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What Does It Take to Modify a MBS Servicing Agreement?

posted by Adam Levitin

This evening I did a little sample of MBS indentures and pooling and servicing agreements (PSAs) to see what it takes to modify them. This is an important issue because it will determine the amount of MBS that the government would have to buy in a bailout to be able to get to the underlying loans in order to modify them and help financially distressed homeowners. I looked at 24 MBS deals (I used Alan White's deal sample, but couldn't find docs for two deals). By my read of the documents, doing any serious loan modification would require the government to hold a lot of MBS. Of the 24 deals, 21 or 87.5% required a 2/3 majority to modify the servicing agreement, while only 3 or 12.5% required a simple majority.

Many PSAs, however, further provide that any amendment that would "reduce in any manner the amount of, or delay the timing of, payment received on Mortgage Loans which are required to be distributed on any certificate.." may not be done without the consent of the certificate holder. Widescale modifications and loan restructurings would inevitably reduce the amount of payment to be distributed or delay the timing of the payments. If the pool is overcollateralized or there is a first loss position willing to absorb these losses, then 100% shouldn't be necessary, but if widescale modifications are necessary, 100% agreement of MBS holders will be necessary.

This means it will be difficult, if not impossible, for the government to gather up enough MBS to get to the underlying mortgages. Not everyone holding MBS will sell to the government or even be eligible to participate in the bailout. And there are second mortgages that are in separate pools. It will also take time to process and to sort, time during which the foreclosure machine will keep rolling along. This is Humpty-Dumpty, and all of Paulson's horses and all of Bernanke's men will have a lot of trouble putting these pools back together again.

What this means is that it will be entirely arbitrary which homeowners the government will be able to assist in the end. It will have nothing to do with the merits of a homeowner's case or the homeowner's willingness to incur a cost. It will be entirely a function of which financial institutions work with the government and who happens to hold what MBS paper. This is another why bankruptcy modification is necessary--it is the only fair solution that is available to all homeowners, not a lucky, random few.

Comments

You can't forget about the MIP insurance on the individual Mortgage loans. They often have restrictions on how and when the loan modifications will go down, not just the parties holding the MBS paper. There is money in that as well. How will that go down? They might have a stake if Mortgages are all re-written down. To deal with that on every single mortgage... No thanks. It would take a Ceasar, one who was vested with the power to make decisions for all sides to get the deal done. Off subject a bit.

As I ranted about earlier:

http://www.creditslips.org/creditslips/2008/09/mortgage-modifi.html#comments

Here is more on the attempts of the Mortgage Bankers Association to get their financial clients $700 Billion in taxpayer money, while avoiding doing anything meaningful - and HOPE NOW "voluntary" stuff (in which servicers have NO financial incentive to actually make any sort of meaningful deal) is the antithesis of meaningful.

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http://www.swamppolitics.com/news/politics/blog/2008/09/wall_st_bailout_causes_lobbyin.html

"Bankruptcy is such a divisive issue in this debate, and resurrecting bankruptcy right now is completely unproductive," said Francis Creighton, vice president and chief lobbyist with the Mortgage Bankers Association. "This bill we are talking about is not a mortgage bill, not a housing bill. It's supposed to address the threats to the entire economy."

He added that the bankruptcy provision could end up "stalling this very necessary and needed bill."
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The unmitigated ARROGANCE, when they should be bended knee.

Is that's what's going to kill the bill? Taking away the special protections mortgages on a debtor's primary residence has enjoyed before they broke faith with the American public? Then kill the SOB.

THEY are the ones who's actions threaten to break either our countries economy or our social contract - or both.

They don't want to help people trying to save their homes? Fine. Let's keep our $700 Billion in powder dry and allow the geniuses who got us into this mess deal with the problem they created all by their lonesome.

Alan seemed to suggest that the "tranche warfare" of lower-priority investors refusing to go along with higher-priority investors' desire for a workout are not materializing (or are at least not impeding modifications). Servicers (some of them, at least) are apparently taking aggressive positions on modification even if all of the MBS holders don't agree--at least that's how I understand Alan's explanation to me in the comments to this post: http://pubcit.typepad.com/clpblog/2008/09/its-the-mortgag.html

Wall Street companies are like your kids and chores; they won’t do it voluntarily unless they want something. Most of the time you have to make your kids do their chores. Just like these workouts. Its stall stall stall and at the last moment they say no or only offer a forbearance which usually raises the payments. They couldn't afford the payments before a forbearance how on earth are they going to afford them afterwards? I have not seen one person who has received a true modification of their loan since all of this has been going down, and we file 15-25 13s a month. To boot, I have seen them denied because the debtors’ proof of income cannot support the higher payments. Hello? Do they want monthly payments or do they want the “guarantee”? Has anyone seen the money from the Recue bill that was passed? Oh ya, not until October. They talk about toxic mortgages, what was the rationale in giving subprime borrowers ARMs sometimes 80/20s, in the first place?

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