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11/12/2008 - Why Some Loans Are Hard to Modify

It sounds simple in principle: find troubled homeowners, change their mortgages and help them keep their houses.

But behind many mortgages sits a complex chain of parties that service mortgages or invest in them amid an array of complicated legal agreements.

At a hearing of the House Financial Services Committee on Wednesday, legislators concerned about the rising tide of foreclosures encouraged the financial industry to alter the terms of more mortgages to keep people in their homes. They focused on mortgages that were sold in packages to outside investors like pension funds, hedge funds and insurance companies.

The problem is that financial executives have competing views on whether mortgages that were packaged — or securitized, in industry parlance — can be modified or not. These mortgages are no longer owned by the banks that service them; they are instead owned by numerous investors, and some in the industry think the investors might sue banks that modify mortgages.

“The servicers are telling me they’re not in power at this time,” said Representative Brad Sherman, Democrat of California. “You have 10 investors, and anyone of them can allege from a purely negligence standpoint that the value of the portfolio has not been maximized.”

At the hearing, panelists disagreed on whether modification was allowed with bundles of mortgages that were resold. An executive from Bank of America said that the contracts behind some securitizations expressly prohibited changes to the underlying mortgages. The executive, Michael Gross, managing director of loan administration loss mitigation at Bank of America, said that banks had more flexibility to modify the rules in loans that they still held.

But an executive with the American Securitization Forum, an industry group, said that contracts did allow bundled mortgages to be modified. The forum is in discussions with a range of investors who bought mortgage bonds to streamline the process of such modification, said Thomas Deutsch, deputy executive director of the group.

“Servicers do have the legal authority, right and responsibility to modify loans in appropriate circumstances, even if those loans are in mortgage-backed security pools,” Mr. Deutsch said.

Mr. Deutsch’s assertion faced skepticism among lawmakers. Barney Frank, Democrat of Massachusetts and chairman of the committee, said he was hearing evidence that servicers were having trouble modifying loans that were securitized.

“They can’t get this worked out,” Mr. Frank said. “Who am I going to believe? You or my own eyes?”

Some hedge funds, including Greenwich Financial Services and Braddock Financial, told banks in October that they might sue the banks if they changed mortgages that were within mortgage bonds the hedge funds had purchased. Changes in the terms of mortgages underlying mortgage bonds can change how much those bonds are worth.

The hearing came days after announcements by banks like JPMorgan Chase and Citigroup that they would modify more mortgages and a similar announcement by Fannie Mae and Freddie Mac, the government-backed home financing companies.

Source New York Times 11/12/2008

Peter Schulz - Editor - Email M

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