Wednesday, November 12, 2008

An Apalling Lack of Legal Creativity

I may be wrong, but I cannot understand why someone has not yet come up with a creative legal solution to the following problem, absent the contentious bankruptcy code modification:

From the WSJ:

Sen. Charles Schumer (D., N.Y.) said in a statement that “a program like this will only scratch the surface of the mortgage crisis.”

“No amount of incentives for investors can change the fact that a program like this will only really work if Fannie and Freddie hold the whole loan, which is true in too few cases,” he said. “When the loan is chopped up into a million pieces and any investor can block a modification from happening.” Schumer said the only solution is to alter the bankruptcy code.

I would think that there are all kinds of shades to this, including making certain contractual provisions against public policy, thereby making such loans eligible for refinancing on other terms.

A limited indemnification for servicers for certain loan types or years.

The temporary imposition of treble or quadruple damages or an excise tax, collectible at the source, that make even the super-senior people find modifications in their interest. In the same vein, finding a way to structure a benign but effective right of recourse of the subordinated holders, in a very targeted or limited way, if a senior holder makes a "non-economic" choice that affects the entire pool.

1 comment:

Boffo said...

Absolutely! The problem can be demonstrated where a simple mortgage is, through a CMO structure, split into interest only (IO)and principal only (PO) CMO's. The interests of each tranche are at odds. In a foreclosure the IO holder will receive no further coupons. HOWEVER since existing documentation does allow homeowner to refinance the conflicts can be resolved through offering creative refinancing.