The recent announcement by the White House to lend a hand to a whopping nine million home owners in evading foreclosures has received a warm welcome from the home owners as well as mortgage services that are entrusted with the job of collecting the loan repayments every month.
However, the announcement has not been able to please everyone concerned with the mortgage industry in the United States. For instance, several private mortgage investors, who own mortgage-backed securities worth trillions of dollars are considered to be at the core of the prevailing financial emergency, do not seem to be very impressed at all. In fact, many of them are actually getting ready to file court cases against the banks as well as other financial institutions (FIs) that service or are responsible for mortgages.
A mortgage program designed by the Obama administration to facilitate home owners harassed with loans refinancing or adjusting their mortgages is in question. On the other hand, looking at things from the view of the mortgage investors, the dozens, hundreds or thousands of amended or adjusted mortgages is actually an infringement on the existing agreements between them and the borrowers.
According to a partner and chair of the financial markets crisis group at Gibson Dunn & Crutcher, Michael Bopp, anyone having services voluntary restructuring mortgages are likely to face some legal suits since the services are probably going to restructure the mortgages, although the investors would be bearing the losses. At the same time, a partner at Dallas-based Patton Boggs LLP, Talcott Franklin is of the view that it is possible that the mortgage modification program may result in lawsuits by investors, especially in the instance of pre-default adjustments. According to the Obama plan, a mortgage servicer received a cash incentive of $500 for modifying a mortgage prior to the borrower becomes a defaulter. In such a situation, the home owner gets a sum of $1,500.
Franklin acknowledged that he is concerned that the pre-default mortgage modifications possibly will result in difference of interest that might infringe on some of the contracts between the servicer and the investors. He is expecting that the mortgage investors will wait till the modifications actually beings to take place in great number prior to filing lawsuits. Franklin further said that stimulus is basically a condition of the mind and, hence, there could be questions regarding why the mortgage was actually modified. Questions may arise if the mortgage was modified because the servicer and borrower both sought after the incentive payments or the mortgage actually needed to be modified.
On the contrary, the Obama mortgage plan was designed keeping in view the interest of the investor. According to a member of the Obama administration, the mortgage plan offers regulated or homogenized assistance in all the mortgage markets. She is of the belief that this will provide comfort to mortgage servicers who are apprehensive regarding possible lawsuits. Nevertheless, the fact remains that modification of the existing mortgages by means of reducing the interest rates the home owners currently pay will actually help a number of investors, while several others are likely to be affected adversely.
The Obama administration official further said that in case you lower the interest rate on these home loans, a number of investors would be harmed, while there are others who would find it helpful. At the same time, she said that in case you foreclosure, some people would be affected adversely, while some others would be helped by the move. Therefore, in such a situation, the economic incentives are not aligned appropriately. She agreed that the investors are trying to force in different ways, possibly threatening to file legal cases.
Meanwhile, though several mortgage investors are opposed to Obama's mortgage modification plan, they are also looking for help and guidance from Capitol Hill wherein lawmakers are considering various aspects of passing legislation in the House that may stop the mortgage investors from filing legal suits.
Democratic representative from Pennsylvania Paul Kanjorski and the Republican representative from Delphi Mike Castle have jointly tabled the legislation that they think would cut down the potential number of lawsuits by mortgage investors to a large extent and, simultaneously, support mortgage services to modify or adjust the existing home loans. In fact, the Bill aims to provide legal protection to home loan servicers provided they opt to modify their mortgages. The House Financial Services Committee has already approved the Bill introduced by Paul Kanjorski and Mike Castle on February 5 last. A spokeswoman of Paul Kanjorski said that she was optimistic that the Bill would be approved sometime later during the current year.
It may be noted that Paul Kanjorski and Mike Castle has table a related legislation in 2010, but it was eventually taken out from a mortgage modification Bill approved by the Congress in July last year.
Prof. James Angel, a finance professor at Georgetown University, mentioned that the initiative taken by Kanjorski and Castle failed to make any impact that time primarily owing to the opposition of the Bush administration to the Bill. Nevertheless, Angel observed that the mortgage modification program introduced by Kanjorski and Castle in July 2010, also known as the 'Hope for Homeowners', was not effective. At the same time, he says that it is likely that the Obama administration will support the program only partially since it has the benefit of observing the extent to which the July program has been unsuccessful.
Angel further said that there is a possibility that the Democrats may back the trial lawyers who might aspiring to protect the facility of their members to file lawsuits by opposing any legal protection provided by the government to the servicers. According to Angel, thus far these modification programs have proved to be unsuccessful since the servicers have been averse to taking risks. However, presently a financial incentive is attached to mortgage modifications as a bonus, but people still require legal protection, he added.
Nevertheless, the fact remains that despite the potential legal suits by mortgage investors, it is expected that there would still be numerous mortgage modifications. Angel says that it is very likely that Fannie Mae (the Federal National Mortgage Association) and Freddie Mac (the Federal Home Mortgage Corporation) would modify mortgages that are controlled by the government-sponsored entities. Meanwhile, the Congress is also preparing a legislation that is expected to permit bankruptcy judges to adjust mortgages for the harassed home owners. Despite the opposition from GOP, as the Republican Party has been nicknamed, an initiative that would permit judges to modify a number of mortgages anticipated to be endorsed.
In fact, the Obama administration is backing bankruptcy judge stipulations that would only be applicable to loans that come under the purview of size limits that apply to home loans which Fannie Mae and Freddie Mac are able to purchase. The Congress is actually mulling over a legislation that is backed by the Citigroup Inc. and permitting judges to modify only those mortgages that have been in place before the enactment of the legislation.