True, but also remember that who prevails in litigation often has less to do with the merits of the case, and a lot to do with how much pain you can inflict on the other side, either just by the act of suing or via the discovery/deposition process (particularly if you can depose important clients and business connections). Remember, 95% of the lawsuits are eventually settled.

So if Castle’s law doesn’t pass, investors can at least harass servicers (I’m sure they could get a claim past summary judgment). And I don’t think servicing margins are all that great for them to be able to afford a ton of litigation. So the threat of litigation could be an effective check on servicers as far as this program is concerned.

If any readers are opposed to the Paulson plan, I suggest you call your Senator and Congressman about the Castle legislation. Some of you may be practiced at this, but one angle that might capture their attention is to say as an investor, you’d never be willing to buy any mortgage or asset backed securities again, and abridging investor protections will destroy faith in the US securities markets.

Investors/Lenders play this game too though. In 2005, after lending consumers a ton of money, they pushed through legislation undercutting individuals rights in bankruptcy. That time retroactive legislation helped the investors/lenders.

Simply make it a condition of any New Deals (rate freeze, Entity) he is brokering that the CEOs, principal officers, and board of directors of the banks, Wall Street brokerages, lenders, etc who caused this crisis be fired. Not only fired, but fired with no golden parachute.

This group of pirates who raped and pillaged the home mortgage industry and the credit markets must be removed from having anything to do with Mr. Paulson’s New Deal.

Mr. Paulson, the public calls your bluff. Show that you can punish the guilty while saving the innocent. The two are not incompatible. In fact, cleaning out the guilty is part of restoring public confidence in the banking system.

(end)

Let’s get this straight.

The government is going to abrogate your property rights because the government knows what is in the best interests for your property better than YOU do.

You as owner of the property would make decisions that would harm your own interests, so the government is going to step in and protect you from yourself.

WHAT? Is this the United States of America? I can’t believe my ears.

Nevada state Treasurer Kate Marshall and some of her counterparts nationwide are calling on Congress to fix what they say is an unfair and unexpected hit to families trying to avoid foreclosure.

Marshall said existing federal law penalizes homeowners who are able to restructure their mortgage and avoid losing their home by treating the amount they save through the new mortgage terms as “realized income.”

“At the very moment that a family is trying to escape the potential loss of their home, they will receive a letter from IRS telling them they owe income taxes on the loan modification,” she said in a letter to each member of Nevada’s congressional delegation.

“The lender’s steps are thwarted, the financial burden on our families and communities increases and much of the money saved may now go to the IRS,” the letter states.

That amount, especially in Las Vegas, where many of the homes in foreclosure sold for $400,000 or more, could be substantial.

“So if you are able to restructure your mortgage and you’re actually able to see some light at the end of the tunnel, you get whacked by the IRS,” she said Friday.

Marshall’s letter, like those from treasurers nationwide, calls on Congress to pass the Mortgage Cancellation Relief Act of 2007, which would exempt that money from taxation.

Marshall said the need is especially critical in Nevada, which has the nation’s highest rate of pre-foreclosure filings for the last 10 straight months. She said Nevada has one pre-foreclosure filing for every 185 households, a per capita rate of 4 percent.

Marshall said she learned about the effort from the Ohio treasurer’s office and immediately agreed to help the effort.

“An added tax bill at a time when what we’re trying to do is keep people in their home is adding insult to injury. If it’s your primary residence, we need to help you stay in your home,” she said.

Sen. Harry Reid, D-Nev., is one of the sponsors of the legislation.

Servicers have an incentive to mod all loans rather than foreclose. The longer the loans stay on their books, and the more they can avoid the high costs of the foreclosure process, the more money they make.

Eliminate the litigation threat and the servicers would be free to pursue their interest at the expense of investors. Most notably, a delay in foreclosure exposes AAA investors to declining recoveries as home prices fall.

Without the legislation passing, it seems no amount of “representation” of investors in negotiations will prevent the lawsuits from flying.

There is an update to the post with a pointer to a post at Credit Slips (those folks are lawyers, BTW) which adds a couple of other wrinkles.

GeorgeNYC,

My dim recollection of one class warfare issue (as they call it) is in foreclosure, if the overcollateralization has already been used up, the principal repayment will go to the top-rated tranche (theoretically, if the top rated tranche has been repaid, then it goes to the next tranche, but we are unlikely to see that happen).

If your ABS has already been marked down in your books (a virtual certainty due to market conditions; it will be marked down even more if there has been a downgrade) you are likely to be happy to take your lumps and go home.

But if the loan gets a mod, the interest payments will be applied as set forth in the original terms, which in most cases means more tranches than just the top tranche get some income (any MBS experts encouraged to provide better/clearer detail).

Newsman,

Hadn’t realized that concern about investors stood in the way of decent settlements in the Household Finance and Ameriquest fraud cases. What an ugly bit of business.

Anon of 3:36 PM,

Remember that this plan is a bastard child. The government isn’t sponsoring it, heavens no, it’s a private sector initiative. Paulson is merely hosting meetings and knocking heads together. Of course, we have matter of the proposed legislation to keep servicers from being sued, but hey, this is still a private sector effort. And as Tanta pointed out, the servicers have a conflict, they do better to see the lenders alive rather than dead.

Note the people who would sue are investors rather than lenders, And it isn’t at all clear that they’d do worse with a judge. A judge’s intent will be to get the borrower to pay as much of the old debt as is realistically possible. With this arrangement, a lot of borrowers could conceivably do better than that.

The 2005 bankruptcy law was a sop to the credit card issuers, and that industry is now pretty concentrated. In fact, the Credit Slips post points out this plan will encourage borrowers to pay the mortgage and not pay their credit card.

Anon of 4:23 PM,

One of my beefs has been that no one has, for this proposal or the California plan, says what happens to the principal. All that has been said is that payments are frozen for a certain period. Is the shortfall added to the principal balance or not?

The other problem is to what degree housing recovers. Housing has been seriously overvalued relative to incomes and rents. The Economist in 2005 said US real estate was 20% overvalued, and it continued to appreciate after that.

We’ve had just about nada income growth except at the very top end, and that is unlikely to change with a weakening economy. So why should housing return to its old level anytime soon? I see this as a repricing, not a housing recession.

Think about:

The banks’ plan recognizes that, absent a proactive move, many subprime ARMs could reset next year to 12 percent or more from current rates of 7 percent to 9 percent.

By offering a broad approach to extend the so-called teaser rates for a certain period — officials and the industry are debating periods of two to five years — it would allow homeowners to keep making payments while the housing industry regains its footing.

Monthly payment: 30 Years
Interest rate: 7.000%
Loan amount: $ 100,000.00
$ 665.30 a month

Monthly payment: 40 Years
Interest rate: 7.000%
Loan amount: $ 100,000.00
$ 621.43 a month