The ASF 2012 Conference held last month in Las Vegas was a success by any measure and attracted an impressive number of attendees (4,500). Attendees were happy to escape New York and other chilly locales and attend some great panel discussions on securitization, regulatory developments and mortgage servicing (or, for some, at least read about those panels the next morning on their iPhones while waiting to tee off). The owners of the Aria will definitely be able to make their mortgage payment this month with all of the money left behind by ASF attendees.
My Dechert colleagues and I who attended the Conference cover almost all of the securitized asset classes. As I described in my blog from the Conference, your particular view of the Conference depends largely on what asset class you focus on in your practice – autos and CLOs, for example, look very strong. As someone who spent unimaginable amounts of hours of my pre-credit crisis life drafting RMBS deal documents, I yearn for the return of the public RMBS deals – and not just because I miss spending my days (and most nights) trying to describe in “Plain English” the waterfall on a multi-group negative amortization deal. I truly believe that we can’t have a meaningful recovery in the housing market without the return of private-label RMBS. But regardless of what particular asset type you follow, there was undeniably a lot of buzz surrounding a couple of topics.
It was clear from a Tuesday afternoon panel that the waves of civil litigation in the RMBS industry will continue to crash on the shores of every major financial institution. Did you actually think that the statute of limitations would prevent plaintiffs from pursuing claims? Unfortunately, in an effort to prove that the government can perform any task better than private actors, President Obama announced at his State of the Union address (televised on the last night of the Conference) that he was forming a new financial crimes unit to pursue mortgage securities fraud during the financial crisis. Wells notices are flying out of D.C. at a rate only surpassed by the dollars coming off the printing presses at the U.S. Mint. It’s ironic that this new focus of investigation is kicking off at the same time that a $25 billion agreement was reached with five large mortgage banks to settle federal and state investigations in 49 states into alleged foreclosure abuses. (Oklahoma reached its own settlement with the banks on Thursday.) Note also that the “settlement” doesn’t prevent individual borrowers from continuing to bring claims. Some of my litigation partners and I plan to host a seminar in our NY office this spring to offer our clients and friends much more detail on all of these developments – I’ll inform you of the particulars of that event in a subsequent blog.
But the other big topic that continues to garner a lot of attention is how to effectively manage the liquidation of the huge inventory of foreclosed homes on the balance sheets of the banks and the GSEs. Analysts estimate that there are 500,000 REOs on the balance sheets of the GSEs and private lenders, and the number is obviously expected to increase as foreclosures continue at a high rate. How then do banks liquidate these properties without having to sell them at fire sale prices and without putting downward pressure on a housing market that is desperately trying to plateau and inch upward in many markets? With demand for rentals rising in many markets, there is a lot of buzz among private equity investors with the idea of buying up bundles of REO, renting them out for 1-5 years, and then flipping those properties when home values recover. And the lenders sitting on a huge inventory should welcome this new investment strategy as such investors should drive up the bids for REO. But the key to all of this happening is on what terms can investors get financing for the bundle of REOs they intend to buy up. I think this discussion will dominate the residential market for the next year and may well be the key to a meaningful economic recovery. Stay tuned for more information on a Dechert sponsored webinar on this topic.
By: Ralph Mazzeo