A group of investors in mortgage-backed bonds dubbed the Mortgage Investors Coalition (MIC) recently submitted to Congress a plan to overhaul the refinancing of underwater borrowers by writing down the principal balances of both first and second mortgages. The confederation of insurers, asset managers and hedge funds hope to break a logjam between Washington DC and the four megabanks with the most exposure to writedowns on second lien mortgages, including home equity lines of credit.
The private sector initiative coincides with House Financial Services Committee Chairman Barney Frank's open letter dated 4 March to the CEOs of the banks in question â€?Bank of America, Citigroup, JP Morgan Chase and Wells Fargo â€?urging them to start forgiving principal on the second lien loans they hold.
But the banks are unlikely to take action until they get new accounting guidance from regulators that would ease the impact of such significant principal reductions on their capitalization ratios, sources with knowledge of the situation told Debtwire.
The downsized first lien mortgages would subsequently be refinanced into new loans from the Federal Housing Administration, allowing RMBS holders to clean the non-performing loans out of their trusts. Such a "short-refinancing" approach is the only way to allow restructuring on a massive scale by employing the existing refinancing infrastructure in the mortgage industry, said Jeffrey Gundlach, formerly of TCW and now CEO of DoubleLine Capital LP.
"If you wanted to modify a lot of people fast enough you need to refinance using the existing machinery," Gundlach said. Just as US banks refinanced trillions in mortgage debt during the housing boom, the banks could refinance once again â€?but this time to lower loan-to-value ratios, he said. "The refi mechanism, in my view, is the only way to get there with the size we're dealing with."