By Silla Brush - 03/30/10 11:06 PM EDT
As millions of home foreclosures racked Main Street, a group of big-league financial players turned their eyes to the nation’s capital, looking to protect $100 billion they had invested in the housing market.
Mounting home foreclosures were weighing heavily on their portfolios. So the hedge funds and money managers battled their way onto the scene in classic Washington style.
Their message was simple, if surprising: Mortgage investors on Wall Street have the same interests as homeowners on Main Street. Washington needed to do more to push banks to modify loans and write down principal to reduce foreclosures, investors argued.
“We happen to believe the needs of the homeowners are very interestingly aligned with the needs of the investors,” said Micah Green, a lobbyist at Patton Boggs who represents the investors. “Both find that they’re in a mortgage that they shouldn’t be in and don’t need to be in.”
Investors favor loan modifications because they can recoup a greater portion of their investment than if the loans headed to foreclosure.
More than a year of lobbying is starting to pay off — potentially in a major way. The group cheered the Obama administration’s decision last week to provide greater incentives for mortgage modifications and refinancings.
And the investor coalition is no longer a loose group, but has transformed itself into the formal Association of Mortgage Investors, which wants a seat at the table in Washington a good while longer.
The investors hold major stakes in what are called residential mortgage-backed securities. Individual home loans are often bundled into much larger pools, or securities, that can be bought and sold by investors. The coalition’s investors have money in a specific part of that market: securities backed by first liens, commonly just called mortgages.
To help deal with the foreclosure crisis, consumer advocacy groups and many Democrats support giving bankruptcy judges more power to write down mortgages. That policy, which banks often call “cramdown,” has been toxic in much of the financial world and has led to bruising battles on Capitol Hill.
Green said the investor group never reached a formal position on the bankruptcy option. Instead, Green said, the investors are focused on other steps to encourage modifications to loans to help homeowners avoid foreclosure.
The investors spent the end of 2009 and early portion of this year prodding the administration and Congress to deal head-on with a stumbling block in the modification process. While they said they were willing to modify first liens and help homeowners, they argued the process was being held up over an issue with second liens.
Those liens, often called home equity lines of credit, boomed as the housing market took off and homeowners looked to leverage the equity in their homes. The secondary liens have been big business for major commercial banks; four banks hold roughly 45 percent of total outstanding second liens.
The administration first announced a second-lien program last May and unveiled details in August. But the program barely got off the ground. Critics, including Neil Barofsky, special inspector general over the $700 billion financial rescue package, said by early this year it had few results.
Curtis Glovier, managing director at Fortress, testified to the Senate Banking Committee last year that the second liens were posing a problem in loan modifications. Glovier said servicers like banks favor loan modification programs “that defer recognition of losses on the second lien portfolios.”
So long as second liens remained a problem, borrowers would face high debt burdens and the threat of foreclosure.
To make the case, investors spent more than $1.1 million on Patton Boggs, a perennial lobbying powerhouse. Fortress on its own spent more than $300,000 in 2009 with the Podesta Group, another firm with close ties to Democratic leaders.
Financial analysts say the second lien issue is a big concern for investors. Amherst Mortgage Insight, a research firm, estimates half of home loans, bundled into securities without government backing, also have secondary liens.
The Obama administration’s new program attempts to provide much bigger incentives for loan modifications and to deal with the second lien issue.
The program will provide some underwater borrowers with a way to refinance into a loan backed by the government through the Federal Housing Administration (FHA). As an incentive, the administration is putting $14 billion on the table to encourage lenders to participate by writing down the second liens.
Several of those policies are similar to a plan the investor group proposed in late January (which was obtained by The Hill). The investors proposed they would reduce the first liens if they could work alongside second lien holders to put homeowners into a new FHA loan.
The group also got a favorable boost in early March when House Financial Services Committee Chairman Barney Frank (D-Mass.) urged the big four banks to write down the second liens.
“I urge you in the strongest possible terms to take immediate steps to write down these second mortgages and allow principal modifications of the underlying first liens to take place,” Frank wrote to J.P. Morgan Chase & Co., Wells Fargo & Co., Citigroup and Bank of America.
Research analysts on Wall Street say that the new program has the potential to benefit housing markets but that there are numerous obstacles to how it is implemented. The program requires first and second lien holders to coordinate, which could prove a high hurdle, and the program remains voluntary.
Still, the investor group is pleased.
“In my view, the program has a great deal of promise,” Green said. “We believe first lien investors will participate in the program. But it’s also incumbent on other lien holders and other creditors to participate.”
The group of investors has grown since it first began, and now includes 15 major firms.
And Green said the group has between $150 billion and $200 billion in total mortgage investment stakes.
Green did not disclose the member companies. Congressional lobbying records name Fortress alongside Varde Partners, Aurelius Capital, Institutional Credit Partners LLC and HBK Capital Management.
“The voice of an association for mortgage investors needs to be heard,” Green said.