No major investor in private-label mortgage-backed securities has been more stalwart about standing up for its contractual rights than the asset manager BlackRock. Along with Pimco, BlackRock has been the backbone of the MBS investor coalition that reached the proposed $8.5 billion breach-of-contract (or put-back) settlement with Bank of America last year and the $8.7 billion allowed-claim deal with Residential Capital last month. The coalition, represented by the law firm Gibbs & Bruns, has also served put-back demands on trustees for more than $100 billion in mortgage-backed offerings by JPMorgan, Morgan Stanley and Wells Fargo. So there’s no one better qualified than BlackRock Managing Director Randy Robertson, who heads the firm’s securitized asset investment team, to judge the impact of put-back litigation on the future of residential mortgage-backed securitizations.
His view: Litigation – or, more precisely, the conflict that leads to litigation – stands in the way of an MBS revival because investors don’t believe issuers will live up to contract terms. “A preponderance [of the pending litigation] would have to be resolved,” Robertson said Wednesday at a briefing on the BlackRock Investment Institute’s new report, “In the Home Stretch: The U.S. Housing Market Recovery.” I asked Robertson how long that might take. “I wish I had a crystal ball,” he replied. I also asked whether there were any more big settlements in the offing; Robertson declined to say.
Until investors’ put-back claims are resolved, Robertson said, any MBS issuer (or the government) will have to provide enough subordination to account for the extra risk investors believe they bear. Robertson estimated it would take 20 percent government backing, for instance, to reassure the MBS market about any new offering. He also said pooling and servicing agreements will have to be, in his word, “tweaked” to reflect investor concerns. Going forward, Robertson said, pooling and servicing agreements will have to distinguish between issuers and servicers to remove a potential conflict of interest, offer investors more access to information about the performance of underlying assets and include additional specificity about the fiduciary responsibilities of MBS trustees.
Mostly banks have to win back the trust of investors, who, according to Robertson and BlackRock Vice-Chairman Barbara Novick, feel that the five-bank, $25 billion nationwide mortgage settlement shifts an unfair share of the burden for the banks’ servicing failures onto MBS noteholders. Investors simply don’t believe that MBS issuers have complied with contractual commitments. “Does a contract mean what a contract says?” Robertson said. “If you change the rules on me and I can’t rely on a private contract, how do I invest?”
BlackRock’s new report hypothesizes that the housing market is at or near bottom, but the firm doesn’t foresee a quick recovery. Novick emphasized the need for a holistic government policy, encompassing overarching principal modification (as opposed to principal reduction), better definition of the role of the government-sponsored enterprises Fannie Mae and Freddie Mac and increased transparency in securitization. “You have to figure out what’s the mission,” she said.