The "repurchase risk" for single family mortgage originators that we've discussed for, literally, years here on the blog was, for the most part, a risk faced by those who sold loans to (or serviced loans owned by) Freddie Mac and Fannie Mae. They are the 800-pound gorillas in that space.
In 2002 billionaire banker Andy Beal had his Beal Bank sue the Federal Deposit Insurance Corp. in a lawsuit that accused the FDIC of originating faulty subprime mortgages to unqualified borrowers. For six years Beal pursued this quest against his very own regulator, until the FDIC agreed to pay $90 million in 2008 to settle the case.
Now Beal has found another seemingly impossible mountain to climb: getting big banks like Bank of America, Citigroup, Goldman Sachs and JPMorgan Chase & Co., to repurchase potentially faulty loans that were sold during the housing boom. According to Katy Burne at The Wall Street Journal, Beal is working to bring bondholders together to investigate potential misrepresentations and contract breaches by the banks that sold residential mortgage-backed securities.
Some of the soured assets Beal purchased at fire-sale prices were residential mortgage-backed securities that were sold in deals in which banks made representations and warranties about loan quality and promised to repurchase those loans if the representations were no good. But in order to investigate, potentially declare a default and maybe launch lawsuits, holders of the securities like Beal need at least 25% of the voting rights in a trust.
The Wall Street Journal reported on Wednesday that Beal Bank holds more than $1 billion of these bonds, has been in contact with more than 20 bondholders, and signed on enough investors in seven of the 93 mortgage-backed securities held by a Beal Bank unit to proceed. Beal has probably already made lots of money off these investments but through this strategy he hopes to make even more. He is not the first person to pursue this kind of thing. The biggest such effort has been led by Houston lawyer Kathy Patrick, who has worked for big institutional investors like BlackRock and Pimco to pursue put-back claims and famously struck an $8.5 billion settlement with Bank of America. But these kinds of claims have proven very difficult to pursue.
Still, Beal seems to relish taking on impossible tasks. He once walked into a Las Vegas casino and challenged some of the best poker players in the world to some of the highest-stakes games ever played. It’s unlikely he is bluffing over this mortgage move.
Well, he didn't just "walk into" a casino and challenge the world's best poker players. He set it up in advance. They knew he was coming. Moreover, although he took some of the world's best for seven figures over the first round, Phil Ivy won that back and then some in the final round. He's still a legend, but he doesn't need the embellishment. To say he's "not bluffing" is entirely accurate.
Following Andy Beal's beat down of the country's biggest banks is going to be a hell of a lot more fun than watching Aunt Fannie and Uncle Freddie grow gray and wither. Stay tuned.