For Thrivent and others, warnings were there

  • Article by: ERIC WIEFFERING , Star Tribune
  • Updated: May 3, 2011 - 8:43 PM

Dumb money.

On Wall Street that phrase normally applies to people like you and me who, in our pursuit of the latest investing fad, demonstrate an unfailing ability to buy high and sell low.

But the carnage in the U.S. housing market revealed that, when it came to buying bonds backed by home mortgages, plenty of professional investors were dumbstruck.

And when the smart money loses money, it sues.

The latest to do so is Thrivent Financial for Lutherans, the conservative fraternal benefit society with headquarters in Minneapolis. Last week, Thrivent sued two of the housing bubble's biggest financial enablers, Countrywide Financial and GMAC Mortgage, and accused them of misrepresenting the quality and soundness of the mortgages loans they sold Thrivent.

Now, Thrivent has reason to feel aggrieved. Investigations by state and federal regulators have laid bare the lengths Countrywide, now owned by Bank of America, would go to in order to stuff its mortgage pipeline.

But take a closer look at the timeline of Thrivent's purchases and the prospectus for some of the securities and you can't help but wonder: What were they thinking?

Home prices peaked in June 2006, and eventually declined by 2 percent nationally that year, according to the S&P Case-Schiller index. Of the 63 or so purchases Thrivent details in its lawsuit, 31 occurred after June 1, 2006. Many purchases occurred in 2007, including one near the end of the year, after Countrywide had laid off 12,000 people and been bailed out by Bank of America, and after the bankruptcy or insolvency of some prominent mortgage lenders and investment funds.

In other words, Thrivent bought high.

Thrivent invested in 27 different offerings. It won't say how much it invested in each, beyond that the total amounted to hundreds of millions of dollars.

What were they buying?

Here are the details from CWL 2007-S1, a $1.6 billion offering of bonds backed by home equity loans that came to market in February 2007. Some of those loans featured adjustable rates, but Thrivent purchased from the A-3 tranche, a $310 million pool of fixed-rate loans.

Sounds conservative -- until you read the prospectus for the pool of 30,000 mortgages.

The weighted average interest rate was 8.64 percent. A fifth of the loans were interest-only payments, and half would eventually require a balloon payment at 10 or 15 years because the minimum principal payments were so small.

Performance history was scanty because most of the loans were recent, meaning they'd been made at the peak of home values. About 43 percent of the loans were made in the "sand states" of California, Nevada, Arizona and Florida, which saw the greatest price appreciation and would eventually experience the sharpest declines.

The prospectus warned that "prices and appraisal values in many states have declined or stopped appreciating," that interest-only loans were more likely to default and that losses on these loans would be magnified by the fact that no principal had been paid down.

Underwriting? Some loans were approved via Countrywide's "Full Documentation Program." Others via either its Alternative Documentation Program, its Reduced Documentation Program, its Stated Income Stated Asset Documentation Program, its Streamlined Documentation Program, or its Super-Streamlined Documentation Program, which generally required no proof of income, assets or other debts.

The lawsuits brought by Thrivent and others make much of the fact that the prospectus does not disclose how many of the loans originated under these looser (read, nonexistent) standards.

But it's not clear anybody ever asked. The bonds were rated AAA, and for some investors, that's all that mattered.

Subsequent investigations by state and federal regulators have revealed that Countrywide and GMAC largely abandoned any pretense of underwriting standards. And the ratings agencies, which once had assured investors that AAA on mortgage bonds meant the same thing as AAA on corporate bonds, have subsequently downgraded more than 90 percent of all mortgage-backed securities.

Thrivent will not say how much it lost, except to say that the mortgage-backed securities in the lawsuit represented less than 1 percent of its total investment portfolio. Delinquencies top 50 percent in some of the mortgage-backed securities purchased by Thrivent. CWL 2007-S1 has experienced "cumulative realized losses of $499 million."

Thrivent also declined an opportunity to explain the reasons for some of its purchases, particularly those made in the second half of 2006 and through 2007.

Earlier this year, Bank of America paid $2.3 billion to Fannie Mae and Freddie Mac to settle misrepresentation claims on billions of dollars in loans that went sour after those two government-sponsored firms bought them. With its lawsuit, Thrivent is the latest smart money investor demanding to be made whole.

"When the issuers of securities engage in fraud or misrepresentation, we take action as necessary to protect the interests of our members and shareholders," Thrivent spokesman Brett Weinberg said in a statement e-mailed to the Star Tribune.

ericw@startribune.com • 612-673-1736

  • get related content delivered to your inbox

  • manage my email subscriptions

ADVERTISEMENT

Connect with twitterConnect with facebookConnect with Google+Connect with PinterestConnect with PinterestConnect with RssfeedConnect with email newsletters

ADVERTISEMENT

ADVERTISEMENT

ADVERTISEMENT

ADVERTISEMENT

ADVERTISEMENT

ADVERTISEMENT

 
Close