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 behavior,” Frey, chief executive officer of Greenwich Financial, a mortgage-bond broker and investor in Greenwich, Connecticut, said in an e-mail. “We are actively exploring strategies with major investors to protect their rights.”
A big deal is being made about keeping people in their homes at all costs. But those costs are coming from both the taxpayers and bond holders, who the last I checked are people too. It would be one thing if you invested in lower rated tranches and got wiped out, or poorly structured finance products which didn't adjust for risks properly. But these are people who aren't complaining about the products they bought, they are complaining that the government is stepping in to change the rules of the game after the contract has been signed. Why anyone would ever put money into mortgage bonds again is beyond me. How do you model governments ability to redefine anything they want? This is a huge line being crossed.
By “allocating losses to some place that’s not expecting it,” including state pension plans, college endowments and life insurers, those investors will demand more return to hold mortgage debt without government backing, if they buy at all, said Amherst CEO Sean Dobson, whose firm trades home-loan bonds and advises clients about the securities. “Capital’s going to cost a lot more for a long time.”
If you are in a senior rated tranche you want liquidation over reduced cash flow, you get paid off first with the proceeds when the mortgage is liquidated but with reduced cash flows it spreads the loss more evenly across the tranches. The administration is saying that the servicers can reduce cash flow over liquidate and they will protect the servicers from the lawsuit. The whole article is excellent and I highly suggest reading the whole thing. I made sure none (fine, the smallest bit of my smallest bond fund holds a minor percentage of mortgage bonds) of my investments held mortgage bonds. The risk/reward isn't there and I don't want my money supporting the mortgage market.
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