"You see, all of these programs deal only with “whole loans” — that is loans on the books of the institutions, unencumbered by securitizations. So far, the attitude of all involved when it comes to securitized mortgages is to throw up their hands and say — “it’s too hard to deal with!” And it may well be: mortgages that were sold to Wall Street and wound up in mortgage-backed securities have been sliced and diced and sold and resold to investors with varying risk tolerances. They are serviced by people who owe a fiduciary duty to all these investors, no matter what their place on the risk continuum.
James Grosfeld, the former chief executive of Pulte Homes, summed up the problem in a recent e-mail message:
There are well over $1,000,000,000,000-$1,500,000,000,000 of mortgages trapped within mortgage-backed securities. These are the most risky mortgages ever issued — mortgages poorly underwritten and often with unaffordable payment shock at the end of teaser rate periods. Pool losses will be unprecedented.
However, there has been no successful effort on a broad scale to reform these mortgages because of contractual obligations of trustees and servicers to bondholders. Simply put these fiduciaries are scared of being sued by bondholders if they modify loans into affordable new mortgages. Every effort to jawbone trustees/servicers to reform these mortgages quickly and on a mass basis has failed and will fail. These fiduciaries fear financial liability, and servicers are overworked and have no meaningful financial incentive to provide this desperately needed refinancing.
Recently, certain hedge funds have threatened to sue fiduciaries of these securitizations if they refinance loans. Congressional hearings are taking place with respect to these threats. Nothing to prevent mass foreclosures of these loans will be effective unless Congress acts affirmatively to remove liability and provide financial incentives for refinancing. Jawboning bondholders and fiduciaries has not and will not work.
The situations borders on the absurd. Investors will not allow mortgage modifications that would hurt them more than some other investors — thereby insuring that everyone gets hurt even more as foreclosures continue. And as foreclosures continue, the financial crisis continues to deepen because foreclosures on Main Street mean billion-dollar write-offs on Wall Street. And struggling homeowners can only pray that their mortgage is still held by the bank and not sold to Wall Street — in which case they are out of luck. It is like flipping a coin to see if you can hold onto your home."
Here's my comment:
“Every effort to jawbone trustees/servicers to reform these mortgages quickly and on a mass basis has failed and will fail. These fiduciaries fear financial liability, and servicers are overworked and have no meaningful financial incentive to provide this desperately needed refinancing.Recently, certain hedge funds have threatened to sue fiduciaries of these securitizations if they refinance loans. Congressional hearings are taking place with respect to these threats. Nothing to prevent mass foreclosures of these loans will be effective unless Congress acts affirmatively to remove liability and provide financial incentives for refinancing.”
This sounds like moral hazard blackmail. Other people have been bailed out, and we’re willing to risk a blowup against the better odds and terms of getting bailed out.
I see only two choices:
1) Free market: Let them blowup.
2) Government intervention: Force terms upon everyone involved.
The in-between route is just too bitter a pill to swallow in my opinion.
So, it's a big problem.
"While Justin has had his eye on Hank Paulson, I've been listening to the House hearing on how well investors, servicers and lenders are going along with mortgage modifications.Barney Frank had nice things to say about the efforts of Frannie, JP Morgan Chase and Bank of America (never mind that B of A got sued into changing the terms of its Countrywide loans), but then he took servicers to task for not more aggressively modifying mortgages held in securitizations.
Of course, there's a fundamental problem with modifying those loans: for each securitization trust, there can easily be hundreds of bondholders with legal rights, and good luck coordinating all of their interests and wishes.
As Frank pointed out, Treasury's original plan to buy toxic assets off bank balance sheets would have made the U.S. government the sole owner of many of these securitized trusts. And once the feds owned the paper, they could have done whatever they wanted, including telling servicers to cut interest rates or reduce principal balances across the board. Well, Frank didn't go into that level of detail, but that's the logical extension.
Now, because of the TARP-and-switch, we're still talking about how we can get investors and the servicers of their investments to eagerly adopt loan modifications. Frank talked about having to "restructure the servicing mechanism," but it wasn't clear to me if that would be retroactive or going forward. He seemed pretty serious about it, though, saying, "You should not have a legal form where the authority to make important decisions is so spread out that no one can make them." (I know someone who would agree.)"
Here's my comment:
donthelibertariandemocrat Says:
Posts
"The solution, free-marketeers will be glad to know, isn't less ownership but better ways to aggregate it. Consider the patent pool created in 1917 that let airplanemakers swap technology and share profits without threat of litigation. For property use, Heller imagines something like a co-op board for landowners. Suddenly, there's someone in charge to talk to--and maybe that airport gets its runway."
I think that you're right here, but not about these bundled mortgages. The problem is that the servicers have no incentive to do this, and the holders are betting on a government subsidy as of right now. They have learned from TARP. But then, I find that many people who appear perplexed by the complexity are quite aware about they're doing.