Hedge funds are warning mortgage companies against modifying mortgages. Well, no kidding. Gee, and to think, the New York Times thought this was NEWS. Hello?
According to the New York Times (link above if you want to read the original), at least two hedge funds are sending letters to banks warning them of the banks’ contractual obligations to the investors (i.e., the hedge funds) who own the bonds and related securities collateralized by pooled mortgages. These letters supposedly warn the banks that the hedge funds might “take action” (I assume that is a polite euphemism for sue) if the banks participate in government backed plans to renegotiate delinquent mortgage loans. The hedge funds are concerned about protecting their investments. They bought bonds backed by mortgages with variable (read high) interest rates. Their cash flow, and ultimately total investment value, will be reduced if the interest rates on those mortgages is reduced — or the principal balance — or the monthly payment.
According to the New York Times this “saber-rattling highlights the conflicting interests of various players in the mortgage arena. . . . ” Well, yes.
Let’s go back to basics:
- Mortgage pools are governed by Master Pooling and Servicing Agreements, these agreements set out each parties rights, liabilities and options;
- Most Pooling and Servicing agreements include some provisions for modifying mortgage loans; one of the problems traditionally with getting mortgages modified (even FHA loans that have regulations requiring certain kinds of modifications) has been actual or perceived restrictions in the Pooling and Servicing agreements;
- The servicer is the player who calls the shots, but the Servicer’s interest is for the Servicer to make money — which isn’t necessarily the same thing as for the investors to make money;
- When the initial bailout provision was being negotiated in Congress, there was a provision to allow modification of mortgages in chapter 13 Bankruptcy included in an early draft, the banks screamed bloody murder; they made it pretty clear that they would just about not have a bailout than have that.
Now, the funny part of the article is at the end:
Officials at Braddock, a hedge fund based in Denver, said they were not against loan modifications per se but that they wanted to make sure renegotiations conformed to the contracts governing mortgages securities, which are backed by thousands of home loans. The most restrictive servicing contracts limit how many and what kinds of modifications mortgage firms can pursue. Other contracts allow the firms to pursue modification more freely if doing so will minimize overall losses. (Punctuation errors in the original.)
Ok, so before a bank — or even better the Treasury as part of its asset buyback plan — can modify a mortgage, an employee will have to identify the pool the mortgage is pooled into, obtain a copy of the Master Servicing and Pooling Agreement (a huge, densely written, pile of legalease in most cases), read it, understand it and stay within its terms. Uh huh, and these people are being paid how much?
Kind of what I thought.
Let’s stop kidding around. If we are going to start modifying mortgages to address the foreclosure rate, we have to have the authority to go outside the scope of the Pooling and Servicing Contracts. The only way that I know of to do that is by modifying Section 1322(b) of the United States Bankruptcy Code.