In a strongly worded statement on behalf of the American Association of Mortgage Investors (AMI), Jonathan Lieberman, Managing Director of Angelo, Gordon & Company, criticized the recent settlement agreement over alleged mortgage servicing and foreclosure processing abuses.  Lieberman, told the Association's bondholders in a conference call that the settlement, reached last week between five major banks and their servicing subsidiaries, the Departments of Justice and Health Education and Welfare, and 49 of the 50 states' attorneys general that, "Current press reports tell a story of regulators imposing penalties not only on the bad actors but also on Americans' investors, pension funds, and retirees," and that "the rush to finalize a flawed and opaque settlement smells funny.

Members of AMI, he said, have neither direct control of servicing nor direct contact with mortgage borrowers; rather have suffered material losses due to the bad acts of mortgage servicers.  He compared the current climate to the time period of 2007 and 2008 "during which our government and regulators picked winners and losers among domestic banks, broker dealers, foreign banks, insurance companies, and auto manufacturers; mortgage investors are confronted by like-minded governmental behavior."

Lieberman said that winners from the settlement, which will cost the banks between $25 and $40 billion dollars, are "potentially irresponsible borrowers, self-servicing, poorly managed and unprincipled banks and servicers, rating agencies with no alignment of interest with investors, situational regulators and select members of the political class."  The losers are "Responsible Americans - especially prudent conservative investors, borrowers and savers. Investors' returns will probably suffer, private capital will continue to shy away from mortgage lending and long term the cost of capital will escalate for responsible borrowers.  All Americans are ultimately the BIG (emphasis is Lieberman's) losers."

Lieberman said he sees no penalty, just continued erosion of responsibility, community standards of care, moral values and fiduciary standards.  "At its root, credit is a privilege, not a right and not democratically allocated.  You earn credit which allows you to borrow tomorrow's money to pay for something you get today."

With the background of the $350 billion in cumulative losses experienced by investors since 2007, the 1 million loan modifications that have helped homeowners remain in their homes, and the 2.5 million mortgages that are delinquent today there are a number of issues that investment managers in the mortgage sector need to ask.

• Can firms effectively assess, protect, and control investor capital?
• Do American standards of fair play and rule of law apply to mortgages investments?
• Why are Fannie Mae and Freddie Mac excluded from the settlement? Were the banks following the GSE guidelines, using their law and document preparation firms and didn't the GSEs have the unilateral right to terminate and move servicing?
• Why were investors not included in the servicing negations nor protected during the settlement?
• Have government officials decided that investors will be the losers in the fight among borrower, banks, and investors.

Lieberman concluded his statements by saying Association members stand ready to provide information and support to government officials and regulators and borrowers who have been abused by servicers and "stand ready to support the write down of underwater second lien mortgages."