Reply #11: BlackRock warns on distressed mortgages

[Demeter]

http://www.ft.com/cms/s/0/aa5607f4-40dc-11df-94c2-00144feabdc0.html

BlackRock, a leading US bond investor, says banks will have to take their share of losses on distressed mortgages before it resumes large-scale purchases of new “private label” mortgage bonds, which are sold without government backing.

The position taken by Curtis Arledge, chief investment officer for fixed income at BlackRock, who oversees $580bn of investments, marks the latest development in an ongoing tussle over who should bear the costs of the US mortgage meltdown.

The return of private investors to the US mortgage market, now mostly financed through government-backed agencies, could have a big effect on mortgage rates and the speed of the housing recovery. Efforts to restore confidence among investors have so far failed.

Disputes between investors and banks have erupted over riskier second mortgages, also called home equity loans. Many US homeowners who are behind on their payments took out two or more home loans. First mortgages were typically packaged into securities and sold to investors, while second mortgages were often kept by banks.

These “second-lien” mortgages should take losses first, in theory. But the holders of such debts have not always agreed to absorb hits before “first lien” mortgage holders. US government programmes to restructure such debts have been slowed by these complications.

Mr Arledge told the Financial Times that BlackRock, which is primarily a first-lien investor, had focused on the interaction with second-lien holders in the US mortgage modification programmes. “If are done in such a way that is not fair ... it will be a real challenge for the mortgage market to move forward.”

Banks owning the second-lien mortgages also own many of the mortgage servicers that decide how losses are shared.

“In many cases the person owning the second lien is also servicing the mortgage and running the process,” Mr Arledge said. “There’s potential for conflicts of interest.”