naked capitalism

As some cynics speculated, the subprime freeze proposal, scheduled to be unveiled early this afternoon, got a considerable push from worries about legislation sponsored by Barney Frank which would have allowed judges in bankruptcy some ability to change mortgage terms in bankruptcy. Note that these proposed rules merely put consumers on the same footing as businesses in the bankruptcy process, and was far from open ended (an article in Credit Slips suggests that the judge could reduce the loan balance to the current market value of the house, and current market rates),

Housing Wire also reports, citing American Banker, that the Bush Administration does not plan to push legislation shielding servicers from investor lawsuits. The lack of protection would presumably make servicers considerably more cautious in approving freezes (although Democrats are considering a law to protect servicers).

This revelations suggest the plan is more cosmetic than substantive, the worst of all possible worlds, setting a terrible legal precedent by abrogating existing agreements while offering little relief.

From Bloomberg:

Treasury Secretary Henry Paulson’s success in crafting agreement on a five-year fix of subprime mortgage rates owes a debt to an unlikely source: congressional Democrats.

Legislation pushed by House Financial Services Committee Chairman Barney Frank that would bypass lenders and investors, giving power to judges to rewrite loans, helped persuade banks and securities-industry lobbyists to sign on to Paulson’s effort, mortgage-industry analysts said.

“The Democrats have given Paulson more leverage and room to maneuver than he otherwise would have had,” said Howard Glaser, a former chief legal adviser to Housing Secretary Andrew Cuomo under President Bill Clinton who now heads Glaser Group, a consulting firm. Paulson could tell lenders and investors “if you go my way, you have some control over the outcome” he said…..

“The threat of Democratic legislation” served to “increase the pressure on the mortgage lenders to strike a deal,” said Michael Barr, a former special assistant to Treasury Secretary Robert Rubin and now professor at University of Michigan law school…..

Martin Feldstein, who served in Ronald Reagan’s White House and currently heads the National Bureau of Economic Research in Cambridge, Massachusetts, said the deal may hurt foreign investment in U.S. securities.

“What are they going to think about investing in American securities in the future if the government can say, well, you thought these were the interest rates and the contract, but we’re going to roll that back now and you’ll just have to settle for less?,” Feldstein said in an interview yesterday.

From Housing Wire:

The second issue in play here is liability — another American Banker story reports:

Servicers are worried that investors may sue if mortgages are modified. Sources said they do not expect the Bush administration to offer any kind of safe harbor from litigation. Instead, the plan will emphasize that the administration believes the modifications are legal under existing pooling and servicing agreements…

“We want to be assured … that they take care of the liability and the tax ramifications of making these broad modifications,” said Erick Gustafson, vice president of government affairs at the Mortgage Bankers Association.