Yesterday's Wall Street Journal's Money & Investing section featured an article discussing the putting back of bad mortgages by institutional investors to sellers of the instruments.
The article cites Countrywide Financial as having reset its liability for such repurchased bad mortgages from $365Mm last year to $935MM now.
According to the Journal article,
"Additional pressure is coming from bond insurers such as Ambac Financial Group Inc. and MBIA Inc., which guaranteed investment-grade securities backed by pools of home-equity loans and lines of credit. In January...MBIA began working with forensic experts to scrutinize pools it insured that contained home-equity loans and credit lines to borrowers with good credit. "There are a significant number of loans that should not have been in these pools to begin with," says Mitch Sonkin, MBIA's head of insured portfolio management."
Further on, the article relates that WMC Mortgage, a unit of GE, made improper representations and warranties of subprime loans it pooled which PMI insured. Essentially, PMI is suing GE's unit for fraudulently describing the loans, for which PMI charged a fee to insure, because, in reality, the loans were much riskier than had been represented to PMI. PMI also wants WMC to repurchase the loans or pay damages to PMI, as the delinquency rate on the loans rose 30% within eight months.
What I find comforting, on some level, is that the legal agreements underpinning various mortgage loan and securitization instruments allow for buyers and insurers to recover for fraud and breach of contract, putting back the misrepresented instruments to the sellers.
Somewhere, in a handful of Wall Street investment banks, i.e., the few still solvent and publicly-owned, I can imagine rooms full of young financial wunderkinds being taught a lesson about the real meaning of those thick piles of documentation that accompany traded, securitized loans.
Buying a security that is what it says it is, and losing money, is one thing. Buying a fraudulently-described mortgage-backed security is quite a different matter. It's good to see that astute buyers are forcing the sellers to take back their fraudulently conveyed paper.
I wonder how much more in losses than currently expected this will bring to the larger mortgage-backed securitizers of the last few years.
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