Tweet
<span style="font-weight: bold">UNSCRAMBLING AN EGG</span>
At the heart of the problem is the financial alchemy lenders used to stretch borrowers into mortgages beyond their means. Hundreds of mortgages – and sometimes other loans – were bundled and placed in separate trusts. Wall Street then sold investors bonds backed by that mortgage pool. The monthly payments from homeowners are used to pay back the holders of those bonds.
Wall Street bankers believed they had minimized the risk to any one investor that an individual loan would go bad. The problem is that no single lender owns a specific mortgage. So there’s no one party for a homeowner to negotiate with when it comes time to modify a loan. Their loan could be owned by thousands of investors.
“It may just be hard to contact all these folks,” said Adam Levitin, a Georgetown University law professor who recently wrote a paper on the problems servicers are having modifying loans. “They can be spread all over the world, and getting approval can be very difficult. This is Humpty Dumpty, and all of Paulson’s horses and Bernanke’s men can’t put this one together."
Recent programs announced by private lenders like Bank of America and government regulators like Fannie Mae only apply to whole loans that are owned directly by a lender.
<span style="font-weight: bold">WHO’S IN CHARGE?</span>
Most mortgages written during the peak of the lending bubble were bundled into pools of loans whose monthly payments are paid to the holders of a series of mortgage-backed bonds. The original lender no longer has an interest in the mortgage.
Payments from homeowners are collected by “servicers” and paid to investors holding the bonds backed by that mortgage. So it has fallen to these loan servicers to try to modify mortgage terms for homeowners whose loans were sold into these pools. So far, that process has involved a painstakingly slow review of each loan, something most servicers weren’t originally set up to do.
Each mortgage pool comes with different guidelines for how to deal with bad loans. Some don’t spell out clearly who has the authority to make changes in individual loans. Some trusts are managed by two layers that include both a 'servicer' and a 'master servicer.' If a servicer decides to modify a loan, it still faces a potential legal challenge from investors.
”That is not a resolved issue and potentially subject to litigation,” said William Longbrake, who recently retired as vice chairman of Washington Mutual. “And that makes servicers more conservative about how aggressive they’re willing to be.”
<span style="font-weight: bold">TRANCHE WARFARE</span>
The securitization of home mortgages has complicated public and private efforts to modify loans because mortgages bundled into pools are backed by many different classes – or 'tranches’ - of bonds.
Each tranche comes with different rules that govern which investors get paid first if some mortgages default. One set of investors may benefit from a foreclosure, for example, even as other investors would profit from avoiding it. Some mortgage pools are backed by dozens of different tranches.
Now, as the companies charged with managing these mortgage pools try to modify terms on individual loans, they’re finding it difficult to get these multiple classes of bondholders to agree.
Industry insiders have dubbed this process 'tranche warfare.'
<span style="font-weight: bold">TWO MORTGAGES</span>
During the height of the lending boom, many lenders accepted a second mortgage in place of a down payment. After all, the thinking went, home prices never fall, so how could they lose?
Now, homeowners with second mortgages face a tough time getting a loan modified. In many cases, there isn’t enough home equity to cover both mortgages. So the investor holding the second mortgage, who takes the biggest hit, has no incentive to agree to new terms.
Without that approval, the holder of the first mortgage can’t modify its terms.
At the heart of the problem is the financial alchemy lenders used to stretch borrowers into mortgages beyond their means. Hundreds of mortgages – and sometimes other loans – were bundled and placed in separate trusts. Wall Street then sold investors bonds backed by that mortgage pool. The monthly payments from homeowners are used to pay back the holders of those bonds.
Wall Street bankers believed they had minimized the risk to any one investor that an individual loan would go bad. The problem is that no single lender owns a specific mortgage. So there’s no one party for a homeowner to negotiate with when it comes time to modify a loan. Their loan could be owned by thousands of investors.
“It may just be hard to contact all these folks,” said Adam Levitin, a Georgetown University law professor who recently wrote a paper on the problems servicers are having modifying loans. “They can be spread all over the world, and getting approval can be very difficult. This is Humpty Dumpty, and all of Paulson’s horses and Bernanke’s men can’t put this one together."
Recent programs announced by private lenders like Bank of America and government regulators like Fannie Mae only apply to whole loans that are owned directly by a lender.
<span style="font-weight: bold">WHO’S IN CHARGE?</span>
Most mortgages written during the peak of the lending bubble were bundled into pools of loans whose monthly payments are paid to the holders of a series of mortgage-backed bonds. The original lender no longer has an interest in the mortgage.
Payments from homeowners are collected by “servicers” and paid to investors holding the bonds backed by that mortgage. So it has fallen to these loan servicers to try to modify mortgage terms for homeowners whose loans were sold into these pools. So far, that process has involved a painstakingly slow review of each loan, something most servicers weren’t originally set up to do.
Each mortgage pool comes with different guidelines for how to deal with bad loans. Some don’t spell out clearly who has the authority to make changes in individual loans. Some trusts are managed by two layers that include both a 'servicer' and a 'master servicer.' If a servicer decides to modify a loan, it still faces a potential legal challenge from investors.
”That is not a resolved issue and potentially subject to litigation,” said William Longbrake, who recently retired as vice chairman of Washington Mutual. “And that makes servicers more conservative about how aggressive they’re willing to be.”
<span style="font-weight: bold">TRANCHE WARFARE</span>
The securitization of home mortgages has complicated public and private efforts to modify loans because mortgages bundled into pools are backed by many different classes – or 'tranches’ - of bonds.
Each tranche comes with different rules that govern which investors get paid first if some mortgages default. One set of investors may benefit from a foreclosure, for example, even as other investors would profit from avoiding it. Some mortgage pools are backed by dozens of different tranches.
Now, as the companies charged with managing these mortgage pools try to modify terms on individual loans, they’re finding it difficult to get these multiple classes of bondholders to agree.
Industry insiders have dubbed this process 'tranche warfare.'
<span style="font-weight: bold">TWO MORTGAGES</span>
During the height of the lending boom, many lenders accepted a second mortgage in place of a down payment. After all, the thinking went, home prices never fall, so how could they lose?
Now, homeowners with second mortgages face a tough time getting a loan modified. In many cases, there isn’t enough home equity to cover both mortgages. So the investor holding the second mortgage, who takes the biggest hit, has no incentive to agree to new terms.
Without that approval, the holder of the first mortgage can’t modify its terms.
Comment