Wall Street Journal Mum On Battle Over Mortgage Cramdowns
Whether conspiracy or something else, I have noticed a strange silence from the Wall Street Journal on a story the Financial Times has covered at least three times in the last two days:
- Clash Looms Over US Mortgage Aid
- Bond Investors Step Up Campaign Against Mortgage Securities Bill
- Investors Take Fifth in Fight to Come First In Contract Battle
While the big money-center banks have grabbed all the headlines in the push to modify existing mortgages, many of the first-lien holders of these mortgages are objecting to the eagerness of Wall Street to make nice with Washington and dumping investors’ interest by the wayside.
As it turns out, the top four mortgage servicers (Bank of America, Wells Fargo/Wachovia, JP Morgan Chase and Citibank) service 55% of the market. These same four banks also hold 52% of second-liens and home equity lines of credit. The first-lien holders are crying foul over the inherent conflicts of interest that’s made possible in these modifications. They are asking that second-liens and home-equity lines take the first hit, as originally intended.
Somehow, the Wall Street Journal finds this a non-story and unworthy of coverage, at least to this point. Editorial oversight or protecting their buddies’ interests? Either way, it serves as yet another reminder to consume news with a skeptical eye. Always watch for possible bias or agenda and weigh it accordingly.
April 26th, 2009 at 11:30 pm
Davy,
Thanks for posting this. It’s an interesting story, but one that I’m not quite getting. Do you understand *how* the first mortgage holders will be impacted, but the second mortgage holders will not be?
Thanks,
Jason
April 27th, 2009 at 10:45 am
My rudimentary understanding is that 2nd liens & home equity lines are much like subordinated debt or riskier tranches of ABS. In case of default and by design, these lower priority claims are supposed to be wiped out and only get repaid if the 1st liens are made whole and something is left over.
If the servicers are given discretion to modify mortgages as well as immunity from any legal consequences for doing so, they could theoretically restructure the mortgage(s) such that all claims (1st, 2nd, HELOC) are reduced by 20%, allegedly for the purpose of keeping people in their homes. This would violate the 1st lien’s priority claims since they’re taking the same loss as the folks junior on the debt structure. That’s not the way it’s supposed to work.
My guess is the 1st-lien folks want the 2nd lien guys, who are also the mortgage servicers conveniently enough, to eat the losses they were supposed to or at least share a disproportionate burden.
This whole mess has really exposed the Wall Street shell game for what it is and just how deeply they’ve embedded their tentacles into Washington.