The NYT shows us this angle on the bailout:
William Frey, the president of one of the funds, Greenwich Financial Services of Greenwich, Conn., said that he was acting to protect the firm’s investments. “Any investor in mortgage-backed securities has the right to insist that their contract be enforced,” he said.
In letters sent to banks and others, Greenwich Financial said that it was particularly concerned about the impact of a relatively new government program, Hope for Homeowners. That plan, which Congress approved over the summer, allows some borrowers to refinance their mortgages into fixed-rate loans with terms up to 30 years.
Mr. Frey said that he was aware of two other funds in addition to his and Braddock Financial that sent similar letters, but he declined to identify them.
Told about the letters, John Taylor, the president of the National Community Reinvestment Coalition, a consumer advocacy group in Washington, said that he believed that the government might have to take action to protect homeowners from getting caught between different classes of investors.
“We can’t try to operate in a crisis and think that we will be able to satisfy all the lowest common denominators like hedge funds,” said Mr. Taylor.
Officials at banks and policy makers who have pushed for loan modifications say the servicing companies have the right to change loans if doing so will maximize returns to all investors.
“We think that by doing more modifications rather than less, investors are going to be better off,” said Tom Miller, the attorney general of Iowa and a leading proponent of aggressive loan modifications.
So far, disputes over loan modifications have been largely theoretical because most mortgage servicing companies are not aggressively altering the terms of loans and the government’s refinance program is just two weeks old.
But lawyers expect the tension over the issue to build. In authorizing the Treasury to buy $700 billion in mortgages and related securities last month, Congress instructed the Bush administration, as an investor, to modify more loans.
Officials at Braddock, a hedge fund firm based in Denver, said they were not against loan modifications per se but that they wanted to make sure renegotiations conformed to the contracts governing mortgage securities, which are backed by thousands of home loans. The most restrictive servicing contracts limit how many and what kinds of modifications mortgage firms can pursue. Other contracts allow the firms to pursue modifications more freely if doing so will minimize overall losses.
David R. Myers, a senior portfolio manager at Braddock, said that if mortgage servicing firms did not strictly follow those contracts, it would delay the recovery of the credit market because investors would be less willing to buy securities in the future.