Via Felix, we discover Joe Nocera at the NYT reporting that securitization professionals are not as stupid as they would have had us believe:
What [the FDIC] has discovered, said [Michael H. Krimminger, the F.D.I.C.’s special adviser to the chairman for policy], is that the contracts are rarely as constricting as investors and servicers have been portraying them. They do not allow principal reduction, for sure, but they almost never disallow interest rate reduction — or delaying principal payments for a short time. What’s more, Mr. Krimminger said, the servicer agreement simply says that the servicer’s job is to maximize the investment — which often means avoiding foreclosure.
Buyers of a security want the best return they can get. Foreclosure stops that cash flow, and bankruptcy procedures—at their best—impede those flows.
This is the rational position. So what had Nocera written that caused Bair and Krimminger to call him?:
I have quoted a number of experts and people in the securitization business who have told me repeatedly that it is nearly impossible to modify mortgages that are trapped in toxic mortgage-backed securities. The contracts, they say, don’t really have provisions for preventing foreclosures. And the servicers face terrible conflicts if they try to modify mortgages, because inevitable some of the bond investors will do better than others — depending on where they stand along the risk continuum — and under those same contracts, servicers are obliged to treat all investors alike. Finally, I’ve heard, servicers have been unwilling to lift a finger for homeowners because they have no financial incentive to do so — and they face the prospect of being sued by one of their investors if they do.
Servicers have been unwilling to lift a finger, and as such are not following the fiduciary responsibility of ensuring investors an appropriate return.
And it takes the bloody Chair of the FDIC—not the Treasury Secretary, whose former firm made piles of money for him with such securitization procedures—to understand the situation and tell the truth.
Apparently, we have to wait for some large investor and/or hedge funds whose bonds have gone into the default to sue their servicer before someone outside of the FDIC understands that investors prefer receiving some money to none.