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With tales of mortgage securitization "improprieties" and foreclosure fraud on the rise, investors may be wondering which companies will be affected. Here are three areas the Dada Portfolio is watching.
To the extent that originators didn't convey mortgage notes to trusts, those trusts may lack legal standing to foreclose. In short, the mortgage-backed securities investors thought they were buying may not have actually been mortgage-backed. Investors may not be happy if it turns out that they were lied to, that their collateral doesn't have clear title, or that their trusts didn't actually qualify for tax-exempt status because of misrepresentations made by originators and/or trustees.
The problem appears to have been widespread: Banking executives told a Florida court that it was standard industry practice to destroy the documents necessary for foreclosure. A Countrywide employee recently testified that it was customary for Countrywide to retain the note rather than pass it on to the trusts (Bank of America has disputed its employee's testimony.) The robosigning scandal may have been driven by a need to cover up the missing notes.
All of this would be a violation of many pooling and servicing agreements that govern those trusts. PIMCO, Blackrock, Legg Mason's (NYSE: LM ) Western Asset Management, and taxpayers (via the New York Fed and Freddie Mac) have been making signs that they will try to force Countrywide to repurchase mortgages. Bank of America (NYSE: BAC ) , JPMorgan (NYSE: JPM ) , Wells Fargo (NYSE: WFC ) , and Citigroup (NYSE: C ) may be in hot water to the extent that mortgage originators didn't convey notes to trusts. Industrywide exposure estimates range from the tens to hundreds of billions. Trustees such as Bank of New York Mellon (NYSE: BK ) and Deutsche Bank may also have exposure.
2. Foreclosure mills
Lender Processing Services, a major player in foreclosure "processing," faces several challenges, including a suit charging illegal fee sharing. A former subsidiary, DOCX, was apparently caught providing a document fabrication service. (It even had a pricing sheet!) While DOCX has since been shut down, a Reuters investigation recently suggested that problems were not limited to subsidiaries.
3. Monoline insurers
During the housing boom, Wall Street sold terrible-quality mortgages as great investments. When those investments blew up, both investors and insurers MBIA (NYSE: MBI ) and Ambac took a big hit. MBIA fell more than 80%, while Ambac filed for bankruptcy last month. Yesterday, MBIA sued Morgan Stanley, arguing that it failed to disclose that the mortgages it underwrote weren't up to snuff. Unlike most homeowners facing foreclosure, MBIA has lawyers. If this type of suit proves successful, it could be a windfall for insurers.