The original Obama plan to stabilize mortgages effectively left out the $4 trillion of loans, mostly sub-prime and ALT-A, that are in private securitizations rather than backed by Federal agencies.
Of these borrowers, one million are already undergoing foreclosure and two million more have missed at least two monthly payments.
It would be in the best interests of securitization holders and of the borrowers to modify many of these loans rather than foreclosing, but the securitization documents were not drafted in a way that contemplated wholesale modifications because at the time no one seemed to visualize the problems that have developed.
This raises the potential that investors might sue the servicers if they adopted the Obama Administration modification objectives.
Part of the program was to pay fees to servicers for effecting modifications and to pay them bonuses for up to three years if the borrowers made all of their reduced payments. This feature might well provide the holders of junior tranches in the securitizations, the last in line to receive payments, to litigate on the theory that the servicer reduced the payments by too large an amount in order to make it more likely that they would get bonus payments.
To deal with these problems, servicers have requested enactment of a safe harbor provision so that complying with the modification formulas does not result in liability.
Congressmen John Conyers and Barney Frank have now introduced H.R. 1106, the Helping Families Save Their Homes Act of 2009, which contains a safe harbor proposal.
The servicing industry is suggesting some refinements to H.R. 1106 so hopefully the discussion will now be how to provide a safe harbor for modifications, not whether or not to do so.
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Wilbur Ross, CEO of WL Ross & Co. LLC, may be one of the best known private equity investors in the U.S. His private equity funds bought Bethlehem Steel and several other bankrupt producers and revitalized them into the largest U.S. producer before merging them into Mittal Steel for $4.5 billion. Mr. Ross remains a Director of what is now ArcelorMittal, the world’s largest steel company. He also created and chairs International Coal Group; International Textile Group, the most global American company in that industry; and International Auto Components Group, a $4.5 billion producer of instrument panels and other interior components, operating in 17 countries; Compagnie Europeenne de Wagons Sarl, the largest rail car leasing company in Europe, and American Home Mortgage Servicing Inc., the second largest servicer of subprime mortgages. Mr. Ross was Executive Managing Director of Rothschild Inc. for 24 years before acquiring that firm’s private equity partnerships in 2000.