Can Mortgage-Backed Bonds be Restructured?

Amidst all the noise and hype surrounding the subprime mortgage market, there’s

one thing which hasn’t got a lot of press. (USA

Today, astonishingly, seems to be ahead of the curve here.) If loans have

been pooled, tranched, retranched, and sold to hundreds of investors and CDOs

and the like, what happens when the loans goes bad? How much leeway do loan

servicers have to modify loans which are owned by a disparate set of bondholders?

And what kind of mechanism exists for bondholders or ratings agencies to approve

servicers helping out homeowners in distress?

I’ve been looking into this a little bit, after attending a panel at the Milken

Institute Conference where Lew Ranieri brought up the subject.


Risk has a transcript of some of his comments:

The real dilemma for me and I think the real issue . . . will be, we’ve never

had to do substantial restructurings in housing in mortgage securities.

They were always in portfolios, and that made it very easy or at least, we

didn’t have to get 409 people or we didn’t have to rent the Nassau Coliseum

to have a bondholders meeting; we could do it very quickly. In a very long

meeting, last Monday, where we tried to collect virtually everybody in a room,

it became evident that there are a whole host of unforeseen technical problems

if you try to restructure or do large amounts of restructuring within the

security, some of which, we had never even heard of or thought about.

One of the accountants raised his hand and said if you restructure that many

loans, you’re going to taint the Q election and FAS 140 and what he was basically

saying in English for the rest of [us] poor fools, was that there is a presumption

when you – when a bank sells loans, into a securitization that it sold the

loans . . . And what he was saying is wait a minute, if you guys can restructure

all these loans without going back to bondholder, you obviously have control

and you’ve just tainted 140 and Q election.

I’m no expert on FAS 140, and I don’t even know what a "Q election"

is, but it does seem to be the case that when more than 5% of the loans in a

pool need to be restructured, the servicer often needs to get permission, which

isn’t something a lot of servicers have had to do in the past. And when 30%

of the loans in a pool need to be restructured, there’s a good chance you need

unanimous bondholder consent for that, which is something all but impossible

to get.

So, if anybody could point me to places or people where I could learn about

whether and how mortgage-backed securities might be able to be restructured,

I’ll be most obliged – and I’ll report back here as and when I learn anything.

This entry was posted in housing. Bookmark the permalink.