Investors Brace for Foreclosure Losses

By Chidem Kurdas

Managers of credit funds at Goldman Sachs and other asset management firms are warning their clients that litigation and government actions to prevent or restrict residential foreclosures could reduce returns. The funds do not hold or service mortgages but are buyers of mortgage-backed securities.

These notes backed by pools of mortgages will go down in value if foreclosures for delinquent loans in the pool are delayed or become more costly.

Recently complaints that mortgage paperwork was not done properly have raised the possibility of time consuming lawsuits. Widespread legal disputes would  prevent the sale of the properties and reduce the value of the notes.

Clients of Goldman funds were told that the nature or extent of limitations on foreclosure cannot be predicted but any such action could reduce the amount of recovery on defaulted mortgages and adversely affect mortgage-backed securities. 

The credit funds bought a lot of MBS at low prices after the property bubble collapsed and delinquencies rose. Because of the low cost, the securities were expected to be profitable investments. But the paperwork issue could depress prices again.

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