by

Mortgage Officer

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The battle over the mass modifications of troubled mortgages has begun in earnest. On Dec. 1, William Frey, a private investor in mortgage-backed securities, filed a lawsuit in New York State Supreme Court alleging that the proposed modification of some 400,000 home loans originally underwritten by the defunct lender Countrywide Financial is illegal.

Investor Sues to Block Mortgage Modifications – Yahoo! News.

At first glance, you’re probably thinking what I was (well, maybe not…) but seriously, why would some mean hearted investor want to prevent Bank of America from helping 400,000 home owners stay in their homes?

Let me attempt to explain:

  1. Countrywide wrote the loans and sold them on the secondary market.
  2. When they sold them, they didn’t sell them in 1 piece, they sold sections (called tranches) to a multitude of different investors and investment companies.   It’s actually possible that parts of one mortgage end up being owned by 30 different “parties.”
  3. The parties who bought these loans bought them as contracts that had a prepayment risk but didn’t buy them with a modification risk.
  4. When a loan gets modified, it changes that contract which inherently changes the value of the investment.
  5. The investors who are suing to stop it are saying that if you start changing the contracts, you are going to effectively ruin the secondary mortgage market because suddenly the value of the loans that are sold becomes an unknown.
  6. If the secondary mortgage market dies, then the housing market dies.   It’s just that simple, without mortgage money, the party is over.

Are the investors saying that the loans shouldn’t be modified?   No they aren’t.   What they are saying is, “I didn’t buy this investment with the thinking that it could be modified going forward.”   So if you, Mr. B of A, want to change the terms, that’s fine, buy it back and change the terms.

The investors are, it seems to me, hoping for one of two results:

  1. That Bank of America will buy the loans back (with our help of course).
  2. That they take their chances with foreclosures.  Given the report that the National Association of Realtors issued earlier on Mortgage Modification Defaul Rates of 50%, that’s not Read more