EXTRA CREDIT: Obama Housing Plan Needs Investors On Board
19 Februar 2009 - 12:01AM
Dow Jones News
There's a $1.7 trillion sticking point in President Barack
Obama's plan to prevent home foreclosures.
A central plank to the measures announced Wednesday are loan
modifications, which ease the burden of mortgages largely through
reducing interest rates.
The administration set aside $75 billion for this program, which
enlists borrowers, lenders and the servicers who collect the
monthly mortgage payments. But it says nothing about the investors
who own these home loans in the form of tradeable bonds.
Approximately $1.7 trillion of home loans, according to
Citigroup, have been packaged into these bonds, which aren't
guaranteed by Fannie Mae (FNM) and Freddie Mac (FRE) - the two
housing financing giants that will play a role in implementing the
government's housing rescue plan.
To modify the loans, the investors need to be on board. Either
they have to agree to sell the loans to the servicers or they have
to agree to receive less income from the loans. To act without
their consent could result in costly lawsuits.
And here's the rub. Price is an issue. The bondholders are
likely to demand servicers pay face value for the loans, which are
now worth far less.
The complicated nature of these securities continues to dog the
government's efforts to fix the housing market. The Treasury
Department's initiative announced last week to get many of these
bonds backed by home loans off bank balance sheets also failed to
provide sufficient details on how to price these securities.
To be sure, the current $75 billion loan-modification plan was a
step up in terms of details from last week's program. The
administration listed eligible borrowers, how the mortgage rates
would be reduced, and incentives for lenders and borrowers who
participate in the program.
But for market participants, it still lacked one crucial
element.
"I was surprised there was no safe-harbor terms," said John Sim,
a strategist with J.P. Morgan Chase.
He said such a safe-harbor clause would protect servicers,
working on loan modifications with borrowers, from lawsuits and any
claims from investors who own these bonds that are backed by home
loans.
The government said it would create a set of guidelines to
standardize the modification program, which will be announced on
March 4. Market participants hope the guidelines will address the
issue of investor claims.
Until those details are released, servicers are unlikely to
modify any loans included in a bond, especially in light of a
Greenwich Financial Services' lawsuit against Countrywide Financial
filed in December. The fund sought $150 million in compensation
since Countrywide changed terms on its mortgage loans.
-By Prabha Natarajan, Dow Jones Newswires; 201-938-5071;
prabha.natarajan@dowjones.com