Loan modifications are complicated for invetsors
The danger, some investors and securitization lawyers say, is that these provisions might allow some financial companies that engaged in improper lending -- and also happen to be loan servicers -- to escape legal punishment.
For example, if the servicer of an abusive loan was also the initial lender, the bill would take that company off the hook for any future predatory lending suits. The safe harbor, therefore, could encourage servicers to modify their most poisonous loans, even if they are not yet near default, just to reduce their legal exposures.
And allowing servicers to void buyback requirements on loans they modify would eliminate any liability for breaches in representations and warranties on the loans they made to investors who subsequently bought into the pools.
"Main Street investors need to know that banks who received their tax money through government bailouts are going to profit again from the safe-harbor loan modification provisions at the expense of their mutual funds, 401(k)'s and pension investments," said Thomas C. Priore, chief executive of ICP Capital, an investment firm that specializes in credit markets.
Another perverse incentive that the bill would create involves the problem of conflicting interests among investors who own the first mortgage on a property and holders of the second liens. First liens of any kind take priority and are supposed to be paid off before secondary obligations are. But many of the companies servicing loans today own second liens on the same properties whose first mortgages are held by investors in securitizations.
By removing any liability associated with modifying the first mortgage, the banks that own the second liens can expose invest
A Reality Check on Mortgage Modification
By GRETCHEN MORGENSON
Published: April 26, 2009
A mortgage modification bill in Congress would create problems like conflicts of interests and the elimination of certain liabilities.