Hiding in Obama’s foreclosure bill are provisions to protect big investors from bankruptcy cramdowns.
Washington is finally realizing that there are two types of mortgage investors and you usually can’t help one without hurting the other.
A last-second addition to the Helping Families Save Their Homes Act of 2009 would make it so that senior mortgage investors–often pension funds, foreign banks and life insurance firms–would fare better with a court-ordered loan modification than a voluntary one involving taxpayer subsidies.
Reducing a loan amount in bankruptcy court is called a “cramdown” and it’s popular with spread-the-wealth types who argue home loans are the only ones that can’t be adjusted in court. It’s also gotten support from Citigroup–after the troubled bank got a bailout from the government–and now from certain investors who were previously terrified at the idea.
The legislative fix was imperative, says Frank Keating, president of the American Council of Life Insurers, in a late February letter to Congress. “Without clarifying language, top-tier mortgage-backed securities could be downgraded significantly, resulting in increased capital requirements for life insurers and a need to raise additional capital in a hostile environment,” he wrote. “This issue by itself is of extreme importance to life insurers.”
Here’s the problem: Most so-called pooling and servicing agreements, or PSAs, currently say all losses in the event of a “cramdown” are shared pari passu, or equally among all investors. Here’s how the House fixed it: Representatives voted to invalidate that part of the securities contracts, restoring the “waterfall” structure that insures top-ranked securities are paid in full before lower-level paper gets anything.
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Very interesting. Is a ‘court-ordered modification’ a modification that requires the borrower to declare bankruptcy?
I bet every bankruptcy lawyer is licking their chops over this new bill. So many new clients about to come their way. I wonder how many other lawyers will be moving into this area of the law so cash in on the soon to boom market in BK’s.
Where is the outrage? Words cannot express how disappointed I am in our President.