Daily Real Estate News  |  October 24, 2008  |   Reworking Bad Mortgages Isn't Easy
In order to rework troubled mortgage, the government may have to do more than persuade lenders and investors that workouts are ultimately more profitable than foreclosure, analysts conclude.

Hundreds of investors hold an interest in trusts that invest in mortgages. If loans are reworked, some of those investors will lose money. Mortgage servicers are prohibited from modifying a pool of loans without getting the OK from two-thirds of the investors. That nod can be difficult to get because some investors stand to make more from foreclosure.

Many observers and government officials are pointing out that it will take government action to nullify or supersede investor interests. If the government stepped in and, perhaps, gave less-favorable tax status to an investor that didn’t agree to accept a modification, there would certainly be lots of litigation and the government might have to reimburse investors for value they lost, analysts say.

Therefore, some analysts conclude that the best answer is to give bankruptcy judges the right to cut the interest rate or reduce the principal owed on a debtor’s troubled mortgage.

"It gets around the biggest impediment to workouts without costing taxpayers a penny," says Jaret Seiberg, an analyst for the Stanford Group brokerage.

Source: Business Week, Jane Sasseen (10/27/08)