Asset management firms that are heavily invested in mortgage bonds have stepped up their attack on Barack Obama’s mortgage modification and cramdown plan.
Bloomberg: Bondholders are preparing for a fight over legislation approved last month by the House of Representatives that would shield companies that collect homeowners’ payments from lawsuits over modified mortgages, even if new terms harm investors. The government’s actions may increase borrowing costs because creditors would demand higher returns to compensate for the risk that once-sacrosanct investment terms can be changed, they say.
“Certainly some greater amount of loans should be restructured, but it is a fallacy to think that policymakers can selectively abrogate contracts without affecting future investor behaviour,” said Frey, chief executive officer of Greenwich Financial, a mortgage-bond broker and investor in Connecticut. “We are actively exploring strategies with major investors to protect their rights,” he added in an e-mail.
They go on to make arguments about the importance of protecting contracts and whatnot.
Now it would be easy to dismiss their arguments, as just being bondholders not wanting to take a haircut. And surely they don’t. But it’s also true that Obama’s mortgage modification and cramdown plans aren’t even good for homeowners.
They’re basically a lose-lose.
Bondholders see their contracts ripped up, and are forced to take a haircut, while homeowners are basically stuck with the equivalent of a new teaser rate — low payments for five years, balloon payments after that. The hope, of course, is that the housing bubble will be fully reflated by then, and that the economy will have returned to “normal” so that the new payments aren’t much of a problem.
What’s more, the loan mod game has brought back all the old predatory lenders out of the woodwork, wearing new clothing and bearing gifts of lower payments.
At best, when it’s homeowners vs. banks or homeowners vs. mortgage bondholders, you’re looking at a zero-sum game. You prop up the banks, but then you try to give the homeowners a break on their payments and all of the sudden the financial system gets nervous again.
David Goldman at AI Times explains the two-minded, policy back-and-forth:
In principal, the major banks can earn enough off distressed assets with low dollar prices and high unlevered internal rates of return to absorb the rising loan losses that inevitably will come from a weakening economy. But the tinkering and interventionism of the academics who sit at the steering wheel in Washington throws in a huge element of uncetainty.
That’s why I expect the financials to range-trade. If bank stocks collapse the administration will immediately make soothing noises, as Geithner did earlier this week when the market feared that the “asinine” (the term used by the president of Wells Fargo) stress tests would force a new round of shareholder dilution and stocks went into free fall. A collapse of bank equity could take down the insurers, and perhaps also the government of Great Britain. As soon as financial stocks look stable, though, Washington will go back to its tinkering, interventionist, populist impulses and mess things up again. It’s sickeningly predictable.