While the plan may not be as big a deal as we thought, the problem still is.
EMC, as master servicer, will make reasonable efforts to ensure that all payments required under the terms and provisions of the mortgage loans are collected, and shall follow collection procedures comparable to the collection procedures of prudent mortgage servicers servicing mortgage loans for their own account, to the extent such procedures shall be consistent with the pooling and servicing agreement and any insurance policy required to be maintained pursuant to the pooling and servicing agreement. Consistent with the foregoing, the master servicer may in its discretion (i) waive any late payment charge or penalty interest in connection with the prepayment of a mortgage loan and (ii) extend the due dates for payments due on a mortgage note for a period not greater than 125 days. In addition, if (x) a mortgage loan is in default or default is imminent or (y) the master servicer delivers to the trustee a certification that a modification of such mortgage loan will not result in the imposition of taxes on or disqualify any trust REMIC, the master servicer may (A) amend the related mortgage note to reduce the mortgage rate applicable thereto, provided that such reduced mortgage rate shall in no event be lower than 7.5% and (B) amend any mortgage note to extend the maturity thereof, but not beyond the Distribution Date occurring in March 2035.
If similar language appears in the fine print for many of the other securities, that would answer one of the questions I raised yesterday, namely, why the Secretary of the Treasury would be a vital player in a voluntary decision by the industry to allow a rate freeze on certain loans. The Secretary is surely in a position to certify condition (y) above, and his signing on to the agreement must add substance to any court claims that the proposed procedures are indeed “comparable to the collection procedures of prudent mortgage servicers.”
Nouriel Roubini downplays any legal concerns on separate grounds:
investors in these assets will be much better off (i.e. the value of their claims will be higher than otherwise) with this proposal rather than the alternative of letting millions of homeowners default on their mortgages.
Regardless of whether Nouriel is correct about that claim, I have little faith that the best interests of the investors would be the key determinant of whether we’re about to see a proliferation of lawsuits. What matters here are not just the incentives for the investors, but also the incentives for lawyers, and those are unquestionably working in the direction of discovering some class that is unfairly treated under this arrangement.
Elizabeth Warren and Yves Smith think the real purpose of the plan may be to forestall congressional legislation. It does appear that the number of households meeting all the qualifications of the plan may be modest. Paul Krugman and the New York Times cite the estimate from the Center for Responsible Lending that only 145,000 households would benefit from the plan. And the Wall Street Journal reported:
Office of Thrift Supervision Director John Reich said this week that the plan could help “tens of thousands” of homeowners,
To which Barry Ritholtz responds:
Tens of thousands? The subprime foreclosure forecast for 2008-09 is over 3/4 of a million homes.
But from another perspective, limited scope is not necessarily a drawback of the Bush plan. If you share my concerns about the magnitude of the obligations with which the government may already have to cope, piling on more may not be the wisest step at the moment. Hence I come back to the key questions which I think we need to be addressing: How big a commitment of public funds are we willing to devote to this problem, and how much of a difference would it make?