House Financial Services Committee chairman Barney Frank is warning Wall Street hedge funds and threatening to subpoena at least two hedge funds, Greenwich Financial Services and Braddock Financial to testify next month after the funds warned mortgage servicing companies not to participate in federal loan modifications.
“Your decision is a serious threat to our efforts to respond to the current economic crisis, and we strongly urge you to reverse it,” the letter said.
The letter was co-signed by five other Democrat committee chairs: the capital markets, insurance and government sponsored enterprises sub-committee chairman Paul Kanjorski; the financial institutions and consumer credit sub-committee chairwoman Carolyn Maloney; the housing and community opportunity sub-committee chairwoman Maxine Waters; the international monetary policy trade and technology chairman Luis Gutierrez; and the oversight and investigations sub-committee chairman Melvin Watt.
The threats came after Greenwich, Braddock and two other funds sent letters in August to mortgage companies expressing concern about the Bush administration’s Hope for Homeowners program, which began Oct. 1.
The program allows borrowers to refinance delinquent mortgages into fixed-rate 30-year loans, with the voluntary participation in regards to loan modifications. These modifications would entail interest rate reductions and in some cases, significant write downs in mortgage balances for borrowers who could prove that their property is worth less than they owe.
Some estimates put this figure at 25% of US homeowners owe more on their homes than their current market values.
The Federal Housing Administration (FHA) Hope for Homeowner program hopes to help as many as 400,000 borrowers refinance their mortgages and avoid foreclosure.
The hedge funds are among the thousands of investors in mortgages that have been pooled by Wall Street banks and sold as mortgage backed securities (MBS). These investors now own the mortgages and have to agree to any loan modifications in their terms before mortgage companies can negotiate those changes. These funds are claiming they must comply with their legal obligation to protect these investments and that they could be liable for charges of breaching their fiduciary duty to their investors.
The Hope for Homeowners program in all its glory may cause billions in write downs for investors.
Barney Frank comments:
“Given the importance of this to the economy and to what it means for future regulatory efforts, we have set a hearing for November 12 and we invite you now to testify.
“We believe it is essential to our policymaking function for you to appear at such a hearing and if this cannot be arranged on a voluntary basis, we will pursue other steps.”
Frank went on to say that hedge funds had “flourished” for most of the past decade and that to oppose measures clearly in the national interest was “deeply troubling” and would have “serious implications” for the rules by which hedge funds would operate in the future.
Frank also wrote to the Managed Funds Association saying he believed existing law allowed for mortgage modification in cases where the losses would be less than in a foreclosure, and thus in the national interest.
“For hedge funds, which have been the beneficiary of a lack of regulations and a very permissive attitude, now to put obstacles in the way of this important national policy is intolerable,” Frank said.