July 20, 2012 / 9:21 PM / 6 years ago

Clock ticking for mortgage claims from private investors

(Reuters) - For one group of investors looking to get banks to pay for their mortgage misdeeds, the clock is ticking.

Investors that bought mortgage bonds during the housing boom are putting increasing pressure on banks to buy back loans that have since gone sour.

For some investors, time is running out because of a statute of limitations.

That statute does not apply to mortgage bonds guaranteed by government-sponsored entities like Fannie Mae FNMA.OB and Freddie Mac FMCC.OB.

But the statute does apply to investors in “private label” mortgage bonds, which have no government guarantee.

The statute of limitations is six years. Many of the worst of the private-label mortgage bonds were issued in 2006 and 2007, meaning investors have to sell mortgages back to banks by this year or next year.

“People are laying down their markers and making sure they don’t miss their window,” said Chris Katopis, the executive director of the lobbying group the Association of Mortgage Investors.

When selling the mortgage securities, banks made promises or “representations and warranties” about the loans packaged into the bonds. Investors can ask banks to buy back bad mortgages if these promises were evidently broken, for reasons such as poor underwriting, insufficient verification of income or other documentation errors.

Banks are receiving more requests to buy back bad home loans from private label mortgage bond investors as well as Fannie Mae and Freddie Mac. Bank of America said earlier this week that its outstanding claims from private investors jumped 77 percent to $8.6 billion in the second quarter from the first quarter, while outstanding requests from Fannie and Freddie rose 35 percent to $10.97 billion.

For statute of limitation claims, lawyers can bicker before a judge over when the clock should start: the day the deal was closed, or the day the alleged breach of contract occurred, for example.

But the most conservative legal approach is for investors to assume a six-year-time frame, lawyers said. “Most lawyers view it as better to be safe,” says Isaac Gradman, an attorney who specializes in mortgage-backed securities litigation and the author of the blog The Subprime Shakeout.

Private investors can’t sue mortgage originators individually. They must cobble support from at least 25 percent of the note holders. That makes such lawsuits difficult to launch in the first place.

Reporting By Michelle Conlin; Editing by Kenneth Barry

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