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December 10, 2008
What's the problem with the loan modification plans?
The biggest obstacle to loan modifications by far is securitization--the fact that an estimated 80% of the troubled loans have been sliced and diced and sold to many investors. This gets in the way of servicers who might otherwise be given incentives to modify loans in ways that are in the best interests of society. Existing commercial law allows loan servicers to make only changes that are in the holder's best interest--"not materially adverse to the Owner." The law also says that if a mortgage is in default or in the servicers' opinion close to it, then servicers have no authority to make changes in interest rates, or principal amount, or time of payments.Could Congress pass a law that allowed servicers to modify loans by invoking a standard such as "a good faith effort to advance the collective interests of holders"? Possibly it could, but it may run into the problem that the constitution provides that "Congress shall make no law impairing the obligations of contract."
Intelligent Design Thomas F. Cooley
If we want to meddle in the mortgage market,I have a different proposal. Offer to insure mortgages at say 80% of their face value, but only if whole mortgages are delivered. None of this hard to value stuff. Simply whole mortgages. With the insurance offer, market participants will get rewarded for working their way through the horrible bureaucratic and legal hurdles to unwind these complicated tranche structures into easier to value and presumably more liquid mortgage pools. By making all the holders of the pool have the same sort of claim it will be easier for fiduciaries (the people who administer the loans) to represent the interests of owners. They may well mean coming up with clever ways of rewriting mortgages to increase the total net present value of payments they generate.
Posted by OneEyedMan at December 10, 2008 10:08 PM
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