Investors who hold billions of dollars of residential mortgage-backed securities are pressing the Obama administration to make changes in its housing rescue plan.
Participation by these investors will help determine the success of President Barack Obama's $75 billion plan to reduce foreclosures and help stabilize the housing market. But many investors are critical of features of the program and have been meeting with Treasury officials in an effort to influence parts of the plan, such as how it treats second mortgages.
Some investors say they are contemplating legal action because they think the administration's plan and legislation before Congress would violate their rights. They are particularly concerned about measures that would prevent lawsuits against mortgage servicers, which collect loan payments for the investors and are responsible for modifying loans with homeowners.
"Investors are given rights through the contracts in the securities, and we expect those rights to be honored," said Jeffrey Gundlach, chief investment officer of TCW Group Inc., which manages roughly $52 billion in residential mortgage-backed securities.
Many of the four million borrowers the administration hopes to help through its loan-modification program have mortgages that were packaged into securities and sold to investors world-wide. Roughly $1.9 trillion of mortgage loans outstanding as of Dec. 31 had been packaged into securities that don't carry government backing, according to Inside Mortgage Finance. Thus far, servicers have been more reluctant to modify those loans than mortgages they own.
Administration officials say they are trying to address the concerns of investors and others as they work out details of the program. The range of investors in mortgage-backed securities includes hedge funds, insurance companies and pension funds.
Some investors say they are willing to work with the administration. Mr. Grundlach says the program would be more palatable to investors if, for instance, modifications weren't given to borrowers who lied when they took out their initial mortgage.
Treasury Department officials say they believe that servicers will be able to modify the vast majority of investor-owned loans based on their current contracts. They also point out that the plan includes financial incentives to encourage investor participation in loan modifications, but doesn't mandate that investor loans are reworked.
Home-equity loans and other second mortgages are an issue because such debt is junior to first mortgages. Some investors and analysts say that mortgage servicers may find it in their own financial interest to modify the first mortgage and not touch the related home-equity loan or line of credit.
Roughly half of delinquent subprime borrowers also have a second mortgage, according to Credit Suisse Group.
Mortgage investors say that rewriting the first mortgage without touching the second violates their rights, because second mortgages are supposed to be repaid second. Modifying the first loan can help the holder of the second mortgage, because it increases the chances the loan will be repaid, they say. But fixing both loans is a better strategy, they add, because it will produce a more affordable payment and reduce the chances that borrowers owe more than their homes are worth.
Investors say the Obama plan results in a conflict of interest, because many loans are serviced by big banks that also hold second mortgages -- and as a result have a financial interest in how these loans are handled.
Government officials say they are working on a plan that would provide incentives for servicers to extinguish these second mortgages.
Investors are also calling on the administration to strengthen the federal government's Hope for Homeowners program. Under it, some delinquent borrowers can refinance and get a more affordable, government-backed loan, provided the investor who currently holds the mortgage agrees to a principal write-down. So far, the program has fallen far short of initial expectations that it would help as many as 400,000 homeowners.
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