War in the tranches – why we need bankruptcy reform
By Chip Parker, Jacksonville Consumer Attorney on Mar 30, 2009 in Uncategorized
Mortgage-backed securities (MBS) are divided into value-based groups, known as tranches. Senior investors, who are typically financial institutions, own the AAA tranches that are insured against default by AIG, and they WANT to foreclose on the Middle Class so that insurance payments kick in. Conversely, the junior tranche investors want workouts with homeowners because their investment is not insured.
To ensure that the mortgage servicer pushes default instead of workout, the servicer is paid double (50 basis points versus 25 basis points) by the MBS to service a loan in default. Why do you think your servicer tells you that you must be in default before it will consider a mortgage modification, a practice known as “invited default”?
Simply put, the government bailout of AIG has actually encouraged foreclosures because the taxpayers continue to fill AIG’s coffers with enough cash to pay out insurance on defaulted home loans.
The Bankruptcy Reform Act of 2009 (Senate Bill 61) is essential to counteract this unnatural incentive because it will force these senior investors to accept a reorganized payment versus an insurance payout. Rather than displacing a family from a house that will sit unoccupied for years, rotting to its foundation, the homeowner will be able to restructure his loan at the FHA certified appraised value, reamortized at a fair, fixed rate.
This of course is not just good for American families, it is good for junior investors who were supporting homeownership, not sabotaging it.
The Senate has tabled the Bankruptcy Reform Act of 2009 until after the Spring Recess, putting off legislation critical to stopping the landslide of foreclosures. The measure has been delayed because lobbyists working for these banks who own the majority of the insured tranches are crawling Capitol Hill, telling Senators that this bill will have a chilling effect on lending.
At best, our U.S. Senators are buying this load of garbage, or at worst, they know the truth and prefer to bailout the banks’ investments through AIG’s government-sponsored insurance payoffs.
Related posts:
Sorry, comments for this entry are closed at this time.