussions.”
When have investors been excluded from the commenting on pertinent proposed accounting and regulatory rule makings? When in fact have these rule makers not stressed their hope investors will opine? What round tables on the crisis have excluded investors? I’ve seen many investors give testimony before Congress as well (though I’ve never seen the panels, commissions or committees grill investors as to why they bought subprime/Alt-A MBS? I better sharpen my search skills!)
Indeed, what is the American Securitization Forum
for? It’s a big, comfort and clout in numbers, voice in policy making. I have no color on this matter, but if ASF was too heavily influenced by the underwriters and dealers, say via the Securities Industry and Financial Markets Association
(SIFMA) its founder, comfort can be taken in the fact ASF ended its affiliation with SIFMA last January. To achieve just that, the independence needed to assist in the restoration of securitization markets.
I’m sure association members - and other mortgage investors - may have their own valid reasons not to find working through ASF entirely to their liking. But to claim “investors have been ignored in market structure discussions” is tunnel vision or paranoia.
By blaming everyone but themselves, they reduce their good recommendations to an expensive public relations campaign.
Years ago, when I took the introductory economics class in college, the professor explained free markets: buyers “vote” with their purchases. I think the association is saying something similar in its white paper, when they threaten there need not be a consensus between issuers and investors on investor-driven reforms, “as investors ultimately provide the capital and have the responsibility to define the terms on which they will commit their capital.”
That was true when they invested their $100bn in ABS too. That’s a heck of a lot of votes for crud.
What Do I Think?
I think virtually no one read the prospectus. That certainly was my impression working in mortgage research. The job of mortgage research is to attempt to answer the most arcane, picky questions investors can come up with. Usually they are relayed by the bond salesman who “covers” them, but some investors are comfortable picking up the phone and asking themselves. These requests are impossible to dodge and it is embarrassing as all get out to have to say you don’t know and don’t have the tools to find out. So you do what it takes. I was never asked a question that required me to read the prospectus (though I read many writing reports, in which I would always remind readers “read the prospectus!”). I was rarely even asked a question that required looking at loan level deal data. The crud sold on yield, ratings and faith that home prices would continue to rise, allowing borrowers to refinance into a new “affordable” loan.
I mentioned the white paper to my favorite investment advisor, someone who’s withstood these cycles of financial mania since the early ‘80s. He snorted. “CYA,” he said. “Eat what you cook.”