Bond investors are lobbying hard to change federal policies aimed at reducing foreclosures in the US, saying the measures discriminate against holders of top-rated securities backed by mortgages.
The investors are set to meet senators next week. The next step could be legal action against the US government if the law is passed, on the basis that it could violate the Fifth Amendment, which prohibits the taking of private property for public use without compensation.
“Serious investors are committing significant resources to this issue,” said Eric Brenner, partner at Boies Schiller and Flexner, which is advising investors that hold mortgage-backed securities. “They are really troubled that government action could prevent enforcement of their contracts and are considering the potential for legal action to protect their property rights.”
The plans, introduced by Barack Obama, US president, last month to try to stem the surge in foreclosures, could go before Congress next month.
The difficulty in changing terms on mortgages – particularly those that have been repackaged into securities and sliced into tranches owned by investors around the world – has angered advocates for homeowners. High levels of foreclosures and forced sales are a factor in depressing house prices.
Investors owning securities backed by people’s main mortgages say banks owning riskier mortgages – so-called second lien – could use the legislation to avoid billions of dollars of losses.
These second-lien loans are mostly owned by banks, which also own the mortgage servicers. A “servicer safe harbour” in the legislation would shield servicers from legal action if they changed the terms on people’s mortgages, many of which back securities.
Investors say this would allow servicers to prioritise the banks that own them, and whose risky mortgages are supposed to take losses first.
This could help banks avoid billions of dollars of losses that would instead be suffered by investors.
The proposals have the backing of large banks, such as Bank of America, JPMorgan Chase and Wells Fargo.
The fight by investors potentially pits some of the biggest buyers of bonds against banks and the government.
JPMorgan declined to comment. BofA and Wells Fargo were unavailable for comment.
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