Washington – Millions of Americans with less-than-stellar credit who took out home loans the past few years are in the middle of a tug of war among Wall Street firms, banks and hedge funds.
Who wins the dispute could have more impact on how many homeowners get financial help to avert default and foreclosure than anything Congress or regulators are contemplating in the near term.
Washington seems to be taking a wait-and-see approach even as the housing market’s woes worsen. Foreclosures this year are twice what they were two years ago at this time.
And monthly payments on more than 8.4 million adjustable-rate mortgages issued since 2004 will be affected by rising interest rates on reset dates the next few years. Research firm First American CoreLogic predicts $326 billion, 13 percent, of outstanding loans will default.
Publicly, officials at banks and hedge funds say they want to do all they can to help distressed home owners.
Privately, however, a debate simmers over whether banks that sold bundled mortgages to institutional investors can legally pluck loans out of those bundles for workouts to help keep the default rates down.
However, which homeowners get chosen for financial help by lenders might be influenced by billions of dollars worth of contracts – called credit-default swaps – negotiated the past few years between lenders and investors, hedge funds allege.
Lenders say they have the legal right and want to pull out some distressed loans and rework or reissue them, taking a financial hit if need be, to keep mortgage-holders in their homes.
Hedge funds argue that the real motive might be to avoid paying what lenders owe on complicated financial contracts negotiated on the mortgages.
Instead of having to pay on a contract at as much as 100 times the value of the underlying mortgage, “it becomes cheaper for some folks to buy worthless loans,” says Harvey Pitt, a former chairman of the Securities and Exchange Commission who represents a hedge fund.
