Tuesday, May 5, 2009

Senate Votes Against Homeowners' Rights

Photo from Article by By Mike Lillis in the Washington Independant

What could have been the best and least costly way to fix the housing market and to save countless homes from foreclosure has been snatched away. A piece of legislation that had become known as "The Durbin Bill", actually Senate Bill 61 which was sponsored and championed by Sen. Richard Durbin, has all but been permanently defeated when only 45 Senators voted to end a filibuster on the bill this past Wednesday (Note: A filibuster is a procedural rule that allows the opposition to proposed legislation to prevent it from being voted upon, by continuing the debate forever. It takes 60 senators to end the filibuster and stop the delay).

The bill, following the House or Representatives' lead, would have given Federal Bankruptcy Judges the authority to modify unfair primary residence first mortgages. First, it must be stated that the Judges have the authority and use it every day on almost every other type of loan. Sometimes the Lender is happy because the Judge will not modify the loan, and sometimes the borrower is happy because needed relief is okayed by the Court. Why then has this proposal brought about such intense debate and one of the most "gloves off" lobbying effort in a long time?

The simple answer is greed, but that does not really explain the full picture. Having worked in the Banking industry, as a banker, regulatory enforcer, and part-time lobbyist, I can attest to the power of the banking and finance lobbies. Why would this sector of the economy which has received billions of dollars, in fact, a trillion dollars, oppose the ability of a Federal Bankruptcy Judge to modify an unfair home mortgage? The explanation lies in the nature of home mortgages in today's financial market and in the new definition of a "Bank". The "banking" industry includes companies like Goldman Sachs, which do not make consumer loans, do not take deposits, do not have checking accounts, do not have ATMs, do not have branches, and do not have customers/depositors, except those few customers who buy SECURITIES. These so-called banks are really securities firms which put pools of mortgages together and sell them to pension plans, large companies, mutual funds etc.

Earlier posts have discussed the securitization of home mortgages into a type of derivative called mortgage backed securities. This pooling of hundreds of millions of dollars of mortgages into packages has caused them to cease being a loan from a bank to a homeowner, and to become a source of income, each mortgage contributing its fair share, for investors who bought not the mortgages, but the right to receive income from the pool of mortgages, the Mortgage-Backed Security (we will refer to these as MBS for the rest of this post).

The argument runs like this: Because the rate of defaults has risen well above predictions, the flow of cash is threatened to a point where the investors may not get what they "were promised"when they paid for their fractional share/piece of the MBS. It is critical to keep in mind at all times when thinking about this issue that the MORTGAGE as we think about it HAS CEASED TO EXIST for the purposes of the investment MBS.

The investors in the securities called MBS,do not want to have the value of their investment decreased. If enough mortgages in the package have the terms changed to lower the payments, the entire package will pay less than expected/promised, and therefore the entire package will be worth less than the investors paid for it. Also, we are referring to a pooling of mortgages where each pool might be $500,000,000 (1/2 billion dollars) or more. The financial stakes are enormous. This in fact is why the term "toxic assets" sprung up - toxic because they would harm or kill the value of the MBS AND no one knew to what value. Therefore the assumption was that they were worth nothing, or close to it.

Okay. So what does that have to do with the Durbin Bill to allow Bankruptcy Judges to change terms? EVERYTHING! If a borrower obtained a loan that had an interest rate which was at the market rate of maybe a bit higher, and it was an Adjustable Rate Mortgage (ARM) where after two years the rate would go up and where the loan could never go down below the original rate, the mortgage could be sold at a premium even if, in reality, it cheated the borrower who never was told about the rate increases. By allowing a Judge to determine that the mortgage was sold to the borrower under false pretenses, and misrepresentations, and therefore permitting the Judge to CHANGE/LOWER the interest rate, the owners of the MBS that owned the loan would lose, as explained above.

Again, if a Judge can state that a loan was unfair, and that the lender cheated the borrower, and therefore the terms have to be changed to make the mortgage fair, the entire structure of the MBS falls apart. If that happens, the "banks" who own them or have sold them, lose millions of dollars. This is because no one knows what the end rates will be or the amount of income any loan will pay, because a Judge could change it. There is NO CONCERN about the family, losing its home and being evicted because they were tricked into taking a loan with a moderate interest rate, not realizing that it would go up after 2 years by 3%, and then adjust every 6 months thereafter. The variations on the theme of bad loans have been discussed in earlier posts ( see the following postings: 3/18, 3/7, 2/21, 1/29, 1/3)

The "banking industry" lobbied the Senate not to allow Judges to make the determination that the loan is unfair. The attitude is that a borrower should have known better; that once you make a deal you MUST live with it, even if you were misled, lied to, cheated etc. What is lobbying? In its nice form it is just talking to members of Congress and expressing the opinion of the lobbyists client. In it TRUE form, it is pressuring Congress on a member by member basis to vote the way the Lobbyist/persuader wants by some of the following: threatening to move a large banking operation to another state; threatening to make no more campaign contributions if the vote isn't the "right" vote; threatening to support the Senator's/Congressman's opponent; threatening to pay for ads like the "Swift Boat" ads that hurt Sen. Kerry's presidential campaign; AND flat out bribery - money, houses, trips to where ever etc.

There are other players as well, like the companies that "RATE" the MBS, in a sense "kick the tires" to see how solid the investment really is. The companies have huge amounts of liability if the rating of the MBS market has been a sham. The stakes are huge -Billions of dollars for the investors,"banks", and the rating agencies!. Motive? "YOU BETCHA!" (thank you Governor Palin for the words to use)

Author's Copyright by Richard I. Isacoff, Esq, May, 2009


No comments: