Bankruptcy Bill Disturbs MBS Market

14 Jan Bankruptcy Bill Disturbs MBS Market

The MBS Market (the financial market that tracks and trades mortgage backed securities) was roiled on Monday as the chances for passage of a new bankruptcy bill continue to improve. According to the Financial Times (UK), the ABX index fell 6.5 points.

In my opinion, a bankruptcy amendment authorizing Judges to modify mortgages is the only realistic method for dealing with mortgages which have been securitized — this would include virtually all of the loans that are in trouble. The reason for this is due to the nature of securitization.

When a loan is securitized, it is essentially sold to groups of investors who own it through super-complex financial transactions involving many layers of responsibility. Loan modification was never contemplated by the agreements which bind all of the parties to a securitized loan.

As a result, no one is certain who ultimately has the authority to negotiate a modification with an individual home owner. If one of the parties to the loan decides to modify the loan, the result can be litigation. The result is that most servicers and mortgage trustees are extremely reluctant to modify mortgages.

If, on the other hand, a bankruptcy judge modifies an individual mortgage, and that judge is authorized to do so by law, no party will be liable for the modification.

Perhaps our lawmakers are finally beginning to understand the problem. If the ABX Index is correct, we will soon have a badly needed bankruptcy amendment.

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