Amidst all the noise and hype surrounding the subprime mortgage market, there’s
one thing which hasn’t got a lot of press. (USA
Today, astonishingly, seems to be ahead of the curve here.) If loans have
been pooled, tranched, retranched, and sold to hundreds of investors and CDOs
and the like, what happens when the loans goes bad? How much leeway do loan
servicers have to modify loans which are owned by a disparate set of bondholders?
And what kind of mechanism exists for bondholders or ratings agencies to approve
servicers helping out homeowners in distress?
I’ve been looking into this a little bit, after attending a panel at the Milken
Institute Conference where Lew Ranieri brought up the subject.
Risk has a transcript of some of his comments:
The real dilemma for me and I think the real issue . . . will be, we’ve never
had to do substantial restructurings in housing in mortgage securities.
They were always in portfolios, and that made it very easy or at least, we
didn’t have to get 409 people or we didn’t have to rent the Nassau Coliseum
to have a bondholders meeting; we could do it very quickly. In a very long
meeting, last Monday, where we tried to collect virtually everybody in a room,
it became evident that there are a whole host of unforeseen technical problems
if you try to restructure or do large amounts of restructuring within the
security, some of which, we had never even heard of or thought about.
One of the accountants raised his hand and said if you restructure that many
loans, you’re going to taint the Q election and FAS 140 and what he was basically
saying in English for the rest of [us] poor fools, was that there is a presumption
when you – when a bank sells loans, into a securitization that it sold the
loans . . . And what he was saying is wait a minute, if you guys can restructure
all these loans without going back to bondholder, you obviously have control
and you’ve just tainted 140 and Q election.
I’m no expert on FAS 140, and I don’t even know what a "Q election"
is, but it does seem to be the case that when more than 5% of the loans in a
pool need to be restructured, the servicer often needs to get permission, which
isn’t something a lot of servicers have had to do in the past. And when 30%
of the loans in a pool need to be restructured, there’s a good chance you need
unanimous bondholder consent for that, which is something all but impossible
to get.
So, if anybody could point me to places or people where I could learn about
whether and how mortgage-backed securities might be able to be restructured,
I’ll be most obliged – and I’ll report back here as and when I learn anything.