Mortgage Investors and Insurers: The People Who Have A Lot To Lose

Credit Slips has a great post related to who is calling the shots related to loan modifications and work-out programs, and that the people who have the most to lose (not counting the homeowner) are not at the table. (click here for the full post) Here is an excerpt:

The ultimate risk on mortgages is held by mortgage-backed securities holders, private mortgage insurers, and pool-level bond insurers. These parties have been entirely absent from the conversation on modification and bankruptcy reform.

Instead, we have been hearing servicers and originators (such as the Mortgage Bankers Association) speaking for the entire mortgage lending industry. But there is strong evidence that servicers are themselves part of the problem and that some may be faithless agents to the MBS holders they represent.

If Congress is concerned about the impact of foreclosure legislation on the mortgage lending industry, it should make sure that the conversation includes parties who bear the ultimate risk in mortgage loans--the private mortgage insurers and the bond insurers and the major pension plans and mutual funds that hold MBS. For that matter, the state regulators of insurers should also be involved in this as a safety-and-soundness issue. Limiting mortgage loan losses limits the insurers losses.

There seems to be little disagreement that foreclosure would result in a larger loss on a mortgage than a modification. One would think, then, that the market would respond by modifying non-performing mortgages to a level that homeowners could afford. But this hasn't been happening on a large scale. As we think about why this market isn't working, securitization structures should get a lot of attention.

As Katie noted, securitization structures can create impediments to modification. Sometimes it is contractual, such as pooling and servicing agreements (PSAs) that forbid servicers from modifying mortgages or severely constrain the modifications that are allowed. Other times the PSAs create incentive structures that lead servicers to prefer foreclosure to modification.