Mortgage Rescue Wonkery
MORTGAGE RESCUE WONKERY....One of the problems surrounding any plan to rescue homeowners with troubled mortgages is that most mortgages are bundled up into securities that have multiple noteholders and are governed by reams of carefully written contractual requirements. So even if the mortgage servicer wants to rewrite mortgages to prevent defaults, they probably can't. The terms of the contract don't allow it, and getting the agreement of every single noteholder is nearly impossible.
So what's the solution? The federal government doesn't have the authority to unilaterally abrogate private contracts, but via Matt Yglesias, CAPAF's Michael Barr explains a way to get in via the back door:
Servicers managing pools of loans for investors are generally barred by contract from selling the underlying mortgage loans, but the trust agreements also provide that servicers must amend the agreements if doing so would be helpful or necessary to stay in compliance with tax rules under the Real Estate Mortgage Investment Conduit, or REMIC, statute, which provide important benefits for these securitization trusts and their investors. We propose to modify the REMIC rules to ensure that servicers have the authority and incentive to sell the mortgages to Treasury.
Legislation would provide that REMIC benefits would be denied going forward if the securitization's contract provisions have the effect of barring servicers from selling or restructuring loans under Treasury's programs. Servicers would have a legal obligation to their investors to modify the agreements to stay in compliance. Servicers could then sell loans to Treasury for restructuring. Participation in the Treasury program would remain voluntary, but the key legal impediments to participation would be removed.
There's more to it, including some indemnification and accounting details, but this appears to be the main change that would allow a broad-based mortgage rescue plan to go forward. Comment is invited from anyone with the background to offer an informed opinion on whether Barr's plan would work.
And as long as we're on the subject, here's an interesting tidbit from Barr's testimony:
Under the Housing and Economic Recovery Act of 2008, an estimated 400,000 at-risk mortgages could be restructured on affordable terms with credit enhancement from the Federal Housing Administration under the "Hope for Homeowners" program....This "Hope for Homeowners" program began insuring loans in the fall of 2008, but as of mid-October had only processed 42 loans.
We sure seem to move faster when it comes to bailing out Wall Street and the auto companies than we do when it comes to helping out distressed homeowners, don't we?