UPDATE: Bond Group Sets Guidelines For Mortgage Repurchases

A leading bond group on Tuesday proposed hiring of an independent reviewer and other new guidelines that would hold mortgage lenders accountable for the quality of their loans and help restore investor confidence in private residential mortgage-backed securities.

The American Securitization Forum created a model that lays out steps for investigating and resolving disputes between investors and the issuer of the bond, an attempt at eliminating the messy negotiations that are costing both sides billions of dollars and dealing a black eye to the RMBS market. Both sides came to a consensus on guidelines after six months of negotiation, said Tom Deutsch, executive director for the ASF.

Bringing issuers and investors together on the guidelines was "challenging," yet "heartening" as they've had competing interests, he said. One of the most important measures would be to establish an independent reviewer that would have full access to information needed to determine if a loan has breached its contract, he said.

The fight between investors and banks, and investor infighting, is playing out in a high-stakes drama over loans made by Countrywide Financial.

BlackRock Inc. (BLK) and other large investors are meeting resistance of some bondholders in a proposed $8.5 billion settlement over faulty loans with Bank of America Corp. (BAC), with some bondholders objecting to the terms. The investors who hold the Countrywide bonds but weren't included in the negotiations believe the settlement falls short of Bank of America's true liabilities while a settlement would chill their ability in future claims.

The bonds are so-called private-label mortgage-backed securities that provided the lion's share of credit at the height of the housing boom but also paved the way for billions of dollars in bad lending. With that market largely shuttered, most lending today is limited to government-backed programs.

The ASF's principles for new issuance would effectively be a form of "risk retention," a notion central to regulatory reforms that seek to force issuers to hold a minimum of 5% of any loan they place in a security, according to the ASF. Because the principles demand full repurchase of faulty loans, they essentially result in 100% risk retention, the ASF said.

"Our issuer and investor members strongly agree that the model repurchase principles effectively establish economic incentives for originators and issuers to create and fund mortgage loans that conform to stated underwriting standards," Deutsch said.

The model is part of the ASF's Project Restart that aims to rebuild investor confidence in the private RMBS market. There is nothing legally binding in the ASF's principles, but the group is confident they will be adopted in some form in new issues and by regulators, Deutsch said.

-By Al Yoon, Dow Jones Newswires; 212-416-3216; albert.yoon@dowjones.com

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