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Allonhill no hired gun for repurchase work

Ever since Ruth Simon’s piece on the “cottage industry” of due diligence providers going after repurchase work ran in The Wall Street Journal, I’ve gotten a lot of phone calls and e-mails from people hopeful that Allonhill wants a piece of the repurchase frenzy.

I disappoint them. Allonhill is not a hired gun ready to go after any repurchase work we can get.  That business model seems to be working for some, but it’s not one we’ll adopt.

Repurchases are a hot topic and will continue to be. Issuers and investors are in “hand-to-hand combat,” as Bank of American Chief Executive Brian Moynihan told Simon, with investors pushing buy-back requests onto issuers and issuers like BofA fighting back. Investors want their money back for assets that went sour and are suing to get it. Due diligence firms have formed a “cottage industry of loan detectives obsessed with detecting fraud, misrepresentations and violations of underwriting guidelines,” Simon wrote. Allonhill was included among the due diligence firms mentioned in the story, leading to the phone calls and emails from law firms, vendors and other companies seeking to do business.

Repurchases, also called “putbacks” and “buy-backs,” are an important mechanism in residential MBS.  Investors bought bonds based on offering documents that provided a right to be made whole for loans that did not conform to the underwriting guidelines.  Investors and issuers also have rights to recoup losses from negligent servicing. Without these mechanisms, investors would be justifiably skeptical of putting their money into RMBS.  They are a legitimate and effective means of assuring investors that what was represented to them is what they got when they bought a bond.

The problem is, the mortgage crisis brought down all of the parties in the securitization chain.  With everyone underwater, and many out of business, we are left with investors -- some of whom bought bonds before the crash and some after -- going after the originators, issuers and servicers who are still standing.  There is at least one coalition of investors created explicitly to form enough of a majority of holders on certain bonds to pursue claims on older securitizations.

Joe Nocera of The New York Times recently observed the irony of Countrywide pursuing repurchase claims against other issuers.  I agree with Nocera’s point—the repurchase issue pits this industry’s members against each other, sometimes in unexpected ways.

At Allonhill, we’ve taken a different approach to repurchases. As Simon points out, there is an entire industry booming right now, with forensic analysis firms offering to support or defend against claims, and law firms willing to take either side.

We don’t go after this work like many of the hired guns we see. However, we represent the interests of our clients.  Sometimes, when we are retained as a credit risk manager to oversee a portfolio of loans, that work involves identifying and pursuing repurchases.  We also examine loans for possible putbacks when doing quality assurance work,   often before a securitization is formed. More stringent reviews of loans pre-securitization are a critical part of restoring investor confidence in RMBS.

The reason we don’t pursue repurchase work actively is two-fold. It is personal to this company and not intended to condemn those who pursue this business.

Allonhill’s mission is to reinvent this industry and to bring it back with important changes that will give investors and all the other parties to a securitization – including the homeowner that borrows money to buy a home – assurances that things really are different from before.  All of my energy is focused on defining the new rules for securitizations and the roles of due diligence firms and credit risk managers in securitizations.  Backward-looking forensic work is challenging.  I find it to be somewhat negative, as it generally involves litigation.  It simply isn’t how I want to spend my resources or those of my company.

Allonhill is a values-driven company whose mission has never waivered. We don’t question the legitimacy of the repurchase business and we urge interested parties to explore the complexities of this matter, as Joe Nocera did in his column. But for us, it simply isn’t our cup of tea.