BlackRock, a major asset management firm and one of the largest investors in U.S. mortgage bonds, announced last week that banks would have to absorb the losses on their holdings in second-lien mortgages before it would resume purchasing “private-label” mortgage bonds in any significant quantity. This represents, to my knowledge, the first instance of an investor threatening to boycott future bond issues as a strategy to solving the gridlock surrounding mortgage-backed securities.
As I’ve discussed in the past, these toxic assets have remained largely illiquid because the players involved cannot agree who should bear losses associated with distressed mortgages. While loan modifications, short sale programs and other workout plans have been rolled out and encouraged by Washington, banks acting as servicers for the underlying loans have been reluctant to comply due to their large second-lien holdings (that would be wiped out in the event of a modification) and their dependence on the late fees generated by loans in delinquency status. Such conflicts of interest have thrown a wrench in plans to rescue troubled homeowners, liquidate toxic assets and restart the stalled-out mortgage bond market.
But, now that private investors are beginning to return to the U.S. mortgage market, and there is talk of the issuance of new securitizations, I think investors like BlackRock are making a wise move in leveraging their massive capital (BlackRock manages fixed income investments of over $580 billion) to force banks to write down their second-lien mortgages. And lest the investor be seen as a bully, let’s not forget that the banks acting as servicers for these loans were often the same institutions whose lending arms irresponsibly created these loans in the first place. When you throw in the fact that second-lien loans are structured to take the first loss in the event of default, and that these servicers should be working in the best interests of investors to modify loans pursuant to their contracts and their servicing obligations, BlackRock’s position seems imminently reasonable.
[Thank you to Chris Corio for bringing this story to my attention – IMG]